Wealth not Always Found in Genes
March 12, 2004
It is widely understood that parents can pass on human capital and spending habits to their children in order to improve their long-term financial welfare. Economists sometimes call this wealth transfer relationship the intergenerational "wealth elasticity."
However, according to a study by two Michigan economists, it appears there is more to becoming wealthy than simply having affluent parents. Using extensive survey data, researchers found that parents whose wealth is 50 percent above the average in their generation will have children whose wealth is but 18 percent over the average in their children's generation.
Overall, the researchers conclude that there is a significant degree of income mobility among the various classes of wealth:
- Some 19 percent of the parents in the lowest wealth quintile have children who are able to break away from this status and reach the first or second highest quintile.
- Similarly, 27 percent of parents in the top quintile have children who end up with a level wealth that ranks them in the lowest or second lowest quintile.
The study found that parental income and portfolio composition (such as the buying assets and stocks) are the two most important influences in improving their children's future wealth. However, once income is accounted for, the parents' education level has only a very small effect on their children's financial prosperity.
Due to limitations in the data, the researchers did not incorporate the transfer of inheritance upon the death of the parents into their analysis.
Source: Kerwin Kofi Charles and Erik Hurst, "The Correlation of Wealth across Generations," Journal of Political Economy, December 2003.
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