The importance of neighborhoods and intergenerational economic inequality in the United States

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Many neighborhoods and communities across the United States are shaped by pervasive economic inequality spanning multiple generations. This intergenerational economic inequality today limits the prosperity of many people who want to attain the American Dream of upward income mobility, and it stunts U.S. economic growth.

Research demonstrates a strong link between one’s neighborhood of residence and upward income mobility. Findings from economics research highlight that parental income and education, the quality of education, and employment opportunities are factors correlated with neighborhood of residence and economic mobility.

Intergenerational economic mobility is a critical economic issue. A person’s economic fate is heavily influenced by their family background and where they grew up. Yet the connections between individual outcomes and family backgrounds still aren’t resolved due to the complexity of these dynamics and how academics and policymakers weigh them, such as the environmental factors that a family faces and the impact of family income on investments in children.

Nonetheless, policymakers at the federal, state, and local levels alike understand that persistent intergenerational economic inequality not only hinders those in our society who begin lower on the income ladder but also inhibits the overall growth potential of the U.S. economy by blocking paths to success for those most in need of support.

In a recent working paper, “Family Background, Neighborhoods, and Intergenerational Mobility,” economists Magne Mogstad at the University of Chicago and Gaute Torsvik at the University of Bergen attempt to understand these issues by reviewing the broad economic literature on location, family, and intergenerational mobility. Much of the existing literature uses the Becker-Tomes model, which looks at how family resources can be invested into a child’s education and how this, in turn, will affect a child’s future economic outcomes, mobility, and productivity.

This model—named after Nobel laureate Gary Becker at the University of Chicago and his co-author Nigel Tomes at the University of Western Ontario—uses parents’ income and spending, which encompasses a single parent’s consumption of everyday goods and necessities, such as rent, food, or other miscellaneous bills, to discern patterns of intergenerational mobility.

To further dig into how neighborhoods and families influence future outcomes, the authors review the Moving to Opportunity Experiment, a 1994 policy initiative that was implemented by the U.S. Department of Housing and Urban Development to evaluate how randomized home mobility for low-income households with children who moved from their neighborhoods to “private-market housing in much less distressed communities” affected future economic mobility. This experiment was an opportunity to delineate family effects and neighborhood in economic mobility by comparing three groups: those who received an experimental rental voucher to move within low-income areas within a city; those who received Section 8 vouchers that allowed them to move anywhere within the designated city; and those who received no additional assistance.

The results found that those who were able to use Section 8 vouchers to move to any location within a city had the most positive results, with declining poverty rates. This demonstrates that neighborhood has a significant effect on economic outcomes beyond what can be explained by family characteristics.

Mogstad and Torsvik’s survey of the research helps connect the links between neighborhood and intergenerational mobility. Yet the research generally looks at neighborhoods in a very broad sense, using commuting zones and counties. This means it is exceedingly difficult to pinpoint what neighborhood has the best or most opportunity for mobility.

Still, the sum of the research clearly indicates that location matters. The multiple barriers that multitudes of families face every single day in low-income neighborhoods affect intergenerational mobility. Furthermore, these barriers interact with family characteristics, such as the income, wealth, and the human capital allotments of parents.

The working paper by Mogstad and Torsvik supports the findings of other scholars in the field, among them research by Equitable Growth grantee and Opportunity Insights Research Scientist Matthew Staiger, which finds that children often have access to early employment at their parent’s employer, which puts them on a higher earnings trajectory, compared to children who do not work at their parents’ well-paying employer.

Children can’t help it if the schooling they rely upon isn’t as academically challenging as the schooling in neighborhoods with more funding. And this blame doesn’t fall on the parents who are providing their absolute best with what they were given from their own parents.

Research along these lines is equally compelling, including Harvard University economists Raj Chetty and Nathaniel Hendren in their study titled “The Impacts of Neighborhoods on Intergenerational Mobility II: County-Level Estimates.” Chetty and Hendren find that children’s future earnings, the rate at which they attend college, their fertility, and even their marriage patterns are determined by the neighborhood they grow up in. This was all found looking at looking more than 7 million families and their commuting zones and counties.

Potential policy solutions include making permanent the recent changes to the Child Tax Credit. The policy change, which makes the credit fully refundable and available on a monthly basis, swiftly helped alleviate some of the financial crunch faced by low-income families with children amid the coronavirus pandemic and ensuing recession.

Finding the financial resources to help their children advance in life is harder for parents who are low on the income ladder. The Child Tax Credit could be an economic vehicle that would help alleviate this problem, allowing these parents to capitalize on opportunities for the advancement of their children and improving intergenerational mobility.

But more extensive policy solutions are needed, given the complexity of the problem of intergenerational mobility highlighted in Morgstad and Torsvik’s survey of the research and the broader body of evidence on the importance of neighborhoods in propagating economic inequality over generations. To address place-based economic inequality, policymakers can build on the locally targeted Pathways to Work program, housed at the U.S. Department of Health and Human Services.

More broadly, federal policy with a “place-concious” lens has the potential to improve outcomes in specific underresourced places, argues University of Michigan economist and Equitable Growth grantee Robert Manduca. He makes a compelling argument for advancing universal policies that will reach the places most in need.

In the case of underresourced neighborhoods characterized by high levels of unemployment and poverty, structural reforms to the Unemployment Insurance system, strengthening the Supplemental Nutrition Assistance Program, and ensuring that the recent reforms to the Child Tax Credit are made permanent would efficiently bring economic resources into disadvantaged neighborhoods.

The guidance is clear for policymakers: They must find a way to ameliorate the disparity in economic mobility due to the effects of neighborhoods on intergenerational mobility.

Vincient Whatley is an undergraduate Rogers Fellow at Kentucky Wesleyan College and was a participant in the AEA Summer Training Program at Howard University who was placed with the Washington Center for Equitable Growth as an experiential learning component of that program.

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