Better Parents or Richer Parents: Understanding Intergenerational Transmission of Human Capital
57 Pages Posted: 5 Apr 2019 Last revised: 20 Aug 2019
Date Written: February 22, 2019
There are two essential mechanisms in the canonical model of the transmission of human capital across generations -- parental income and parental education. We provide novel empirical evidence to disentangle the significance of these two factors in determining children's human capital. Two reforms in Sweden provide us with natural experiments to separately identify the effects of parental income versus parental education: an educational reform that exogenously changed the level of compulsory schooling and quality of education of the parent generation; and a tax reform that exogenously altered parents' net income. Using Swedish administrative data, we first find that a 1,000 SEK increase in parental human capital leads to a 190 SEK increase in children's human capital. Second, exploiting the tax reform, we show that a 117 SEK increase in children's human capital -- that is, slightly over 60% of the overall effect -- is due to the parental education channel. Third, by explicitly measuring the effect of parental education channel, we verify that our results are robust to the estimation methods employed. Fourth, we highlight heterogeneity in the results across various sub-populations and show that parental income channel is the main driver of differences in children's outcomes when we focus on the sample of parents with similar levels of education. Considering heterogeneity of the effects based on children's gender, we additionally emphasize that parental education channel has a larger impact on daughters with the effect being estimated at over 70%.
Keywords: Intergenerational Transmission, Education and Inequality, Government Policy, Personal Income and Other Nonbusiness Taxes and Subsidies
JEL Classification: J62, I24, I28, H24
Suggested Citation: Suggested Citation