Income Inequality, Social Mobility, and the Decision to Drop Out of High School

It is widely documented that places with higher levels of income inequality have lower rates of social mobility. But it is an open question whether and how higher levels of inequality actually lead to lower rates of mobility. We propose that one channel through which higher rates of income inequality might lead to lower rates of upward mobility is 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 rate of return on 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: Individuals from low socioeconomic backgrounds 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 in relation 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 it has implications for the types of interventions and programs that would effectively promote upward mobility among youth of low socioeconomic status. I comparisons show that the United States is a country that ranks high in its level of income inequality and low in its level of social mobility. Miles Corak (2006)—building on the theoretical contributions made by Gary Solon (2004)—was the first to show empirically that this relationship is part of a broader pattern that exists across countries. Countries with high levels of inequality also tend to exhibit lower rates of social mobility, as measured by greater intergenerational income persistence. 334 Brookings Papers on Economic Activity, Spring 2016 Alan Krueger (2012) popularized this relationship as the “Great Gatsby Curve.” Using data on the 50 states, we construct a Great Gatsby Curve for the United States. Figure 1 shows that states with greater levels of income inequality tend to have lower rates of social mobility. This positive cross-sectional relationship between rates of income inequality and intergenerational income persistence often leads to claims about causality, implying that higher rates of income inequality lead to lower rates 1. Social mobility is a concept that includes the likelihood of moving up or down in the income distribution, which is specifically labeled as economic mobility, but may also include changes in position in other distributions as well, like educational attainment, occupational status, and health. We restrict our attention to economic mobility in this paper, but adopt the common approach of using the terms “social mobility” and “economic mobility” interchangeably. The specific mobility measure used here is taken from Chetty and others (2014a), and reflects the correlation in the income rank of parents and their adult child. It is worth noting that if we replaced the Gini coefficient with alternative measures of income inequality, we see the same relationship. In particular, the figure looks the same using the 50/10 ratio of income, which is our primary measure of income inequality in this paper, as described below. Sources: Chetty and others (2014a); American Community Survey, 2014. a. Higher values indicate less relative mobility. b. Higher values indicate greater inequality. Intergenerational income persistencea Gini coefficientb 0.25 0.30 0.35 0.40 0.42 0.44 0.46 0.48 0.50 0.52 AK WY UTHI NE WI IN DE MD MS