Parental Priorities and Economic Inequality

by Casey B. Mulligan

Chapter VII

The Intergenerational Dynamics of Consumption, Earnings, Income, and Wealth

This chapter presents evidence on the intergenerational dynamics of consumption, earnings, income, and wealth. The newest evidence comes from my own computations using intergenerational samples from the PSID. I believe the empirical contributions of this chapter are fourfold. First, I am the first to study the intergenerational dynamics of consumption. I show that, contrary to the predictions of the permanent income model, consumption regresses to the mean across generations. However, I do verify the permanent income prediction that consumption is much more persistent than earnings. My second contribution is to analyze the intergenerational dynamics of consumption, earnings, income and wealth in a single representative data set. Most previous studies focus on only one of these variables. Other studies utilize highly select samples such as those obtained from probate records. Third, I make substantial progress on some serious measurement issues. I utilize information on the occupation, industry, schooling, and county of residence of fathers to construct instruments for parental earnings and income. Building on the result from Chapter III that, according to the intergenerational permanent income and borrowing constraints models, parental income is an appropriate instrument for parental consumption, I report here the corresponding estimates of intergenerational consumption mobility. The main conclusions from my analysis of the measurement issues is that the intergenerational persistence of earnings has been understated in the literature, consumption and income are significantly more persistent than earnings, intergenerational mobility is very similar within and across groups, and that all measures of economic status regress to the mean across generations. Fourth, I arrive at two tentative conclusions, but conclusions that are important for evaluating models and government policies concerned with intergenerational mobility: intergenerational mobility in the U.S. has not changed with the introduction of apparently progressive income and estate taxes, and intergenerational earnings and income mobility does not vary across countries. The final two conclusions are more tentative because of an important lack of relevant research and data.

© copyright 1996, Casey B. Mulligan.