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Do Wealthy Parents Raise Wealthy Kids?

Investopedia logoInvestopedia 05-12-2015 Daniel Kurt
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If there’s a quintessentially American virtue, it might just be self-reliance. More than almost any other country on earth, there’s a deep-seated belief here that hard work will eventually lead to prosperity.

But does America's reputation for social mobility hold up? Perhaps not. A growing body of evidence suggests that the U.S. is far from a pure meritocracy. Researchers are finding that the socioeconomic class into which Americans are born has a strong correlation to where they end up in later in life. That’s especially true at the top.

Lack of Mobility

Recently, two Stanford researchers published a study that an   alyzed the “intergenerational elasticity” (IGE) of American families – in other words, the degree to which parents’ income affected the children’s earnings in adulthood. Overall, they found an average IGE of around 0.5, meaning that parental income accounts for about half of a child’s eventual wages. (The IGE was marginally higher for men than women – 0.52 vs. 0.47.) 

When they looked at those on the higher end of the income scale, however, the correlation was more like two-thirds. So you’re a lot more likely to end up affluent if you were born that way.

This isn’t the only research to show a lack of social mobility among the wealthy. Richard V. Reeves, a fellow at the Brookings Institution, has noted that 30% of children born into the top quintile of income-earning families are likely to stay there. Another 26% end up in the second-highest quintile as adults. 

However, the odds of making into the top two quintiles are dramatically lower if you were born without means. White children who start in the lowest rung, Reeves reports, have a just one-in-four chance  of cracking the top 40% as a grownup. For black children, the figure is even more dismal: 51% who grow up in the bottom rung remain there in adulthood.

Figure 1. The following  chart reveals the odds that an individual born into a particular quintile (20%) of income earners will end up in each quintile by age 40. 

Source: The Brookings Institution 

It’s worth noting, however, that not every segment of society is equally influenced by the generation that preceded it. For example, the Stanford team found that females had a lower correlation between their income and that of their parents than did males. One possibility: Women simply work less when their husbands make a fairly large salary. 

Where you live also seems to affect social mobility. One study found that residents of some cities, such as Salt Lake City and San Jose, had relatively high levels of upward mobility. In other places, such as Milwaukee and Atlanta, the chances of moving up the ladder are miniscule. 

‘The Transmission of Advantage’

There are a number of possible explanations for what social scientists dub “the intergenerational transmission of advantage.” One of the most basic is the vital influence of education on future wages. Wealthier parents are more likely to have college degrees, thereby serving as role models for their children. They also have the means to put their kids in better schools.

A Johns Hopkins study trackedabout 800 students living in Baltimore from first grade until their late 20s. Only 4% of lower-income students went on to earn a college education, compared to 45% of kids from more affluent families. Students armed with a university degree are in a much better position to find a high-paying job.

Researchers have also found less obvious reasons for the passage of wealth from one generation to the next. For instance, Reeves notes that studies are finding that prosperous parents tend to spend more time with their children, possibly imparting more of the skills and character traits that lead to long-term success.

That extra attention is particularly important in one’s early years. Children in the poorest families hear much fewer words than those from affluent, educated families – 30 million more by age 4, according to one estimate Reeves reports. By the time these children enter school, they already have a leg up on their peers. 

The Bottom Line

We tend to think of America as the land of rugged individualism. However, researchers are finding that it’s a lot easier to crack the top tier of income earners if your parents made it there before you.

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