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The Intergenerational Elasticity of Earnings: Exploring the Mechanisms

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  • French, Eric Baird
  • O’Dea, Cormac
  • MacCuish, Jamie
Abstract
Using data covering a single cohort's first 55 years of life, we show that most of the intergenerational elasticity of earnings (IGE) is explained by differences in: years of schooling, cognitive skills, investments of parental time and school quality, and family circumstances during childhood. To decompose the fraction of the IGE explained by each of these channels, we implement a multi-level mediation analysis combined with a latent factor framework that accounts for measurement error. Multilevel mediation analysis allows us to assess not only the direct effect of each channel on the IGE, but also its indirect effects working through the other channels, thus providing an in-depth understanding of the link between parents' and children's earnings. Of these channels, we show that the main driver of the IGE is increased levels of parental investments received by children of high income parents early in their lives, which encourages greater cognitive development and lifetime earnings.

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  • French, Eric Baird & O’Dea, Cormac & MacCuish, Jamie, 2021. "The Intergenerational Elasticity of Earnings: Exploring the Mechanisms," CEPR Discussion Papers 15975, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15975
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    Cited by:

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    Keywords

    Parental investments; Cognitive skills; Intergenerational elasticity of earnings;
    All these keywords.

    JEL classification:

    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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