In this research spotlight, a paper by Miles Corak focuses on Australia to answer questions of theory, data, and statistics when calculating intergenerational mobility.
Equality of opportunity might seem like a straightforward concept, but in fact it is hard to define. A new paper by Stone Center Senior Scholar Miles Corak examines one of the many dimensions of equal opportunity: the degree of stickiness between the incomes of parents and the incomes of their adult children. “Income mobility across generations does not directly translate into equality of opportunity, but it is a necessary part of the public policy dialogue on this issue, particularly during an era of rising income inequality,” Corak writes in the paper — “Intergenerational Mobility: What Do We Care About? What Should We Care About?” — published in the Australian Economic Review.
Corak focuses on the empirical literature of Australia, and explores three aspects of one question: When measuring equality of opportunity, what is the “right” number to use? The aspects include: the “right” value of a popular summary measure of intergenerational mobility, the intergenerational elasticity of incomes; the “right” countries to include when making international comparisons; and the “right” statistics to use when demonstrating the consequences of inequality and on which to base public policy discussions.
The Great Gatsby Curve, which reflects the relationship between inequality and mobility, shows that Australia has “middling inequality and middling mobility,” Corak writes. Yet Australian researchers have produced a range of values for the intergenerational elasticity of incomes, and it is not surprising that studies have generated what might be considered conflicting signals. “These are conflicting only if we do not account for the sometimes subtle differences in measurement and definition between studies, differences that are not so much the result of errors researchers make, but rather reflect their struggle to exploit the strengths of the data at hand, while trying to minimize their weaknesses.”
When comparing Australia to other countries, it is important to include comparisons that are most relevant for public policy, Corak writes. Australia should be compared not just to the United States, but to Canada, because the three countries share “big geographies,” a Commonwealth legacy, and histories of immigration, he says. In addition, both Australia and Canada are trading nations, with important regions of both countries significantly affected by development of resources.
As for the “right” statistics to use when evaluating public policy, Corak stresses the importance of recognizing that intergenerational elasticity has limitations and also the purpose for which this measurement is being used. “If that purpose is to offer a broad summary measure of the degree of relative mobility then we should be certain that it accurately reflects the broad majority of the population, without at the same time losing sight that it does not capture all aspects of the mobility process for the entire population,” he writes.
Taking all these considerations together, Corak finds that about one-quarter to no greater than one-third of income inequality among parents is passed on to a recent generation of children. This compares relatively well to many other rich countries, particularly the United States and Canada. However, it is important to be agnostic in the use of statistics in order to capture all dimensions of intergenerational dynamics and to inform public policy.
“Our understanding of intergenerational income dynamics advances through a sometimes awkward dance between three partners: theorists, statisticians and policy makers,” Corak writes in his conclusion. “But at different times, a different partner steps up and takes the lead in this dance, and Australian economists have recently been able to take important steps in understanding intergenerational mobility because their appreciation of theory and statistical methods has coupled with important advances in the availability of good data.”