From Rags to Riches: An American Dream or Reality?

As Capital in the 21st century, a recent book by economist Thomas Piketty, remains sold out across bookstores around the world – income inequality has shown to be a major concern both among citizens and policymakers. However, little attention has been given to a mechanism closely related to income inequality, but perhaps even more tangible to us – social mobility (although social mobility can encompass a broader definition including moving social classes, now it is mostly defined as income mobility).

How likely are you to surpass the income of your parents, to create your own story of success? One would like to believe this probability is neutral of the place we were born to (especially if we are considering a developed country such as the U.S.), that our effort and motivation if strong enough would be sufficient to go from the projects in Detroit to a loft in Manhattan. A recent paper by Chetty et al., puts this under question showing the U.S. is a Land of Opportunity for only a few geographically concentrated areas .

Often popularly called the American Dream would imply that all children have equal opportunity, i.e. a child’s chances for success should not depend on his family background. Using administrative federal income tax records on the incomes of more than 40 million children and their parents between 1996 and 2012, Chetty et al. describe the main features of intergenerational mobility in the United States, showing that the American Dream is more of an optimistic idea rather than an American reality .

Intergenerational mobility varies substantially across specific smaller geographical areas (commuting zones, CZ). For example, the probability that a child reaches the top quintile of the national income distribution starting from a family in the bottom quintile is 4.4% in Charlotte but 12.9% in San Jose. As the main empirical analysis tool, they measure absolute upward mobility at the 25th percentile (expected rank of children from families at the 25th percentile of the income distribution) where mobility is defined as the slope of this rank-rank relationship, which identifies the correlation between children’s and parents’ positions in the income distribution.

Although their primary measure is absolute upward mobility, they find it is highly correlated with relative mobility. Picture 1 shows the spatial distribution of absolute upward mobility across the U.S. where we can see that mobility is lowest for children who grew up in the Southeast and highest in the Mountain West and the rural Midwest (comparable to Canada and Denmark).

Picture 1. Absolute Upward Mobility: Mean Child Rank for Parents at 25th Percentile by CZ
Picture 1. Absolute Upward Mobility: Mean Child Rank for Parents at 25th Percentile by CZ

Additionally they study the relationship between parent income and two intermediate outcomes for children, college attendance and teenage birth, to show that much of the difference in intergenerational mobility across areas emerges while children are teenagers, i.e. before they enter the labor market as adults.

There exists variation in both intermediate outcomes and the variation is highly correlated with the variation in the intergenerational income mobility. For example, as picture 2 shows, college attendance rates for children with parents at the 25th percentile vary from less than 32.4% in bottom decile of CZs to more than 55.6% in the top decile of CZs. Also, teenage birth rates for female children whose parents are at the 25th percentile vary from less than 15.4% in bottom-decile of CZs to more than 29.4% in the top decile.

Picture 2. College Attendance Rates for Children with Parents at the 25th Percentile by CZ
Picture 2. College Attendance Rates for Children with Parents at the 25th Percentile by CZ

Finally they explore potential explanations by correlating the spatial variation in mobility with five observable characteristics: segregation (areas that are more residentially segregated by race and income have lower levels of mobility), inequality (more inequality also means less mobility), education (proxies for the quality of the K-12 school system are positively correlated with mobility), social capital (higher levels of networks and community involvement positively correlated with mobility), family structure (mobility is significantly lower in areas with weaker family structures such as more single mothers).

Even though they stress that these descriptive analysis do not imply a causal effect of neighborhoods or differences in the characteristics of people living in those neighborhoods, a followup paper by Chetty and Hendren (2014) shows that a substantial portion of the spatial variation is driven by causal effects of place by studying families that move across areas with children of different ages.

Morten Olsen is Assistant Professor of Economics. Ph.D. in Economics, Harvard University; M.A. in Economics, Harvard University; Bachelors degree in Economics, University of Copenhagen

Ria Ivandic is Research Assistant at Economics Department. Master in Economics at the Barcelona Graduate School of Economics;  Bachelor in Economics, University of Zagreb.


About Morten Olsen

Morten Graugaard Olsen is an assistant professor in the Department of Economics. He earned his Ph.D. and M.A. in economics at Harvard University and holds an undergraduate degree in economics from the University of Copenhagen. His areas of specialization include international economics, banking, contract theory, growth theory.