The Intergenerational Elasticity of Earnings: Exploring the Mechanisms

How do family circumstances during childhood, parental time and school quality investments, skills, and educational attainment contribute to the persistence of earnings across generations? Building on a classic literature in sociology and a more recent literature in economics, our model allows each of the above variables to affect lifetime earnings directly, as well as through their contribution to human capital formation. The model allows us to decompose the intergenerational elasticity of earnings (IGE) into its drivers. Using data from a British cohort followed from birth to age 55, we show the above variables explain most of the IGE. A key driver is the higher levels of parental investments received by children of high income parents which result in greater cognitive development.