By Brant Abbott and Giovanni Gallipoli
We develop and estimate an equilibrium model of intergenerational earnings persistence based on skill complementarity in production. We show that when a worker’s productivity is relatively independent of co-workers’ skills (i.e., skills are substitutable) parental investments in a child’s human capital have a stronger impact on the child’s future earnings. This leads to higher earnings’ persistence across generations. Observed patterns of geographic variation in intergenerational income persistence, both across countries and within the US, appear to be consistent with this hypothesis. We show that differences in skill substitutability may account for up to 1/5 of cross-country variation in intergenerational earnings persistence. We also find that public policies which equalize skills are more desirable in places where skills are more complementary in production. Thus cross-country differences in production arrangements provide a rationale for the observed concurrence of proactive government policies and increased economic mobility. When accounting for this indirect effect, the model explains an even larger share of cross-country differences in mobility, up to 1/3 of the total. As a by-product of this analysis we provide the first set of estimates of skill substitutability in different industries.
While the emphasis of the paper is on the international differences in intergenerational persistence, I wonder what it implies for its change through time. I believe, for example, that there is more persistence in the United States than before, and I think that jobs are more complementary that substitutable than before. Wouldn’t that contradict the results of the paper? Maybe there is another mechanism in the time dimension for the US: how borrowing or liquidity constraints are blocking access to education for some.