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

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Author Info
Diego Restuccia (University of Toronto)
Carlos Urrutia (Centro de Investigación Económica, ITAM; Universidad Carlos III de Madrid)

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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'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 Western Ontario, RBC Financial Group Economic Policy Research Institute in its series University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers with number 20024.

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Date of creation: 2002
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Handle: RePEc:uwo:epuwoc:20024

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Postal: RBC Financial Group Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85228
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Related research
Keywords: human capital education intergenerational mobility ability

Other versions of this item:

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. Elizabeth M. Caucutt & Lance Lochner, 2005. "Borrowing constraints on families with young children," Proceedings, Federal Reserve Bank of Cleveland, pages 39-48. [Downloadable!]
  2. 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:
  3. Sumon Kumar Bhaumik & Manisha Chakrabarty, 2007. "Is Education the Panacea for Economic Deprivation of Muslims? Evidence from Wage Earners in India, 1987-2004," William Davidson Institute Working Papers Series wp858, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
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  7. Carlos Garriga & Mark P. Keightley, 2007. "A general equilibrium theory of college with education subsidies, in-school labor supply, and borrowing constraints," Working Papers 2007-051, Federal Reserve Bank of St. Louis. [Downloadable!]
  8. Todd R. Stinebrickner & Ralph Stinebrickner, 2007. "The Effect of Credit Constraints on the College Drop-Out Decision A Direct Approach Using a New Panel Study," NBER Working Papers 13340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Nikos Benos, . "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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  13. Andres Erosa & Tatyana Koreshkova & Diego Restuccia, 2006. "On the aggregate and distributional implications of productivity differences across countries," Working Paper 06-02, Federal Reserve Bank of Richmond. [Downloadable!]
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