Parental Income Has Outsized Influence on Children's Economic Future

Study Shows Persistence of Advantage More Pronounced Among Higher-Income Families

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Jul 23, 2015, 11:42 ET

WASHINGTON, July 23, 2015 /PRNewswire-USNewswire/ -- New analysis by researchers at Stanford University, funded by The Pew Charitable Trusts and the Russell Sage Foundation, finds that approximately half of parental income advantages in the United States are passed on to children, which is among the lowest estimates of economic mobility yet produced. The research also finds that the degree to which income advantages are transferred from parents to children differs across the income spectrum, and that parental income differences benefit children from higher-income families more than those from lower-income families. The results indicate that opportunities for economic success are far from equally distributed.

The report, "Economic Mobility in the United States," provides the most comprehensive assessment to date of the intergenerational transmission of economic advantage. It draws on a new data set from tax returns and other administrative sources to overcome limitations that hampered previous studies. These findings make clear that children raised in families that are far apart on the income ladder can expect markedly different economic futures.

"This analysis finds that a family's economic circumstances play an exceptionally large part in determining a child's economic prospects later in life," said Erin Currier, director of Pew's financial security and mobility project. "For example, children raised in families at the 90^th percentile can expect their own family income to be three times more than the children raised at the 10^th percentile. These findings are at odds with our country's aspirations for equal opportunity."

This report utilizes the intergenerational elasticity (IGE) to measure the share of economic advantage that is passed on to children. The IGE is typically between zero and one, with an IGE of zero implying that children from families of different socioeconomic status have the same expected income as one another, with no inherited income advantage or disadvantage. An IGE of one, on the other hand, implies that parental advantages are fully passed on.

Among the report's key findings:

Approximately half of parental income advantages are passed on to children. The IGE, when averaged across all levels of parental income, is estimated at 0.52 for men and 0.47 for women. These estimates are at the high end of previous estimates and imply that the United States is very immobile.
The persistence of advantage is especially large among those raised in the middle to upper reaches of the income distribution. The IGE among adults whose parents were between the 50th and 90th income percentiles is 0.68 for men and 0.63 for women. This means that approximately two-thirds of parental income differences within this region of the income distribution persist into the next generation.
Children born far apart in the income distribution have very different economic outcomes. While a finding of unequal outcomes is not in itself surprising, the magnitude of this inequality has not been well appreciated: The expected family income of children raised in families at the 90th income percentile is about three times that of children raised at the 10th percentile.
Parental income matters more for men's earnings than for women's. The average earnings IGE for men (0.56) is more than 40 percent higher than that for women (0.32). Although both men and women benefit from being born into higher-income families, men benefit much more –at least when it comes to their own earnings.
Parental income matters more for women's chances of marriage, and of marrying better-off partners. The income IGE is large for men (0.52) mainly because children from higher-income families tend to have higher earnings as adults. For women, the income IGE is nearly as large (0.47), mainly because those from higher-income origins are more likely to be married in their late 30s—and to marry higher-earnings partners.

These results show that children born into lower-income families have very different futures than those from higher-income households. The study's findings provide a fact base that can inform policies intended to increase economic mobility.

"The report documents that public policies must do more to level the playing field so that children from low-income families have greater opportunities to compete in the 21^st century economy. Over recent decades, the rising income and wealth of affluent parents have allowed them to increase investments in their children, from day care through college. At the same time, wages have stagnated for most workers and low-income families have struggled to pay for routine expenses," noted Sheldon Danziger, president of the Russell Sage Foundation.

The results reported in this study are based on a new data set, the Statistics of Income Mobility Panel, which combines tax data and other administrative sources. All access to tax data was limited to Internal Revenue Service employees.

Click here to read the report

Click here to read this release on Pew's website

The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Learn more at www.pewtrusts.org.

The Russell Sage Foundation is the principal American foundation devoted exclusively to research in the social sciences.

Sultana Ali, 202-540-6188, [email protected]

SOURCE The Pew Charitable Trusts