Yes, Your Parents’ Status Does Influence Your Earning Power

Welcome to the lottery of birth

“If you’re born poor, you die poor,” a U.K. politician lamented six years ago. Sadly, little has changed.

Britain is joined by the U.S., France and Italy in having a high correlation between parents’ earnings and those of their children, according to a report by Standard Life Investments. The relationship also exists in Scandinavian economies as well as Australia, Germany and Canada, but to a lesser extent.

That’s creating challenges for the most-affected countries. Such societies tend to waste or misallocate human capital; workers are often less motivated and as a result, less productive; and the associated higher levels of inequality are found to be detrimental to economic growth, the research shows.

“In practically all countries for which evidence is available, there is a clear link between what your parents earned and your own earnings prospects,” said Jeremy Lawson, chief economist at Standard Life and a lead author of the report. “Addressing low mobility is challenging. There is no global silver bullet, with each country facing issues in its own unique institutional and policy environment.”
An obvious first solution is education, including spending on early age intervention and developing schooling systems that don’t separate students by ability. But the problem is deeply ingrained.

In the U.S., three decades of sluggish real wage gains have prompted researchers to seek answers. They tracked the proportion of those aged 30 who earned more than their parents at that age and found a significant downtrend: just 50 percent of children born in the 1980s earned more than their parents at the same age, compared with nearly 80 percent of 1950s kids.

Industrial decline has been a major culprit. In the American Midwest, just 41 percent of children born in 1984 earned more than their parents, compared with 95 percent for those born in 1940.

“Little wonder that President Trump’s campaign messages were so well received in states like Michigan, Ohio and Pennsylvania,” said Lawson.

But the U.K. is even more socially rigid. About half of the economic advantage high-earning fathers have over low-earning dads is transmitted to their sons, while an OECD analysis found Britain among the countries where socioeconomic background appeared to have the largest impact on a student’s performance.

In Asia, much attention is paid to rising inequality in China; indeed among the world’s largest economies only Brazil tops the nation in terms of income inequality. But China does have mobility. Over the past four decades, rapid and broadly distributed growth has meant fewer households staying in the same income quintile for long periods of time. But that may be changing as the economy matures.

“While children will likely earn more than their parents did as adults, it is becoming less likely that they will break out of their social class,” Lawson said. “In this respect, perhaps China is looking less like a developing economy and more like the U.S.”

This articles was published on bloomberg.com