Rasmusen Weblog

Early research on the statistical relationship between parents� and their
children�s economic status after becoming adults, starting with Blau and Duncan
(1967), found only a weak connection and thus seemed to confirm that the United
States was indeed the "land of opportunity."

This says that if father and son do differentely economically, that is a
sign of "opportunity", and, by implication, of meritocracy. No-- not at all.
Suppose, to take the extreme case, that sons are clones of their fathers and are
brought up to be just like them. What would we expect in a meritocracy? --We
would expect the son, who is identical to the father in ability, to do exactly
as well. If he does differently, that is a sign that luck, not ability and
effort, are what determine wealth.

But more recent research shows that the estimates of high levels of
intergenerational mobility were artifacts of two types of measurement error:
mistakes in reporting income, particularly when individuals were asked to recall
the income of their parents, and transitory components in current income
uncorrelated with underlying permanent income (Bowles, 1972; Bowles and Nelson,
1974; Atkinson, Maynard and Trinder, 1983; Solon, 1992, 1999; Zimmerman, 1992).
The high noise-to-signal-ratio in the incomes of both generations depressed the
intergenerational correlation. When corrected, the intergenerational
correlations for economic status appear to be substantial, many of them three
times the average of the U.S. studies surveyed by Becker and Tomes (1986).

Excellent point! If our data is bad, then correlations will be low. The test
has low power.

Most economic models treat one�s income as the sum of the returns to the factors
of production one brings to the market, like skills, or capital goods. But any
individual trait that affects income and for which parent-offspring similarity
is strong will contribute to the intergenerational transmission of economic
success. Included are race, geographical location, height,
beauty or other aspects of physical appearance, health status and personality.
Thus, by contrast to the standard approach, we give
considerable attention to income-generating characteristics that are not
generally considered to be factors of production. In studies of the
intergenerational transmission of economic status, our estimates suggest that
cognitive skills and education have been overstudied, while wealth, race and
noncognitive behavioral traits have been understudied.

Another excellent point. Incomes depend on lots of inheritable things, of
which IQ is only one.

Estimates of the intergenerational income elasticity are presented in Solon
(1999, this issue) and Mulligan (1997). The mean estimates reported in Mulligan
are as follows: for consumption, 0.68; for wealth, 0.50; for income, 0.43; for
earnings (or wages), 0.34; and for years of schooling, 0.29.

The high consumption correlation is especially interesting. Rich kids learn
to spend; poor kids don't. This implies an equalizing effect on income and
wealth (not on labor earnings), because rich kids will save less for a given
income.

... whatever it is that accounts for their success, successful blacks do not
transmit it to their children as effectively as do successful whites.

I've nothing to add- but this is an interesting factoid.

If the heritability of IQ were 0.5 and the degree of assortation, m, were 0.2
(both reasonable, if only ballpark estimates) and the genetic inheritance of IQ
were the only mechanism accounting for intergenerational income transmission,
then the intergenerational correlation would be 0.01, or roughly 2 percent the
observed intergenerational correlation.

I think Murray and Herrnstein's work supports this. They found a highly
significant effect of IQ on earnings, but that doesn't mean the effect is
large-- only that it clearly exists. We professors are especially conscious that
the smartest people don't earn the most-- we try to send our best students to be
professors, and only our next best to be investment banker or consultants.

The concern that the tests are a very noisy measure is misplaced. In fact, the
tests are among the more reliable variables used in standard earnings equations,
where reliability is measured by the correlation between tests and retests,
between odd and even numbered items on the tests, and by more sophisticated
methods. For the commonly used Armed Forces Qualification Test (AFQT), for
example--a test used to predict vocational success that is often used as a
measure of cognitive skills--the correlation between two test scores taken on
successive days by the same person is likely to be higher than the correlation
between the same person�s reported years of schooling or income on two
successive days.

A point I hadn't heard before. Surveys ask people how many years they went to
school-- they don't check with the schools-- so "years of schooling", it seems,
is not measured as well as AFQT scores.

Consider the case of South Africa, where in 1993 (the year before Nelson Mandela
became president), roughly two-thirds of the intergenerational transmission of
earnings was attributable to the fact that fathers and sons are of the same
race, and race is a strong predictor of earnings (Hertz, 2001). That is, adding
race to an equation predicting sons� earnings reduces the estimated effect of
fathers� earnings by over two-thirds. Because the traits designated by race
are highly heritable and interracial parenting uncommon, we thus find a
substantial role of genetic inheritance in the intergenerational transmission of
economic status. Yet, it is especially clear in the case of South Africa under
apartheid that the economic importance of the genetic inheritance of physical
traits derived from environmental influences. What made the genetic inheritance
of skin color and other racial markers central to the transmission process were
matters of public policy, not human nature, including the very de? nition of
races, racial patterns in marriage and the discrimination suffered by nonwhites.

Wonderful example! The importance of genetic inheritance depends entirely on
the context, as every geneticist will admit.

Osborne (forthcoming) has studied the economic importance and intergenerational
persistence of fatalism, as measured by the Rotter Scale, a
common measure of the degree to which individuals believe that important events
in their lives are caused by external events rather than by their own actions.
Her study of a sample of U.S men and their parents found that
the score on the Rotter Scale measured before entry to the labor market has a
statistically significant and large influence on earnings. Moreover, the Rotter
score is persistent from parents to offspring. T he normalized
influence of the Rotter Scale on earnings in Osborne�s study is somewhat larger
(in absolute value, namely 20.2) than the average influence of IQ red>in our meta-analysis of 65 studies discussed earlier. The estimated
correlation of parental income with child fatalism is 20.14. The contribution of
the fatalism channel to the intergenerational correlation is the correlation of
parent income to child fatalism multiplied by the correlation from child
fatalism to subsequent income, 0.028--that is, (20.2)(20.14).

I can well believe that. Some people accept things as they are; others try
to change them. This is a just as important as IQ. Professors advising PhD
students are often frustrated by the smart student who won't try to go beyond
existing ideas. In business, this is equally important. The smart plodder is
useful, but equally so is the stupid innovator.

Table 3 is the bottom line. The total correlation to be explained is about 0.45.