Working Paper: NBER ID: w20195
Authors: Melissa S. Kearney; Phillip B. Levine
Abstract: It is widely documented that places with higher levels of income inequality have lower rates of social mobility. But it is an open question as to whether this reflects a causal relationship. We propose that one channel by which higher rates of income inequality might lead to lower rates of upward mobility is through lower rates of human capital investment among low-income individuals. Specifically, we posit that greater levels of income inequality could lead low-income youth to perceive a lower return to investment in their own human capital. Such an effect would offset any potential “aspirational” effect coming from higher educational wage premiums. The data are consistent with this prediction: low-income youth are more likely to drop out of school if they live in a place with a greater gap between the bottom and middle of the income distribution. This finding is robust to a number of specification checks and tests for confounding factors. This analysis offers an explanation for how income inequality might lead to a perpetuation of economic disadvantage and has implications for the types of interventions and programs that would effectively promote upward mobility among low-SES youth.
Keywords: Income Inequality; Social Mobility; High School Dropout
JEL Codes: D31; I24; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income Inequality (D31) | High School Dropout Rates (I21) |
| 50-10 Income Ratio (D33) | High School Dropout Rates (I21) |
| Income Inequality (D31) | Perceived Returns to Education (I26) |
| Income Inequality (D31) | Social Mobility (J62) |
| Low SES (I32) | High School Dropout Rates (I21) |
| Income Inequality + Low SES (I24) | High School Dropout Rates (I21) |