“Equitable Growth in Conversation” is a recurring series where we talk with economists and other academics to help us better understand whether and how economic inequality affects economic growth and stability.
In this installment, Equitable Growth Senior Policy Advisor Liz Hipple talks with Bhash Mazumder, senior economist and research adviser in the Economic Research Department and director of the Chicago Federal Statistical Research Data Center at the Federal Reserve Bank of Chicago. His research focus is on labor economics, education, and health, focusing on intergenerational economic mobility, the long-term effects of poor health early in life, and black-white gaps in human capital development. Mazumder also oversees access to U.S. Census Bureau microdata on behalf of a consortium of institutions, including the Federal Reserve Bank of Chicago, Northwestern University, the University of Chicago, and the University of Illinois system. The views represented here do not reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.
In a highly informative conversation, Hipple and Mazumder discuss:
- Different kinds of measures of intergenerational mobility
- The reasons for less U.S. intergenerational mobility compared to other countries
- Specific policy interventions to improve intergenerational mobility in the United States
- The accumulating evidence of the decline of intergenerational mobility
- Housing segregation and intergenerational mobility in the 20th century
- Intergenerational health mobility
[Editor’s note: This conversation took place on December 14, 2018.]
Liz Hipple: I know you’ve been researching topics related to intergenerational mobility for a number of years now. I’m curious why you think this is an important topic to study and what you think measuring intergenerational mobility tells us about people’s experience with the economy.
Bhash Mazumder: I think relative intergenerational mobility tells us something pretty important about how much opportunity there is in society and whether there are barriers that hold back our full potential as a society. So, one way you can think about it is to borrow an idea from a classic paper by [University of Arizona economist] Gary Solon. Imagine there are two societies, both of which experience similar levels of economic growth and have similar levels of income inequality. In one of them, each person’s place in society is pretty much exactly where their parents were. So, if your parents were among the top income earners, then you’re very likely to be, and likewise, if your parents started at the bottom, then you’re likely to stay at the bottom. In the other society, there is a lot more movement.
So, both societies are growing, the amount of inequality is pretty similar, but there’s a lot of movement from one generation to the next in one society but not the other. That gives us a sense of how we could characterize the nature of each society, by thinking about how much intergenerational mobility there is. That, in turn, tells us whether or not opportunities to move up and down the income distribution are widely shared or not.
Different kinds of measures of intergenerational mobility
Hipple: You used the term “relative intergenerational mobility.” I know there are a lot of different ways that you can go about measuring mobility, including relative mobility, which compares kids to their parents’ economic situations. You also can measure absolute mobility. What are these different ways you can measure intergenerational mobility? What are some of the different metrics people have used? For example, I know there’s income versus earnings. You also have looked into siblings’ economic outcomes. What do these different methods show us about mobility when you measure one way versus another?
Mazumder: Let me put aside the kind of concepts of income for now, whether it be earnings or wages or total family income, and think more broadly about the kinds of measures we use. There are a number of different approaches researchers have used. I would say what’s gotten the most attention in the United States have been measures of intergenerational persistence. One minus the degree of persistence, in turn, tells us about mobility. If incomes or ranks are very similar across generations—if parent’s income is a lot like their kid’s income—then we infer that mobility is low.
A second major approach that I don’t think has been emphasized enough in the United States is to look at the commonality between siblings in their outcomes. What I like about the sibling approach is that it’s not just focused on how parents’ income translates into the next generation, but it thinks about a whole broad set of family background characteristics, including other characteristics of parents such as education, their health, their jobs. It also includes other community-level characteristics such as the kinds of peers they grew up with, what schools they went to.
The sibling correlation basically boils everything down into one number by saying, what are all of the things that two siblings shared growing up? How much does that determine their overall outcomes? The higher the number is, the more the commonalities are really important, and the lower the number suggests there’s a lot of room to make up for deficiencies in, say, neighborhoods or parent income or what have you.
I think that’s an important measure that we haven’t studied a lot. In the United States, there has been some research on sibling correlations, which I’ve contributed to a little bit, that suggests there’s much less intergenerational mobility in U.S. society than in other countries. If you measure the sibling correlations, for example, in people’s wages or their test scores in the United States, they’re actually higher than the correlations you would find in physical characteristics such as height or weight, or other psychological characteristics measures we tend to think are strongly genetically determined. So, it suggests that there is something about the nature of our society causing family background characteristics to strongly influence children’s long-run outcomes, thereby reinforcing inequalities.
The reasons for less intergenerational mobility in the United States compared to other countries
Hipple: That is really striking. Why do you think you see that stronger relationship in the United States than in other countries?
Mazumder: That’s a good question. And I don’t think we have a definitive answer. I think one important source of the differences across countries in mobility has to do with early childhood development. This includes the period from the time kids are in utero all the way through their high school years. There is a significant degree of inequality in early-life access to quality childcare and health care. There is also inequality in the quality of K–12 schooling. School financing in the United States is very unequal. In many places, it’s highly related to property taxes.
These institutional factors create inequalities that you don’t see in many other advanced economies where resources are equally shared in terms of having government-run health care systems that equalize access to early life health care, to national childcare systems, to much more equitable financing of schools. I also think there are important differences across countries in labor market institutions. The degree of union power in the United States has been on the wane for many decades, and it’s much weaker than in other countries.
Other institutional structures such as how we regulate industries also are different. The tax rates on individuals and how that might affect redistribution of resources are very different. So, I think there are a whole host of factors. And I don’t think we know well enough yet, how to apportion which ones are the crucial ones for understanding these cross-country differences in mobility.
Hipple: That’s interesting that you make that distinction between early childhood factors and later-in-life factors. In my paper with my co-author, Elizabeth Jacobs, we actually take a similar approach to breaking down the channels via which equal opportunities impact intergenerational mobility into those that impact the development of human potential and the deployment of human potential. We focused on early childhood development and helping kids acquire skills that they will later go on to use—or, as we put it, could deploy in the labor market. And that second group of factors, we characterize as the deployment of human potential or impediments to that deployment. So, I’d be curious to hear your thoughts on that distinction. In particular, in our paper, we argue that while there is a lot of research on the development side, there’s not yet a whole lot into helping us untangle the factors going into the deployment side. So, curious to get your reactions to that.
Mazumder: I think that’s a good point. I think for a long time my bias has been that the human capital development side was much more important. The idea is that if kids enter labor markets with very strong skills, then it’s a lot harder to keep them from achieving success. This would be the case if they experienced good health early in life and developed the ability to learn in school. These skills would grow cumulatively and help them as adults in the labor market.
However, I think this emphasis on early-life skill development should be tempered a bit. A growing number of studies demonstrate the importance of factors such as monopsony power in labor markets or the power of labor in the bargaining relationship has influenced how the benefits of economic growth are distributed. Unfortunately, I think it’s just a lot more challenging from a research standpoint to try to understand exactly how these factors influence intergenerational mobility. It’s probably going to take some time for researchers to develop the kind of convincing approaches that will allow us to see how the institutional side of labor markets matter.
It is much easier to use individual data to identify people who have either faced extreme disadvantages in human capital development or who have benefitted from specific policies. In contrast, in thinking about the role of labor market institutions, researchers typically compare entire countries or large regions within countries where there are a lot more confounding factors. This makes it much harder to make a strong case for how those factors matter. But I think with time, we may gain a better understanding of the role of labor market institutions.
The other point I would make is that from a policy point of view, there is lots of very low-hanging fruit. There are a number of policies that have already been documented through very good research that shows there are strong long-term returns to providing greater resources to kids in terms of health or schooling.
Given that we’re clearly not doing all we can on this front right now, the easiest way we could improve mobility would be to make investments in health and schooling.
Specific policy interventions to improve intergenerational mobility in the United States
Hipple: Can you say a little bit more about those policy interventions and how you think the research supports them? What would be some specific policy interventions you would recommend?
Mazumder: I think there are a whole host of social safety net programs that could help improve mobility. This includes food stamps, the Women, Infants and Children supplemental nutrition program, access to Medicaid early in life, immunizations, and policies that reduce air and water pollution. A number of studies have really leveraged the combination of the fact that there are a lot of programs implemented now that were put in place 40 or 50 years ago, with modern data sources on these same individuals. We can now use data to trace out the effects on people who were “treated” by these programs and compare them to people who were not. And we can observe kids who were exposed to these programs now, many decades later.
And a number of studies—such as work by [University of California, Berkeley economist] Hilary Hoynes, Northwestern University human development and social policy professor] Diane Schanzenbach, and [Columbia University economist] Doug Almond using data from the panel study of income dynamics—have shown that the rollout of food stamps in the 1960s had clear effects on improving long-run economic and health outcomes that also improved mobility. That’s just one example among many. There also are a number of studies that have shown similar long-run effects from the rollout of Medicaid.
Often the debate in Washington about the value of these social safety net programs has largely ignored these long-run intergenerational benefits when figuring out the effectiveness of these policies in terms of costs and benefits. The research is starting to show how important it is to make sure that we have as much funding for these programs as possible in order to lower the barriers to access. These are the easiest policies that can make a big difference.
The accumulating evidence of the decline of intergenerational mobility in the United States
Hipple: Taking a step back, let’s discuss some of the big-picture relationships and trends we’ve been seeing in intergenerational mobility in the United States. There’s been a lot of popular press attention to the notion that mobility in the United States is on the decline, that today’s kids can’t expect to see the same kind of upward trajectories of their parents’ generation or grandparents’ generation could. What do you think the research actually shows on that? Has mobility declined over time? Do you see different things if you measure in different ways, and what might those differences tell us?
Mazumder: I think it’s important to make a distinction between absolute mobility and relative mobility. I think there’s some pretty good early evidence suggesting that absolute mobility has declined, even though the research is in its initial stages and we’re not really sure about the magnitudes. With absolute mobility the idea is to simply compare how much income you make, adjusted for inflation and maybe some other adjustments that you might want to make such as family size, compared to your parents. The numbers suggest that compared to kids who were born in the middle of the 20th century, kids who are born later in the 20th century are much less likely to exceed their parents’ income.
Now, I would say that roughly 60 percent of kids still exceed their parents’ income, but you might have expected a much higher number in a country where the economy is growing at a steady pace of, say, 2 percent or 3 percent a year. If the gains to income are relatively equally shared, we would expect that the vast majority of people would be making more money than their parents. This is simply because if the economy is growing, then the overall pie should be growing as well.
So, the fact that we’ve seen this decline in absolute mobility suggests that the way in which the gains to economic growth have been distributed has not been equal. Again, while there’s some good early research showing this, there’s really just been one or two papers on the topic. In my view, the extent of the decline in absolute mobility may have been a bit exaggerated because we just haven’t had really good intergenerational data on older cohorts the way we have good administrative data for more recent cohorts.
I think it’s useful to turn to looking at relative mobility because here there’s been more research. For relative mobility, we’re not interested in whether you exceed your parents in absolute income but simply where your position in the income distribution compares to that of your parents. If your parents were highly ranked, are you more likely to be highly ranked, irrespective of whether you actually make more money than your parents? And here, I think, there’s been more of a debate about whether relative mobility has changed. I have a couple of papers that have convinced me that relative mobility also has declined.
I think the key is to look at cohorts who grew up in the middle of the 20th century. While the data here is more limited, we do have form surveys conducted by the U.S. Bureau of Labor Statistics called the national longitudinal surveys. Analysis I’ve done based on these surveys strongly suggests that the association between parents’ income ranks and kids’ income ranks has increased, implying that mobility has declined. In the big picture, this reflects many economic changes that have happened. In the post-World War II period, there was a lot of shared prosperity, and this was also a period when unions had a lot of power. There was also relatively rapid economic growth, and the gains were widely shared between both business owners and workers, which fed through to much greater intergenerational mobility. In this period, your education level or where you grew up simply didn’t matter as much.
A variety of changes happened starting around 1980. We started to experience much higher inequality and higher returns to schooling; product market regulations and union power started to decline; technology began to fundamentally reshape the nature of how companies operate; there was a greater integration of the U.S. economy with the world economy. All of those changes altered how our economy operated in a way in which inequality increased. This, in turn, affected intergenerational mobility as well. Now, it began to matter a whole lot more where you grew up, how much schooling you got, the nature of the labor market you entered into—all in ways so that mobility has declined.
Hipple: Those are all really interesting and also very big picture changes. Are there takeaways for policymakers when they’re thinking about how to make sure mobility is still based on equality of opportunity? Is that still possible for folks? Do you see any takeaways for policymakers based on those historical changes and over time?
Mazumder: I think there are some things that we can do, but it’s difficult. I don’t think the answer is to turn back the clock. Obviously, there are a lot of things that were dependent on the nature of the way the world was in the post-World War II period that we probably can’t achieve. But I think we can look for answers here and there.
As I said earlier, improvements in policies that affect human capital development through access to health care and schooling and maintaining social safety net programs are the low hanging fruit for policymakers to improve mobility. They have also been proven effective through careful research. We might also want to consider baby bonds that allow for greater investments in children’s human capital as well as greater access to quality early childhood education programs.
I think that policies that affect labor market institutions may also be important. Policies that improve the ability for unions to organize, higher minimum wages, and expansions of the Earned Income Tax Credit are some of the labor market policies we should think about. With respect to tax policy, we could reform the estate tax, as that would have a direct effect on intergenerational transfers. But as I said, it’s not so simple as going back to the 1970s. Policymakers need to think carefully about policies in the current context and where the research evidence has shown that they can be successful.
Housing segregation, wealth accumulation, and intergenerational mobility in the 20th century
Hipple: You’ve done some really interesting work looking at the long-term effects of redlining in the United States from the 1930s using maps from the old Home Owners Loan Corporation. What do you think researchers and policymakers should know about this research, and how they might use it to inform future research questions?
Mazumder: This is a project I’ve been very excited about, and it’s a great example of how better technology—the ability to digitize old maps—has allowed us to do this research. Basically, in the 1930s as part of the New Deal, a federal housing agency, the Home Owners’ Loan Corporation, created a set of neighborhood maps for more than 200 cities to help improve appraisal practices and to stabilize real estate markets after the Great Depression. These maps graded neighborhoods on an A to D scale that was color coded, with the worst-graded neighborhoods, D, colored in red. Many believe this was the origin of the so-called practice of redlining, where entire neighborhoods were deprived of credit because of their demographic makeup, with race playing a major role.
We look at the effects of these maps starting with the post-World War II period and out to the current period. We compare individuals who lived on the lower-graded side of a Home Owners’ Loan Corporation’s map border versus those who lived on the higher-graded side. We are able to show there that there were striking gaps in homeownership and housing values that began to emerge in the decades after the maps were drawn, even when we compare boundaries that were very similar before the maps were drawn. The degree of racial segregation that emerged along these borders also strongly suggests that the maps influenced the trajectories of entire neighborhoods for much of the post-World War II period.
These gaps across boundaries started to fall around the 1980s, which is around the same time that many national policies came into play such as the Community Reinvestment Act and the Fair Housing Act. These policies attempted to directly address discriminatory lending and tried to undo the legacy of federal policies that might have led to this greater degree of discrimination. So, in some sense, what we’re doing is documenting the history of the impacts of certain federal policies.
But I do think there are important lessons going forward. One would be that our research simply shows the importance of discrimination in credit access on long-run outcomes, both for individuals and for entire communities. There may be tipping points where if you allow for discriminatory policies against entire neighborhoods, then this can have a cumulative effect. If financial resources don’t flow to neighborhoods for a sustained number of years, it leads to much worse neighborhoods. The quality of the building infrastructure deteriorates, school resources decline, other businesses don’t invest in these areas, and you can create widespread geographic disparities in neighborhood quality.
What’s interesting is that some of the work that Raj Chetty and Nathan Hendren have done has shown how important entire neighborhood influences are on intergenerational mobility. And one reason why neighborhood influences may matter could have been the legacy of federal policies that allowed for certain areas to be vastly underfunded for decades. In this way, the research on redlining ties in nicely with the research on intergenerational mobility.
The causal relationships between the redlining maps and intergenerational mobility hasn’t yet been shown, but I suspect they have been a factor, and it’s something I’m continuing to do research on. But, again, the key point would be to show how discriminatory credit policies can have long-run effects that could last for many decades and affect entire communities.
Intergenerational health mobility in the United States
Hipple: We have covered a lot of territory here. I want to thank you again for taking the time to talk to me today, and see if there are any final points you want to make or things you wish we had gotten a chance to talk about but didn’t?
Mazumder: The only other thing I think I would’ve liked to mention is that I’m doing some new work looking at intergenerational health mobility. And the main finding there is that there actually appears to be much greater mobility with respect to people’s overall health than with respect to income. My interpretation of this finding is that there’s actually been a stronger social safety net when it comes to health and the public health infrastructure in the United States, compared to the protective effects of labor market institutions. This has resulted in there being much greater health mobility than income mobility.
That’s not to say there aren’t challenges with respect to improving intergenerational health mobility as well, but I think it suggests that policy can have an influence. We can probably do a lot more to improve labor market outcomes and improve economic mobility the same way that our health policies have led to rapid mobility with respect to health. Thank you, Liz, for all these great questions.
Hipple: Thank you. I’ve really enjoyed our conversation and hope we can talk again soon.
In conversation with Richard Reeves
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