Intergenerational Transmission. You what?

It’s a pretty easy concept once you think about the two words. Intergenerational – between generations – and transmission – movement. Add another word in, such as wealth, and you get the movement of wealth between generations.

In the context of today’s world, we have increasing inequality (but decreasing poverty). I’m sourcing this paper in this post as it is up to date (2015) and contains some very interesting points. First, let’s make some assumptions and clear some things up.

1. Wealth and income are different.
2. Wealth is less equally distributed intergenerationally than education and income.
3. Wealth IS however, more easily distributed intergenerationally.

Right the boring stuff done, why do richer people stay rich? Is it because they have some innate biological superpower that they give to their little Sebastians and Indias that allow them to be fantastic at finding money making opportunities & being intelligent. Well the study says nope. Innate biological features, such as father/mother’s intelligence, are a very small factor in the positive correlation of intergenerational transmission of wealth. Therefore, we have the nurture argument remaining (environmental factors). These include parents’ education, wage, parents’ investment knowledge & their propensity to save.

However, the study says that none of these factors actually suggest there is a mechanism to which wealthier parents can provide increased wealth to their children (which I think is bollocks and the study just hasn’t gone deep enough since it’s pretty evident through experience that wealthier parents can provide better contacts, investment knowledge & occupational advice, since it’s self fulfilling).

What is interesting about this paper is that they fix for the biological (innate) factors by looking at the Swedish adoption system. They find that any child moved from biological parents, irrespective of innate ability, to a wealthier family automatically have much higher chances of being wealthier. I won’t bore you with the statistical robustness checks, but trust me, the data and regressions are confident on this (no surprises there).

Returning to the introduction therefore, no wonder we have inequality, with a very dense amount of wealth at the top and less and less as the triangle bottoms. That base is only going to get wider as well, as the middle class is squeezed. Low wage growth, the automation of jobs and increasing barriers of entry to the market for innovative ideas will increasingly make wealthier people more wealthy and reduce the requirement of human capital for the middle classes (which therefore in turn leads to less wealth and a weaker transmission of wealth to future generations).

I’m pretty depressing on all of this aren’t I? Next article will be something fun… pissing off Corbynites.

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