Inequality, Heritability and the American Dream

Ever since people finished identifying "the American Dream" -- the idea that in the US in particular and the New World in general somehow allowed people to escape the hidebound social structures of the Old World and better themselves via their own efforts -- people have been worried that it is on the point of dying. Americans continue to show an an unusual degree of belief in the ability those who work hard to better themselves by their own efforts. For instance, in the 1999 International Social Survey, 61% of Americans agreed that "people get rewarded for their effort", whereas only 41% of Japanese agreed, 33% of British and 23% of French. This belief has actually increased in recent decades. In 2005 the New York Times reported that while in 1983 only about 60% Americans agreed that "It is possible to start out poor, work hard and become rich" by 2005 nearly 80% of Americans agreed with that statement.

And yet, those who study inter-generational income mobility have been increasingly worried in recent decades that despite American's belief that people can work hard and get ahead, that it is becoming increasingly difficult for people to actually achieve this in the US. In a lengthy report by the liberal think thank Center for American Progress, Tom Hertz of American university brings together a number of the recent studies on intergenerational income mobility in the US as compared to other countries, showing how people who are born into the lower income quartiles in the United States are less likely to reach the top levels of income than in other countries such as Germany, Sweden or Denmark.

To give an idea of what is meant by this intergenerational mobility, it helps to look at a particular study which Hertz quotes in detail. In this study, researches tracked 4000 children originally surveyed in 1968 and compared what the household incomes of their parents were in the 1967 to 1971 period to what those children's incomes were in 1994 to 2000. The intergenerational correlation in family income between parents and children was .42, and the implications of that for the children themselves are shown in the this chart:

Family incomes are inflation adjusted.  On the left column you see quintiles of parental household income in the original 1967 to 1971 window.  In the column headers you see the quintiles of household income for the children.  (The numbers are higher despite inflation adjustment because the group as a whole was better off in the late 90s than in the late 60s.  On average, people within the bottom 20% had higher incomes in the 90s than people in the bottom 20% in the 60s.)

In regards to intergenerational mobility, you can see that of the children of parents in the bottom income quintile in the late 60s, 41% of those children wound up in the bottom income quintile themselves in the late 90s.  24% made it into the second quintile, 15.5% into the third, etc.  Only 6% made it into the top quintile.  Of those born to parents in the top income quintile in the late 60s, 42% were themselves in the top income quintile in the 90s, while only 6% were in the very bottom quintile.

Now, it seems to me that a lot of the question as to whether the American Dream still holds true relies on to what extent we can assume that there is an equal distribution of ability and effort among all children across all income ranges in a study such as this. Yet, when we start to look at this, we (particularly because as Americans we have a great attachment to a variety of ideas relation to the American Dream) run into all sorts of contradictory emotions.

For example, let's take two typically American Dream statements:
1) If you work hard and save, you can work your way up and become rich.
2) If you get your kids a good education and teach them how to work hard, they will do as well as or better than you.

Let's assume for the sake of argument that both of these are true, and look at what happens over two generations. In generation A, people work their way up and become rich to the extent that they work hard and save. They have children: generation B. Now, generation A does a great jobs of getting generation B a quality education and teaching them to work hard, with the result that the children of B who work hard and save all do as well as or better than their parents. A few children of people in A whose parents did not work hard or save also work hard and save, and they become rich too, so we see some movement upwards movement from the lower earning families in generation A -- but given that the middle and upper earning families of A did such a great job of teaching their kids and giving them a solid work ethic, we have the appearance of very little social mobility -- because people are doing a very good job of teaching their children the skills that allowed them to achieve their current space on the income ladder, and so the only room for movement is if some people who themselves did not work hard or save manage to teach their children to do differently.

So, if the kind of abilities and behaviors that result in doing well economically are heritable or teachable, then after the first generation we would probably expect to see less intergenerational income mobility. If your abilities and work ethic are fairly similar to your parents, and if your parents economic success was determined by the extent to which they worked hard and saved, then in all probability your success will be a lot like your parents'.

On the other hand, if there is a great deal of chance involved in how one's ability to work hard and save translates into household income, then one would actually expect more intergenerational variability in income. If your parents worked very hard, saved, etc. but through bad luck or lack of opportunity made very little, and yet they taught you to also work hard and save, then if you experienced better luck in translating your hard work and saving into higher income, you would do significantly better than your parents.

Similarly, if until recently people's economic success in a given country did not reflect their efforts, but then something changed so that in future greater effort resulted in greater success, one would expect to see a period with a lot of intergenerational income mobility, and then a settling out.

Of course, all this is working off the assumption that the traits which might result in higher earnings are heritable. Some characteristics such as measured IQ appear to be quite heritable. One's adult IQ has a .75 correlation to the average of one's mother's and father's IQs -- a significantly stronger correlation than the one between one's income and one's parents' in the US. But other determining factors in how much one makes (willingness to work hard, the amount one is interested in making more, the type of career one is interested in, etc.) are much harder to quantify and may quite possibly be less heritable.

All of which is to say: It seems to me that discussing whether or not Americans are right in believing that "anyone can succeed in America" with hard work and ability is much more difficult than simply looking to see how often people whose parents were in the bottom income quintile end up in the top income quintile. Moreover, the fact that one country has higher intergenerational income mobility in recent years does not necessarily mean that it is more of an opportunity society than the United States (though that's one of the possible meanings of that statistic), especially if the two countries have significantly different histories in recent decades.