Modeling Intergenerational Economic Mobility Dynamics Via Calibrating Markov Models

Abstract

Quantifying rates of intergenerational economic mobility, or the ability for children to achieve a higher standard of living than their parents (the ``American Dream"), is a challenging empirical task. Previous studies have largely relied on measures such as log-log elasticities and rank-rank correlations to assess levels of mobility. However, these models are limited in their precise quantification of specific transition probabilities, which model the likelihood of a child transitioning to a particular socioeconomic group given their parents' data. In this work, we formulate a series of Markov transition matrices to model observed rates of intergenerational mobility over several decades using data from the Panel Study of Income Dynamics. Both relative and absolute mobility formulations are considered, where relative mobility is defined by income quintiles and absolute mobility is defined by discrete fixed income buckets. We demonstrate that rates of intergenerational relative mobility have remained remarkably stable between the 1968 and 1997 birth cohorts, with high levels of income persistence. These findings largely align with past literature even though income inequality has increased in subsequent decades. However, our absolute mobility formulation indicates statistically significant results of higher levels of upward mobility (almost double the likelihood of joining the top income bucket) when comparing the 1968 and 1997 birth cohorts. We note that the results from the absolute mobility parameterization are confined to this paper's specific parameterization and are likely structurally skewed towards greater perceived levels of intergenerational mobility. Furthermore, we acknowledge that our findings are limited in terms of broader inferences regarding intergenerational mobility due to the lack of significant robustness checks and limited historical data. Yet, the results are still interesting and useful for researchers in terms of providing a future model framework for better estimators of economic mobility.