Intergenerational income mobility revisited: Estimation with an income dynamic model with heterogeneous age profile

Abstract

The traditional method of estimating intergenerational income elasticity by using the average income over a few years for each generation is subject to attenuation bias due to measurement error and lifecycle bias. In this paper, I estimate the intergenerational elasticity using an income dynamic model with intergenerational linkages. The model can explicitly account for sources of biases such as heterogeneous age profile and transitory shocks of changing variance over the lifecycle. The model can be identified through the covariance structure of earnings within individuals and across generations. Based on the models, I simulate the lifetime income of both generations and calculate the implied intergenerational elasticity. Using PSID data from the United States and GSOEP data from Germany, the estimated intergenerational elasticity of fathers and sons is substantially higher than those in the literature. The intergenerational elasticity is as high as 0.66 for the US and 0.48 for Germany.