Why Do Children Tend to Earn What Their Parents Earn?

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Each issue of The Regional Economist, published by the Federal Reserve Bank of St. Louis, features the section “Ask an Economist,” in which one of the Bank’s economists answers a question. The answer below was provided by Research Officer and Economist George-Levi Gayle.

Why are the earnings of children so close to those of their parents? Is this relationship the same for blacks and whites?

In a recent paper, my co-authors, Limor Golan and Mehmet Soytas, and I¹ wrote that the structure of the family and the division of labor within the household were the main sources of the correlation of earnings across generations. For a long time, the economics literature has included ample documentation on the strong correlation between the earnings of fathers and sons, namely between 35 to 50 percent. (Now that women make up at least half of the workforce, this literature needs updating to cover the changing roles of females—both mothers and daughters.) Besides income, other factors need to be considered: how parents accumulate human capital in the labor market, the availability and returns to part-time jobs versus full-time jobs and the return to parental time invested in children.

In another study, we looked at the difference between blacks and whites in the intergenerational transmission of human capital.² We focused on the roles of time and income spent in the early childhood years to see how they impacted educational outcomes, if at all. We found that the time that parents spend talking to and otherwise interacting with their children is the major reason for the disparity in educational outcomes between black and white children. For example, for black and white parents who spent the same amount of time interacting with their children, there is no black-white attainment gap.

Notes and References

¹ Gayle, George-Levi; Golan, Limor; and Soytas, Mehmet A. "What Is the Source of the Intergenerational Correlation in Earnings?" Working Paper 2015-019A, Federal Reserve Bank of St. Louis, August 2015.

² See Gayle, George-Levi; Golan, Limor; and Soytas, Mehmet A. "What Accounts for the Racial Gap in Time Allocation and Intergenerational Transmission of Human Capital?" Working Paper 2015-018A, Federal Reserve Bank of St. Louis, August 2015.

Additional Resources

• Regional Economist: Ask an Economist
• On the Economy: Is There a Gender Gap in Promotions and Pay in the Top-Executive Market?
• On the Economy: Looking beyond the Unemployment Rate