U.S. Kids Now Less Likely To Earn More Than Their Parents

Stanford University professor of economics Raj Chetty discusses the idea of American upward mobility and why kids are increasingly less likely to earn more money than their parents.

MICHEL MARTIN, HOST:

We're going to spend the next few minutes talking about upward mobility and the American dream. For decades, the assumption has been that with hard work the next generation will do better than their parents. Over the course of this past year, people on both the political right and left have argued that the American dream is no longer true. And now there's a growing body of academic research supporting that argument with data. A new paper published this month says that in fact, fewer American children are making more than their parents did.

Lead economist on this report is Raj Chetty. He's the founder of the Equality of Opportunity Project. That's a research group that focuses on economic mobility. He's also a professor of economics at Stanford University, and that's where we reached him. We began by talking about his research, which looked at baby boomers.

RAJ CHETTY: If you look at kids born in the 1940s, in the 1950s and compare their incomes at age 30 to what their parents were earning at age 30, adjusting for inflation, you find that 90 percent of them were earning more than their parents. But when you look at kids born in the 1980s, kids turning 30 today, that number has dropped to 50 percent. It's basically a coin flip as to whether you will do better than your parents for the current generation.

MARTIN: What caused this?

CHETTY: One is declining economic growth. So GDP growth is now lower than it was in prior decades. And so think of that as the economic pie is now growing more slowly than it did in the past. The second major trend that's occurred is that we have more inequality, so more of the growth that is occurring is going to a handful of people at the very top of the income distribution. So we ask, how much did these two trends contribute to the decline in upward mobility?

And what we find is that the vast majority of the reduction is because of growing inequality rather than reduced growth rates. If all of the growth is going to, say, a single person, then of course it's going to be very difficult for a large fraction of kids to do better than their parents. That is, it's really about how the pie is divided rather than the total size of the pie.

MARTIN: Are there particular people whose share of the slice of the pie, as it were, has gotten smaller?

CHETTY: Yes. So the middle class is now getting a much smaller slice of the pie of economic growth. So if GDP has basically doubled from 1980 to today, on average, American incomes have gone up by a factor of two since 1980. Yet for - most Americans didn't see any of that gain at all.

MARTIN: What do we know about the other half of kids who are doing better than their parents?

CHETTY: These are kids who, you know, were very talented and did extremely well based on their own abilities and ambitions. But also, I suspect many of them had the opportunity to go to great schools, live in excellent neighborhoods, have mentors who really helped them succeed, had access to great job opportunities, internships, colleges. There's still a large fraction of kids who luckily have those opportunities. The question is how we can extend those opportunities to the remaining 50 percent of American kids.

MARTIN: I think the question for a lot of people would be would similarly situated people living in different places have different results? For example, is some of this not just individual, but is it also geographic?

CHETTY: Absolutely. And when we look at the subset of people who do choose to move to different areas, we find that some parts of the country - for example, Salt Lake City, Utah or parts of the West Coast, like here in the Bay Area, San Francisco or the Northeast - have incredibly high rates of upward mobility. But if you look at other places, like many cities in the industrial Midwest - think of places like Detroit or Cleveland, Ohio - these places have much lower rates of upward mobility. And when we look at families that move, we find that the earlier they make that move, the better their kids do in the long run.

MARTIN: OK, but how can you disaggregate the who from the what? I mean, given that if you have the wherewithal to get yourself to San Francisco, which is a very expensive city, how could that not be about the person?

CHETTY: So what we do is we don't actually just compare the outcomes of kids who made that move with kids who didn't make that move. What we're actually exploiting is the timing of when families make this move. So take a family that moved from Oakland to San Francisco with, say, a 9-year-old and a 13-year-old. We find the 9-year-old does better than her 13-year-old brother or sister in proportion to that four years of additional exposure to the schools and the environment in San Francisco. So those kinds of tests rule out the possibility that it's just different families because we're comparing kids within the same family.

MARTIN: But going back to your first answer here, which is that, you know, you said it's a coin flip. Like, half of kids are earning less than their parents did and half of kids are earning more. How would any of those factors that you cited - you know, geography, better schools - change that?

CHETTY: Look, so people usually talk about income inequality in the U.S. in the context of the current generation. How do we raise American workers' incomes? How do we deal with issues like globalization and competition with technology and so forth? And I think thinking about things like immigration or trade and so forth can matter for the current generation.

But if you think about the next generation and going forward, my view is that what really matters in the end is education, investments in human capital starting at a young age, giving kids the opportunity to grow up in good neighborhoods, go to good schools, be exposed to a variety of pathways that will allow them to succeed themselves by having higher incomes.

MARTIN: That's Raj Chetty. He's a professor of economics at Stanford. He is the founder of the Equality of Opportunity Project. He was nice enough to interrupt his weekend to speak to us from the studios at Stanford University. Professor Chetty, thank you so much for speaking with us.

CHETTY: Thank you.

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