Accounting for Intergenerational Earnings Persistence: Can We Distinguish Between Education, Skills, and Health?

This paper illustrates the difficulty in disentangling the underlying channels of intergenerational earnings persistence by means of path analysis and recursive models. On closer examination, these models manifest their shortcomings as regards accounting for how parental earnings have a direct impact on their offspring's earnings, but also have an effect through other factors such as education, skills and health. The estimated effects of these mediating factors are likely to capture the influence of other mechanisms not taken into account in the analysis. Nonetheless, the results suggest that education is the most important mechanism in the earnings transmission process, although it is sensitive to the inclusion of other covariates and the order in which these are entered into the equation. Nonlinear specifications suggest that the effect of a father’s earnings on his son’s has the greatest impact primarily through education and IQ in the upper middle categories of the earnings distribution of the fathers, while health status is of secondary importance.