Rethinking the state-of-the-art intergenerational wealth mobility measure

What is it about?

How much of your wealth is determined by how wealthy your parents are? In other words, how much does your family background shape your financial future? Many people feel it's unfair when society makes it hard to do better than the situation you were born into. To gauge whether people can rise above their background, policymakers and researchers often employ a measure known as Intergenerational Elasticity (IGE). This measure looks at how closely your wealth is tied to your parents' wealth. It’s based on a simple regression model that assumes a direct link between one generation’s wealth and the next. While IGE is widely used to make comparisons across time or countries, our research shows that it overlooks an essential part of the story. The conventional way of using IGE assumes that people from different backgrounds are, given enough time, moving toward the same wealth level. However, in reality, this is often not the case. This is why we argue that researchers should report the other parameter in the model, the convergence value (i.e., where the wealth is heading), in addition to the IGE and the variances of these two parameters, to account for how the wealth of individuals or subgroups is shifting over time.

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Photo by Tetiana SHYSHKINA on Unsplash

Photo by Tetiana SHYSHKINA on Unsplash

Why is it important?

While IGE on its own doesn’t fully reflect how wealth actually moves—or doesn’t move—across different social groups over generations, researchers and policy makers are using this measure to make temporal or global comparisons. As it is used now, it could lead to the conclusion that a society is highly mobile in terms of wealth, while the rich stay rich and the poor stay poor. We provide a framework that requires minimal adaptation to the model, allowing for a more representative discussion on wealth mobility.

Perspectives