Does Money Matter for Intergenerational Income Transmission? Evidence that Intergenerational Income Transmission is Largely Driven by Human Capital
47 Pages Posted: 18 Nov 2016 Last revised: 21 Nov 2017
Date Written: November 18, 2016
Parental income can predict children’s income through human capital or monetary transfers. Using data from the Panel Study of Income Dynamics (PSID), we decompose parental income into a component that is predictable based on a wide array of human capital measure and a “luck” component that by construction is uncorrelated with human capital. We find that the intergenerational income transmission occurs through both channels but at sizably different rates. While the predictable component has a transmission rate of at least 0.8, the “luck” component has a transmission rate of at most 0.2. Therefore, the “pure human capital” component, calculated as the difference between these two estimates, has a transmission rate of at least 0.6. Thus, the intergenerational income elasticity is largely recovering the transmission of human capital rather than the influence of money.
Keywords: Intergenerational Income, Human Capital, Income Mobility
JEL Classification: D31, E24, J62
Suggested Citation: Suggested Citation