The Intergenerational Elasticity of Earnings: Exploring the Mechanisms

60 Pages Posted: 31 Mar 2021

See all articles by Uta Bolt

Uta Bolt

Institute for Fiscal Studies (IFS)

Eric French

Department of Economics; Institute for Fiscal Studies (IFS)

Jamie Hentall Maccuish

University College London - Department of Economics

Cormac O'Dea

Yale University

Date Written: March 2021

Abstract

Using data covering a single cohort's first 55 years of life, we show that most of the intergenerational elasticity of earnings (IGE) is explained by differences in: years of schooling, cognitive skills, investments of parental time and school quality, and family circumstances during childhood. To decompose the fraction of the IGE explained by each of these channels, we implement a multi-level mediation analysis combined with a latent factor framework that accounts for measurement error. Multilevel mediation analysis allows us to assess not only the direct effect of each channel on the IGE, but also its indirect effects working through the other channels, thus providing an in-depth understanding of the link between parents' and children's earnings. Of these channels, we show that the main driver of the IGE is increased levels of parental investments received by children of high income parents early in their lives, which encourages greater cognitive development and lifetime earnings.

JEL Classification: C38, I24, J24

Suggested Citation

Bolt, Uta and French, Eric and Maccuish, Jamie Hentall and O'Dea, Cormac, The Intergenerational Elasticity of Earnings: Exploring the Mechanisms (March 2021). CEPR Discussion Paper No. DP15975, Available at SSRN: https://ssrn.com/abstract=3816860

Uta Bolt (Contact Author)

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Eric French

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Jamie Hentall Maccuish

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

Cormac O'Dea

Yale University

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