Intergenerational Income Persistence and Transmission Mechanism: Evidence from Urban China

Abstract

In this paper I investigate the intergenerational income association and its transmission channels amid China’s economic transition period using urban data from the Chinese Household Income Projects in 1995 and 2002. The estimated intergenerational income elasticity is 0.43 and 0.51 for cohorts educated prior to and after the market reform respectively, and reaches 0.71 among households with above average income in the post-reform era. Besides the conventional channel of education, this paper estimates the contribution from social capital and ownership of work unit across cohorts and income groups. There is weak evidence that prior to market reform, ownership of work unit contributes most to the intergenerational income persistence for households with below average income, while social capital leads the three contributors in households with above average income. However, in the post-reform era, parents with below average income invest statistically significantly in children’s education which contributes most to the intergenerational income persistence. The leading contributor in families with above average income shifts to social capital. Explanations for such a shift could lie in the ability and incentive of parents from different income categories to invest in their children. The results are tested through a series of robustness checks, and provide empirical evidence for promoting policies on the equality of opportunity.

Keywords: Intergenerational income elasticity, transmission mechanism, schooling, social capital, ownership of work unit

JEL Classification: D10, J13, J62