Does Higher Transitory Income of Parents Permanently Increase the Income of Their Children?

Abstract

Parent income can predict child income because both parent and child have high human capital, broadly defined, and because the presence of money makes it easier for the child to develop better job prospects. We use 45 years of Panel Study of Income Dynamics (PSID) data to investigate these two channels. We break parent income into a predictable human capital component and a transitory component whose variation is uncorrelated to a wide array of human capital measures. We find that intergenerational income transmission occurs through both channels, but that the coefficient tied to human capital income is approximately 0.7-0.8, whereas the coefficient on the residual or transitory income component, which is more closely tied to pure money transfer, is 0.2 and possibly substantially lower. Thus it appears that the intergenerational income elasticity is largely recovering human capital effects rather than the influence of money.