It’s been well documented that one of the best predictors of a person’s economic status is the economic standing of their parents. While that’s good news for those whose parents are well-off, it’s really bad news for economic mobility. A new study from the St. Louis Fed attempts to discern precisely what factors contribute to this phenomenon, and how those factors might be manipulated to increase economic mobility in America.
The paper’s authors, George-Levi Gayle and Limor Golan of Washington University in St. Louis; and Mehmet A. Soytas of Ozyegin University, looked at several characteristics to figure out the factors that play the largest role in the earnings alignment between parents and their children. They looked two-parent households and their respective participation in the labor market, education, number of children, spousal choice, and division of labor.
Gayle says that some of what they found surprised them. They initially thought that assortative mating, an increasingly common occurrence where individuals wed someone of a similar educational status, would be a significant determinant of earnings similarity. But according to their analysis, it only accounted for around 13 percent of correlation. “This is supposed to be one of the holy grails of household economics in terms of generating persistence,” he said.
Instead, they found the most significant contributor to intergenerational earnings similarities was the way the modern labor market is set up. “The lack of flexibility in jobs was one of the major things accounting for intergenerational persistence,” Gayle says. The way employers (and employees) think about work and human capital has a huge influence on how households distribute their time. And those decisions play a big role in shaping the earnings of the next generation. After taking a significant amount of time away from the workforce, it can be difficult if not impossible, to just pick back up where you left off. “You actually have a depreciation of human capital,” Gayle says. “The cost of raising kids is much more than just the cost of the foregone wages current value, it’s also the future wages that you're going to lose.” That’s a cost that some families can afford more easily than others.
The study also notes that often, research about intergenerational earnings focuses on the relationship between the earnings of fathers and sons. But that measuring stick is largely outdated since women now make up 50 percent of the workforce. And factoring in the role of women, both at home and at work, is especially crucial given how important the trade-off between working and child-rearing is to familial earnings—both current and future.
So how do parent’s choices impact children’s future earnings? It’s largely through investment—of both time and money. Parents have to make choices about how much time they allot to caring for children and who will do so. Those decisions can impact how children grow up and then make their own choices about education, family, and work-life balance in the future. Families with more money may be able to afford more time away from the workforce, or more high-quality childcare and educational opportunities, should they choose to remain on the job.
Gayle says that based on the research, increasing changing the way workers interact with the labor market will be crucial to whittling away at earnings persistence in the future, by decreasing the financial losses inherent in choosing to spend more time with kids. “Flexibility in jobs and in the labor market and friendlier workplaces may be one of the better avenues for affecting changes in intergenerational mobility.”