Is the Intergenerational Income Elasticity a Sufficient Statistic for Fairness?

Abstract

Recent estimates of intergenerational income transmission suggest that there are vast cross-country differences in economic mobility. Under the most common models this is attributed to a combination of credit constraints and failure of some nations to adequately invest in the human capital of poor children. These models sometimes lead to the presumption that intergenerational mobility measures capture indices of fairness or opportunity and to policy recommendations to lower them. In this paper we show that such reasoning is premature. We present an alternative model, which makes many of the same observed predictions as educational underinvestment models, but has the opposite normative conclusions. In this model the disincentive effects of labor market taxation and redistribution, not public educational underinvestment, drive cross-country differences in intergenerational mobility. We test the predictions of our model using data on income mobility, tax rates, and public expenditures. The data largely supports the model predictions.

Keywords: intergenerational income, cross country, human capital

JEL Classification: J24, J62