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Sentences about income mobility
So, if everybody's income is 50 percent higher than their parents', that shows up as zero income mobility. On the other hand, if average income stays constant, but a lot of low-earning parents have high-earning children, and vice-versa, that shows up as high income mobility.
That is Arnold Kling. Here is much more from Brink Lindsay. He writes:
...is measured income mobility between generations really on the decline in the U.S.? Not according to Gary Solon of the University of Michigan, who is probably the leading American researcher in the field. (He is on the advisory board of the Economic Mobility Project.) His most recent research on the subject, in a paper co-authored with Chul-In Lee, concludes that “intergenerational income mobility has not changed dramatically over the last two decades.”
I once wrote (read the whole thing):
1. "Age-adjusted parental wealth, by itself, explains less than 10 percent of the variation in age-adjusted child wealth."
2. 20 percent of parents in the lowest quintile of the parent's wealth distribution have children who end up in the top two quintiles of their generation. One-quarter of the parents in the highest wealth quintile end up with kids in the two lowest quintiles.
3. The age-adjusted intergenerational wealth elasticity is 0.37. What does this mean? If parents have wealth 50 percent over the mean in their generation, the wealth of their children will be 18 percent above the mean in the childrens' generation.
That all said, I think there remains a very real disaggregated problem concerning income mobility. Given the rising size of the college earnings premium, many more people should be going to college but are not. Not every country in Europe has the same problem. Here is my previous column on that topic. Since I do not think there is a single unique bottleneck preceding higher education, and many of the issues are sociological, I do not think this problem will prove easy to fix.
Posted by Tyler Cowen on May 30, 2007 at 05:21 AM in Economics | Permalink
Comments
Yes, what two letter concept could possibly explain why the return from education is high for some and low for other…
If only economist could spend 30 years more research on this amazing puzzle. In the meantime let’s assume it is due to non-existent liquidity constraint for the poor, and spend billions of taxdollars on it.
“ Not every country in Europe has the same problem.”
According to the OECD no country in Europe has a higher share of the adult population with tertiary degrees as the US. (Among the 25-34 population the four smaller European countries have countries have higher, but the difference is miniscule, 0,2-3,2%).
2004 OECD
1. Canada 44,6%
2. US 39,1%
3. Japan 37,4%
4. Sweden 34,5%
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OECD average 25,2%
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Germany 24,9%
France 23,9%
Italy 11,4%
Maybe the return to education is so high in the United States that 100% of the population should be encouraged to pursue advanced college degrees. Who could possibly be wrong with such a plan?
Posted by: Tino at May 30, 2007 5:54:39 AM
Brad Delong,
Professor of Economics in UC Berkley:
“It's not just that the college premium is bigger than it was a generation ago: it's roughly 90% compared to 30% a generation ago. A lot more people should be going to college, for any economist's definition of "should. "”
All those years of schooling doesn’t seem to have taught Delong the difference
between average and marginal. Maybe academic education really isn’t that effective in making people
less dumb? For any economist's definition of "dumb".
Posted by: Tino at May 30, 2007 6:09:13 AM
So why aren't more people going to college? Is it because...
a) They're not qualified and can't get in
b) There's not enough college slots available
c) College overhead costs (professor salaries, ahem) are too high, forcing tuition costs higher to cover that overhead
d) Some other explanation?
Posted by: Morgan at May 30, 2007 6:11:16 AM
Conversely, given the same logic, fewer people should be pursueing PhDs.
Posted by: triticale at May 30, 2007 8:17:01 AM
Part of the problem is that people frequently confuse the average increase in income with the increase in average income.
Posted by: Stormy Dragon at May 30, 2007 8:50:27 AM
Wow - who would have thought there would be confusion of marginal and average "returns" to education on Marginal Revolution!
It ought to be apparent to anyone who has taught in all but the best college classrooms that there are already plenty of folks in college that would be assigned by a benevolent social planner to be doing something else with their time.
The Heckman, Lochner and Todd (2006) chapter on Mincer equations (the equations that yield estimates of the "return" to education) is well worth a read in this regard. The delicious smell of scorched intellectual earth pervades it.
Jeff
Posted by: Jeff Smith at May 30, 2007 8:59:10 AM
The best evidence, such as Card (2001, Econometrica), cited on this blog, suggests that the marginal returns are there as well, not just average returns.
Posted by: Tyler Cowen at May 30, 2007 9:03:43 AM
There are many margins - one for each instrument used in studies of the "returns" to schooling based on IV methods. Many of those instruments are not very compelling, as argued in the Heckman, Lochner and Todd (2006) chapter.
I do not dispute that there may be some margins where additional enrollment would yield a payoff sufficient to justify the subsidies received. I do dispute that simply increasing enrollment across the board, rather than at specific margins, would pass a social cost-benefit test. Also, the fact that some people at the margin could benefit from going to college does not imply that for many students currently in college, the endeavor does not yield a net loss from a social cost-benefit perspective. Thus, even if some additional students would benefit, the optimal number may lie below the current total.
Moreover, the different margins associated with particular instrumental variables is not the only issue. For example, college quality for marginal students likely lies well below that for the average students and I think (though some would disagree) that the literature is pretty clear on the earnings effects of college quality.
OK - it pleases me more than I care to admit to have pulled a response out of Tyler. And, of course, it is a bit grumpy, despite my having defended him on the heterodoxy thread. :)
Posted by: Jeff Smith at May 30, 2007 9:43:53 AM
I think (though some would disagree) that the literature is pretty clear on the earnings effects of college quality.
That is, the literature is pretty clear that college quality has only a small effect on earnings.
Posted by: K. Williams at May 30, 2007 10:01:23 AM
Let us say that the marginal "college premium" is 100%, and that a high school grad makes $25,000 per year, and that a high school grad would normally work for 40 years.
High schooler could choose:
$25K * 40 years = $1,000,000
or
$50K * 36 years = $1,800,000.
Now, there is college tuition (say, 10K per year at a state school), and college loans for living expenses and because you can't work full time (say, another $15K per year).
So, there is an "immediate" payout of $100,000 ($25K for four years), for a return (over 40 years) of $800,000. That works out to an approximately 5% to 5.5% return on your investment, and assumes a 100% chance of graduation, and 100% marginal graduation premium.
Lower either of those percentages, or assume a higher annual college cost, and the return decreases.
This does not strike me as a particularly odd break-even point.
Posted by: Rich B. at May 30, 2007 10:13:51 AM
Rich, the high schooler doesn't have the $100,000 to invest when he's 18 unless he goes to college. (No one's going to lend a new high-school graduate $100K to invest as he wishes.) So in one case, he works 40 years, and earns $1,000,000, and in the other case he works 36 years and earns $1,800,000. Who wouldn't choose the second?
Not to mention the fact that in the second case he's also smarter, understands more about the world, is more likely to meet smart women, will be a more attractive marriage candidate, etc.
Posted by: K. Williams at May 30, 2007 10:18:35 AM
Rich, the high schooler doesn't have the $100,000 to invest when he's 18 unless he goes to college.
Sure he does. He does what lots of kids do -- he works full time and lives in his parents' basement for four years. He saves money, and puts down a downpayment on a house at the same time the college kid is getting his first apartment.
Posted by: Rich B. at May 30, 2007 10:39:10 AM
Kling's complaint about the metric is valid. A society in which everyone's lifetime income profile was randomly assigned at some point in childhood would have maximal income mobility (zero correlation between parental and child positions in the income distribution), but many would have a hard time calling such arbitrariness, even arbitrariness uniformly applied to all, just.
Posted by: Cyrus at May 30, 2007 11:02:22 AM
Sure he does. He does what lots of kids do -- he works full time and lives in his parents' basement for four years. He saves money, and puts down a downpayment on a house at the same time the college kid is getting his first apartment.
He's going to save $100,000 in four years by doing that?
Posted by: Bernard Yomtov at May 30, 2007 11:06:34 AM
Over the years there has been widespread criticism of the various studies of intergenerational mobility, largely because they were snap shots of how it existed at time. Many conservatives, libertarians argues that they understated mobility. But recently there has emerged a school of research that looked at intergenerational mobility in terms of total lifetime earnings.
But these studies have found that intregenerational mobility was actually much lower then the snapshot type studies found.
If I am not mistaken these studies would suggest that your estimate that the age-adjusted intergenerational wealth elasticity is 0.37 is significantly too high.
Posted by: spencer at May 30, 2007 11:09:27 AM
Given the rising size of the ____ earnings premium, many more people should be going into ____ but are not.
acting, entertainment
CEOs and entrepreneurship, business
financial, investment banking
legal, law
This would only be true if there were a shortage of such, of which there is no evidence. It is every bit as likely more entrants would only decrease returns and this decrease would outweigh the costs.
Posted by: Lord at May 30, 2007 11:17:11 AM
On the one hand, with respect to college, interest rates would have to be much higher before an education that was worth buying was not worth buying with borrowed money.
On the other hand, almost all of us are akrasiacs, though the manifestation and the intensity of this akrasia vary among individuals. It may be that a large fraction of us ontologically cannot do higher education, even though we recognize it as the best thing to do. To improve the human capital of this fraction of the populace, preparatory education must cause them to not just become greater than they are, but other than they are.
Posted by: Cyrus at May 30, 2007 12:10:03 PM
The Rich Dad/ Poor Dad mantra is true. Wealth is a measure of how far you can see in to the future.
Posted by: jurisnaturalist at May 30, 2007 12:12:09 PM
The return on education is only overall welfare-enhancing to the extent that it results in an increase in the supply of consumption goods, either directly or indirectly. Otherwise, larger salaries for graduates only enables them to outbid non-graduates for existing consumer goods.
Regards, Don
Posted by: Don Lloyd at May 30, 2007 12:17:47 PM
What does college have to do with being successful? It doesn't make you smarter. It doesn't give you insight into the world. It doesn't make you a more well rounded person. It doesn't improve your mating potential. It doesn't necessarily equate intrinsically to higher income. It doesn't mean your competent. It doesn't mean much of anything besides you can solve problems by throwing 100K at it and not fail.
Most Americans would be better suited with a 1-2 year vocational program. Doctors, engineers, lawyers and sophists need to goto college, they actually benefit from a voyeuristic approach to life and knowledge.
College is the life equivilant of a Prada bag. Something sold by hype.
Posted by: Jacob at May 30, 2007 2:02:21 PM
He's going to save $100,000 in four years by doing that?
This is ignoring the point. A high school graduate will have certain expenses over the next four years of his life. He can either work and make money for those four years, or he can go to college, not make money, and accrue debt.
Four years later, I am presuming, the college grad's net worth will be a lot lower, because he has foregone $100,000 in income, and accrued college debt.
The question is whether the $800K accrued over the next 36 years compensates for the $100K+ foregone at the outset.
If you make realistic assumptions that there are no extra assets for the student who goes to college, the numbers are not obvious one way or the other.
Posted by: Rich B. at May 30, 2007 4:27:25 PM
The truly heterodox economists are the ones who dare to mention the two dread letters "IQ."
Posted by: Steve Sailer at May 30, 2007 4:48:52 PM
Probably because economists have such high IQs, which largely determines success in life. People who are successful in life will not dare mention IQ in civilized debate.
This leaves only a certain group of people who will dare mention those two letters.
Posted by: Barbar at May 30, 2007 4:58:22 PM
One reason a higher proportion of people aren't going to college is because illegal immigration has lowered the average test scores of young people. For example, in Los Angeles County, the nation's largest county and the harbinger of America's demographic future, only about one out of six teenagers -- public or private schooled, Compton or Beverly Hills -- scores 1000 or higher on the SAT (the equivalent to 890 on the SAT before scoring was made easier in 1990).
Encouraging students with three digit SAT scores to try to graduate from college is obviously beneficial to the wallets of economics professors, but does it do much for the students who forego years of wages in pursuit of an unlikely degree?
Posted by: Steve Sailer at May 30, 2007 5:01:14 PM
Rich B.,
You wrote:
Rich, the high schooler doesn't have the $100,000 to invest when he's 18 unless he goes to college.
Sure he does.
And you claim I missed your point? You want to argue that college is a bad investment, go ahead. Lots of data out there. But learn to do the math. A return of $25K/yr (Difference between $25K for HS grad and $50K for college grad in your example) for 36 years on a $100K investment is just under 25% a year. Make the investment $200K and you get over 12%.
Cyrus,
Kling's complaint about the metric is valid.
No it's not. If we are talking about the degree of intergenerational mobility it is irrelevant. He is merely stating a simple arithmetical point.
Posted by: Bernard Yomtov at May 30, 2007 5:37:55 PM
