Intergenerational Income Mobility and Economic Freedom

Abstract

Numerous studies have found that income inequality reduces the chances of upward relative mobility (i.e., climbing up the income ladder). However, most of this work ignores the role played by institutional quality (namely, economic freedom) in determining mobility and increasing the individual’s set of choices. We fill this gap by empirically testing the direct and indirect (through economic growth) impacts of economic freedom on intergenerational income mobility. We find that economic freedom has both direct and indirect effects on intergenerational income mobility. Income inequality is also a strong predictor, but of downward income mobility. When we incorporate findings about the purely mechanical relationship between inequality and intergeneration income mobility (e.g., Guner 2015; Berman 2019), we find that the legal system and property rights component of economic freedom matters more than inequality. These results suggest that good institutions can increase intergenerational income mobility.

Keywords: Economic Freedom, Income Mobility, Inequality, Positive Liberty

JEL Classification: N31, H41, D72, L51