Parents undoubtedly play a significant role in shaping our lives, whether through the affection they provide or sometimes the lack of it, and of course, through the genetic traits they pass on to us. In the realm of finance, experts often discuss intergenerational income persistence, which explores how much influence parental income has on determining our own financial success, and its counterpart concept, social mobility.
These factors don’t look the same across the globe. According to economist Miles Corak, countries with greater income inequality generally exhibit lower levels of social mobility. This means that when the gap between wealthy and poor individuals is wide, those born into poverty find it more challenging to ascend the economic ladder.
Yet, it’s crucial not to overlook a vital insight that goes beyond comparing average mobility rates between nations: the differences within a single country regarding the impact of parents’ financial status on their children’s economic outcomes. A recent study from Denmark illustrates this point vividly, having tracked over 630,000 children born between 1972 and 1982.
The study delves into the relationship between a family’s income and that of their children by the time they reach their mid-30s. Unsurprisingly, the research supports a common notion: wealthier parents often have wealthier children.
What’s particularly intriguing is how parental finances influence the economic futures of children from low-, middle-, and high-income backgrounds. For those at the lowest income levels, having parents with slightly more resources primarily increases the likelihood of employment, which in turn boosts individual earnings.
Conversely, in middle-income households, the emphasis shifts to education rather than immediate employment. Children from these families tend to achieve higher levels of education if their parents are better off financially. However, in the top 5% of income brackets, an interesting dynamic occurs: affluent parents enhance their children’s wealth through capital income, essentially the returns on investments and asset ownership. This transfer of assets is a significant factor in maintaining the wealth of the very rich across generations. So, while all parents influence their children, they do so in markedly different manners based on their economic standing.
This study offers a fascinating glimpse into how various economic backgrounds affect the opportunities and outcomes available to the next generation, reinforcing the diverse and complex ways in which parental financial standing molds our economic destinies.
Torsten Bell, serving as the Labour MP for Swansea West, is an insightful commentator known for his work “Great Britain? How We Get Our Future Back,” which delves into the broader financial implications of such dynamics.
