WIDER Working Paper 2020/6-Drivers of Mobility
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WIDER Working Paper 2020/6 Drivers of mobility Patrizio Piraino* January 2020 Abstract: Empirical studies in developing countries tend to find higher levels of socioeconomic persistence across generations compared with those of high-income economies. However, there have been relatively few advances in the identification of the drivers of such higher levels of intergenerational persistence. By focusing on relevant evidence from developing and emerging economies, this paper points to some of the potential drivers of mobility that are either outside those typically considered in high-income countries or likely to be of greater relevance in the developing world. The paper builds on the standard model of intergenerational mobility to discuss the appropriateness of some of its assumptions in a developing-country context. It will then advance some suggestions for future theoretical and empirical investigations of social mobility in the Global South. Key words: intergenerational mobility, Global South, market exclusion JEL classification: D63, J62, O15 Acknowledgements: I would like to thank Vito Peragine and Kunal Sen for detailed comments on an earlier draft, as well as participants in the UNU-WIDER workshop on Social Mobility in the Global South (Helsinki, 2019) for helpful discussions. * University of Notre Dame, Notre Dame, IN, USA; [email protected]. This study has been prepared within the UNU-WIDER project Social mobility in the Global South—concepts, measures, and determinants. Copyright © UNU-WIDER 2020 Information and requests: [email protected] ISSN 1798-7237 ISBN 978-92-9256-763-7 https://doi.org/10.35188/UNU-WIDER/2020/763-7 Typescript prepared by Luke Finley. The United Nations University World Institute for Development Economics Research provides economic analysis and policy advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki, Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank, research institute, and UN agency—providing a range of services from policy advice to governments as well as freely available original research. The Institute is funded through income from an endowment fund with additional contributions to its work programme from Finland, Sweden, and the United Kingdom as well as earmarked contributions for specific projects from a variety of donors. Katajanokanlaituri 6 B, 00160 Helsinki, Finland The views expressed in this paper are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors. 1 Introduction A large empirical literature on intergenerational income mobility shows consistent evidence of positive correlations between the income of parents and that of their adult offspring. This is true for every society for which we have data and for several types of income (e.g. labour market earnings, total market income, welfare receipts, etc.). Björklund and Jäntti (2009), Black and Devereux (2011), and Corak (2013) provide comprehensive reviews of this literature. The existing international evidence has allowed researchers and policymakers to identify a number of ‘stylized facts’ on the multitude of factors that can help to explain the observed variation in mobility levels across and within countries. This largely descriptive literature, while falling short of identifying the relative role of alternative causal mechanisms, offers very plausible hints about where to look to improve social mobility. At the same time, it is notable that most of the stylized facts on possible drivers of mobility are derived from empirical analyses of high-income countries. Since only a relatively small share of the world population currently lives and works in this group of countries, a natural question is whether the findings from these regions can easily be extended to the much larger pool of the world population living in the developing world. Empirical studies of intergenerational mobility in developing countries tend to find higher levels of economic status persistence across generations compared with those of developed economies (Brunori et al. 2013; Narayan et al. 2018), but there have been relatively few advances in the identification of the underlying drivers of this higher persistence. This is due to a combination of data availability and, to some extent, an over-emphasis in the economics literature on analyses of the Global North (e.g. Europe/North America). In fact, it is fair say that even the existing theoretical contributions in this literature appear to be implicitly benchmarked on structural processes that may be more applicable to the developed world. The purpose of this paper is to contribute to reducing this gap in the literature and offering a more complete picture of social mobility across the globe, including in developing and emerging economies. It will point out some of the potential drivers of mobility that are either outside those typically considered in high-income countries or likely to be of greater relevance in the developing world. I will begin with a simplified description of standard models of intergenerational income mobility, followed by a discussion of the appropriateness of some of their underlying assumptions in a developing-country context. I will then advance some suggestions for future theoretical and empirical investigations of social mobility in the Global South. 2 Theoretical framework Empirical analyses of intergenerational mobility have largely relied on the classic model developed by Becker and Tomes (1979, 1986)—and subsequent adaptions and extensions—for a theoretical underpinning of the intergenerational income regression typically estimated in the literature. In its most basic versions, the model assumes a two-period utility framework for families consisting of one parent and one child. In the first period, the parent faces a budget constraint which dictates the allocation of disposable income between own consumption and investment in the child’s human capital. In the second period, the child earns income as a function of the acquired human capital and other endowments. I discuss here a simplified version of the standard model using the adaptation presented in Solon (2014). 1 2.1 Parental investments and heritable endowments Following Solon (2014), we can begin by expressing the income-generating function for the child as ln(푌푡) = 휇 + 훾푡퐻푡 (1) where 푌푡 is the child’s income, 퐻푡 is their human capital, and 휇 is the intercept for the 푡 generation. The returns to human capital in the labour market are captured by 훾푡. Next, we can specify the child’s human capital as depending on the parent’s investment in the previous period, 퐼푡 − 1, and on the composite effect of other endowed attributes: 퐻푡 = 휗 ln(퐼푡 − 1) + 퐸푡 (2) The parameter 휗 in Equation 2 represents the ‘effectiveness’ of parental investment in generating human capital. Substituting Equation 2 into Equation 1 gives ln(푌푡) = 휇 + 훾푡휗 ln(퐼푡 − 1) + 훾푡퐸푡 (3) A key assumption of the model is that 퐸푡, which is independent from parental investments, is transmitted across generations according to a first-order autoregressive process: 퐸푡 = 휅 + ℎ퐸푡 − 1 + 휔푡 (4) That is, the child’s endowed attributes are partly inherited from the previous generation according to the heritability parameter ℎ ∈ [0,1]. As we will see below, the parameter ℎ plays an important role in these models. These inherited endowments encompass a variety of genetic, cultural, and environmental attributes that are transmitted across generations via a mechanic heritability process—i.e. they are independent of parental investments in the child’s human capital (Solon 2004, 2014). Examples of these attributes may be genetic ability or non-genetic aspects of family culture, attitudes, and connections that children gain by virtue of belonging to a given family. Parents are aware of Equations 1 to 4 and decide the income allocation between own consumption, 퐶푡 − 1, and investments in the child’s human capital, 퐼푡 − 1, by maximizing a Cobb- Douglas utility function of the form 푈 = (1 − 훼) ln(퐶푡 − 1) + 훼ln(푌푡) (5) subject to the budget constraint 푌푡 − 1 = 퐶푡 − 1 + 퐼푡 − 1 (6) where 푌푡 − 1 and 푌푡 are, respectively, the parent’s and the child’s income. The parameter 훼 represents parental altruism, which determines the weight that parents assign to children’s future earnings relative to current own consumption. The budget constraint and Equation 3 allow us to rewrite the parent’s utility as 푈 = (1 − 훼) ln(푌푡 − 1 − 퐼푡 − 1) + 훼휇 + 훼훾푡휗 ln(퐼푡 − 1) + 훼훾푡퐸푡 (7) 2 which, after solving the first-order condition, yields the optimal investment in the child’s human capital: 훼훾푡휗 퐼푡 − 1 = [ ] 푌푡 − 1 (8) 1 − 훼(1 − 훾푡휗) Intuitively, Equation 8 suggests that parental investments in the child’s human capital will be higher for richer and more altruistic parents, and for periods of greater returns to human capital. This simple model allows a rationalization of the intergenerational earnings elasticity (IGE) typically estimated in the empirical literature to measure the degree of economic mobility in a given society. To see this, one can substitute the optimal investment amount Equation 8 into the child’s earnings function Equation 3, to obtain: ∗ ln(푌푡) = 휇 + 훾푡휗 ln(푌푡 − 1) + 훾푡퐸푡 (9) As explained by Solon (2014), this is a first-order autoregression of ln(푌푡) with a serially correlated error that also follows a first-order autoregression.1 In steady state—i.e. when 푉푎푟[ln(푌푡)] = 푉푎푟[ln(푌푡 − 1)]—the slope coefficient in Equation 9 is the commonly estimated IGE, which will be equal to the sum of the two autoregressive parameters divided by one plus their product: 훾푡휗+ℎ 퐼퐺퐸 = (10) 1+훾푡휗ℎ Expressing the IGE as in Equation 10 clarifies that earnings persist across generations (i.e. 퐼퐺퐸 > 0) as a result of two main ‘transmission channels’: (i) Higher-earning parents invest more in their child’s human capital, which increases income in the next generation: 훾푡휗 > 0.