Wed Jul 10

Your parents’ income doesn’t determine yours – unless you’re ultra rich or extremely poor

Written by Catherine de Fontenay, Honorary Fellow, Department of Economics, The University of Melbourne

Australia is among the strongest global performers in terms of income mobility between the generations, according to a new Productivity Commission report ^[1].

The country’s long-term economic growth has led to each generation earning more than the last, on average.

Our report finds 67% of the so-called “Xennial”^[2] generation – those born in 1976–1982, on the cusp of the Millennial/Gen X divide – earn more than their parents did at a similar age.

This is particularly true of those born into poorer families.

When we look at where people rank in an income distribution, the picture is a little less rosy. While children with parents at the bottom or top of the income scale are more likely to remain there, almost 15% of people with parents in the lowest income decile, remain there while just 6% move to the top.

And those living in poverty - who often include renters, people from migrant backgrounds who don’t speak English at home and single parents - face some of the biggest barriers to improving their economic lot.

Fairly Equal? Economic mobility in Australia, ^[3]released on Thursday, measures intergenerational income mobility by examining the relationship between a person’s income and the eventual income of their children.

Measuring inequality

Most countries anxiously monitor income distribution and economic mobility amid concerns inequality may be increasing.

And countries with high inequality tend to have low mobility: the rungs of the social ladder are far apart making it difficult to move up to the next level.

If mobility is low, the consequences are serious. Low mobility is discouraging, unproductive and unstable. If young people have little chance of achieving their aspirations, their wellbeing is affected.

The Productivity Commission’s report found Australia’s income mobility is only second to Switzerland.

Social unrest is more likely ^[4]. And the abilities of young people from less affluent backgrounds are under-used. The next tech entrepreneur Steve Jobs may never be discovered, and many other opportunities are lost.

In Australia we are used to thinking of ourselves as having inequality and mobility somewhere between Scandinavia and the US; but that comparison is not as comforting as it used to be, if inequality and mobility are worsening in the US.

Our report considers people’s income mobility over the course of their lives, and across generations. If income mobility is low, people will struggle to recover from initial disadvantage, and those born into privilege will be financially secure.

First we look at whether people move in the income distribution; there is a surprising amount of movement. And we look for evidence people can access opportunities throughout life, after setbacks.

Recovering from setbacks

There is not much evidence of recovery after a person experiences a severe illness or a job loss, perhaps because the causal factors are still at work.

More encouragingly, the income of women who experience separation does increase ^[5], eventually restoring the buying power of their household. This is in part due to well-targeted government support.

For intergenerational mobility, we extended the dataset developed by an analytical dataset ^[6] to measure the influence parents’ income had on the income their offspring were likely to earn.

We found Australia’s intergenerational mobility is actually higher than the Scandinavian ^[7] countries, and second only to Switzerland ^[8] among comparable studies.

In all countries studied there was some link between parents’ income mobility and that of children, because parents pass on tastes, ambitions and abilities.

And there was greater correlation between the incomes of mothers and daughters, and fathers and sons than with parents of the opposite gender, perhaps because of role model effects.

While Australia’s strong income mobility between generations is remarkable, it’s concerning there is less mobility among those at the very bottom and top of the income distribution scale.

The fact children born into the poorest families were more likely to remain in the lowest deciles, while those born into the top earning families tended to remain in the top deciles, suggests privilege is often passed on.

People who grew up in frequently poor households were three time more likely ^[9] to be poor at age 26 to 32 than those who never experienced poverty.

And consistent with other studies ^[10] we found children whose family received government payments were twice as likely to receive support as adults, compared with those whose families received no help.

Movement in the middle

Taken together, these results suggest some segmentation of opportunities. In the middle of the income distribution, there are opportunities to get ahead, and individuals’ careers are not restricted by their families’ circumstances.

At the bottom, things are a lot more “sticky”, and finding opportunities to permanently escape poverty is more difficult. Some of this boils down where people live, peers, school quality and local job options.

Researchers Deutscher and Mazumder ^[11] (2023) have shown regional economic conditions have a big impact on mobility, and we show remoteness limits movement out of poverty.

Overall, the mobility picture is extremely good news for most Australians.

But this should not blind us how difficult it is to move out of poverty, especially for those in remote areas. Identifying where mobility fails to deliver allows us to focus our policy response.