Aggregate Implications of Occupational Inheritance in China and India

Abstract

This paper documents occupational inheritance -- interpreted as children inheriting their parents' occupations -- in China, India, and the US. We argue that the prevalence of occupational inheritance in China and India, usually presented as low intergenerational occupational mobility rates, is largely due to two categories of impediments: (1) labor market frictions, e.g., parents' social networks (guanxi) giving unfair advantages to their children and household registration (hukou), which ties rural families to agriculture in China, and the caste system, which restricts young workers' occupational choices in India, and (2) barriers to acquiring human capital, i.e., it is much easier for the young in the US to accumulate human capital from sources other than senior family members compared with the young in China and India. Based on a new tractable occupational choice model, this paper quantitatively evaluates the aggregate implications of occupational inheritance. Counterfactual experiments suggest that if the impediments mentioned above could be reduced to the US level, labor productivity would grow 57 to 73% in China and over fourfold in India. In addition, China has realized 60 to 74% of this growth potential from the 1980s to 2009.