Thursday, January 20, 2011

Social Mobility: Nature versus Dollar

In his recent post The Half-Full Glass of Economic Mobility, Greg Mankiw looks at the causes of Social Mobility and remarks that even though the income of parents has some predictive power for determining their children's future income it is difficult to conclude that there is a causal relationship between inter-generational incomes.

It may be hard to believe at first but when you actually account for what else is transmitted to children by their parents, it actually make sense. Mankiw talks about the role of IQ heritability (nature) in determining the socio-economic fate of one's offspring to make his argument.

However, the transmission mechanism of one's place in society actually goes beyond that and is much more complex: Culture, values and opportunities also play a role that goes well beyond the randomness of genes and the certainty of money.

To my surprise, the graph above shows that the U.S. has less social mobility than European nations. Yet, Mankiw's piece offers an explnation for that as well.

What do you think?

Anyways, here is Mankiw's blog entry:

"When people look at data on economic mobility, they see different things. For example, it is well known that if your father had high income, you are more likely to have high income than if you father had low income. According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son's income with respect to father's income is about 0.5 in the United States. How do you interpret this fact?

"Some people might be tempted to see it as evidence against equality of opportunity. After all, it shows that it matters where you started. Rich parents can buy better schools, expensive tutors, fancy summer camps, and all sort of other great stuff for their kids. How fair is that?

"But what strikes me about that 0.5 number is not how large it is but how small it is. As I understand it, that 0.5 estimate is roughly the correlation between father and son income. That means that the fraction of variance of son's income explained by father's income--that is, R-squared--is only 0.25. This last number is sometimes called the "heritability" of a characteristic.

"By contrast, the heritability of IQ is usually estimated to be much larger than that. At least some of the heritability of income must come not from inequality of opportunity but from the genetic transmission of talent. Other aspects of talent, such as drive, energy, and spunk, might well have a genetic component as well, but they are harder to measure and thus we know less about them. But the one that has been studied extensively, IQ, seems more heritable than income.

"The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income. And that would be true even if equality of opportunity were perfect.

"One further thought: The study cited above points out that economic mobility is greater in some European countries. That fact does not surprise me, as those are nations with less inequality. Moving up and down a short ladder is a lot easier than moving up and down a tall one."

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