Your American Dream is Not Mine! A New Approach to Estimating Intergenerational Mobility Elasticities

48 Pages Posted: 30 Sep 2015

See all articles by Yonghong An

Yonghong An

Texas A&M University

Wang Le

University of Alabama

Ruli Xiao

Indiana University

Date Written: August 1, 2015

Abstract

This paper provides a new framework to estimate intergenerational mobility elasticities (IGE) of children's income with respect to parental income. Our approach is nonparametric allowing for heterogeneity in IGEs and nonlinearity by leaving the relationship unspecified, while acknowledging the latent nature of both child and parental permanent incomes. Our approach also addresses life-cycle bias directly in estimation without requiring knowledge of permanent income as the previous literature does. We confirm some of the previous findings and also have some novel results. First, we uncover that the association between observed annual income and permanent income varies over the life cycle; and that the observed patterns differ over generations, although the latter result is statistically insignificant due to large variances. Second, we find strong evidence that there exists substantial heterogeneity in IGEs across population and that the mobility function is nonlinear. The implied IGE exhibits a Ushape pattern with "twin-peaks". Specifically, there is a considerable degree of mobility among the broadly defined middle class, but both the children of high and low income fathers are more likely to be high and low income adults, respectively. This result suggests that the U.S. is indeed the "land of opportunity" to live out the "American Dream", just not for everyone! These results survive a battery of robustness checks. Finally, we also find that there exist a great deal of within-group heterogeneity. Our approach is also immediately applicable in many other similar contexts both within and outside labor economics.

Suggested Citation

An, Yonghong and Le, Wang and Xiao, Ruli, Your American Dream is Not Mine! A New Approach to Estimating Intergenerational Mobility Elasticities (August 1, 2015). Available at SSRN: https://ssrn.com/abstract=2666697 or http://dx.doi.org/10.2139/ssrn.2666697

Yonghong An

Texas A&M University ( email )

3051 Allen Building
4428 TAMU
College Station, TX Texas 77843
United States

Wang Le

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Ruli Xiao (Contact Author)

Indiana University ( email )

100 S Woodlawn Ave
Bloomington, IN 47405
United States

HOME PAGE: http://https://sites.google.com/site/iueconomicsrulixiao/

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