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Intergenerational Persistence of Earnings: The Role of Early and College Education

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Author Info
Diego Restuccia
Carlos Urrutia

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Abstract

Recent empirical studies show that the intergenerational persistence of economic status in the U.S. is much higher than previously thought. We develop a quantitative theory of inequality and intergenerational transmission of human capital where parents invest in early and college education of their children subject to borrowing constraints. Children differ exogenously in innate abilities, which can be correlated with their parent<92>s innate ability. An important feature of the environment is that the quality of early education determines the probability of college completion. We calibrate a stationary equilibrium of this economy to relevant statistics in aggregate U.S. data, and use it to investigate the sources of inequality and persistence in earnings. In our benchmark model, about half of the intergenerational persistence and one fourth of the inequality in earnings are accounted for by endogenous investments in education. We find that early investments in education account for most of the endogenous persistence in earnings, while college education generates most of the endogenous inequality in earnings. Our theory is suited to study the effect of educational policies on the persistence of inequality. We show that public resources devoted to early education have the largest impact on earnings mobility. Moreover, non-progressive college subsidies generate more intergenerational persistence of earnings.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number diegor-02-03.

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Length: 37 pages
Date of creation: 11 Sep 2002
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Handle: RePEc:tor:tecipa:diegor-02-03

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Related research
Keywords: Human Capital; Education; Intergenerational Mobility; Ability.;

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Find related papers by JEL classification:
I2 - Health, Education, and Welfare - - Education
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
J62 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Job, Occupational and Intergenerational Mobility; Promotion

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tuomas Pekkarinen & Roope Uusitalo & Sari Pekkala, 2006. "Education Policy and Intergenerational Income Mobility: Evidence from the Finnish Comprehensive School Reform," IZA Discussion Papers 2204, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Andres Erosa & Tatyana Koreshkova & Diego Restuccia, 2009. "How Important is Human Capital? A Quantitative Theory Assessment of World Income Inequality," Working Papers 09007, Concordia University, Department of Economics, revised Mar 2009. [Downloadable!]
    Other versions:
  3. Greenwood, Jeremy & Guner, Nezih, 2008. "Social Change," IZA Discussion Papers 3485, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Sumon Kumar Bhaumik & Manisha Chakrabarty, 2008. "Is Education the Panacea for Economic Deprivation of Muslims? Evidence from Wage Earners in India, 1987-2004," CEDI Discussion Paper Series 08-02, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  5. Iñigo Iturbe-Ormaetxe Kortajarene & Marisa Hidalgo, 2009. "Should we transfer resources from college to basic education?," Working Papers. Serie AD 2009-18, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  7. Nikos Benos, 2005. "Education Systems, Growth and Welfare," University of Cyprus Working Papers in Economics 5-2005, University of Cyprus Department of Economics. [Downloadable!]
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  19. Holmlund, Helena, 2006. "Intergenerational Mobility and Assortative Mating. Effects of an Educational Reform," Working Paper Series 4/2006, Swedish Institute for Social Research. [Downloadable!]
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