Greg Mankiw: The Half-Full Glass of Economic Mobility
When people look at data on economic mobility, they see different things. For example, it is well known that if your father had high income, you are more likely to have high income than if you father had low income. According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son's income with respect to father's income is about 0.5 in the United States. How do you interpret this fact?
Some people might be tempted to see it as evidence against equality of opportunity. ...
... But what strikes me about that 0.5 number is not how large it is but how small it is. As I understand it, that 0.5 estimate is roughly the correlation between father and son income. That means that the fraction of variance of son's income explained by father's income--that is, R-squared--is only 0.25. This last number is sometimes called the "heritability" of a characteristic. ...
... The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income. And that would be true even if equality of opportunity were perfect.
One further thought: The study cited above points out that economic mobility is greater in some European countries. That fact does not surprise me, as those are nations with less inequality. Moving up and down a short ladder is a lot easier than moving up and down a tall one.
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