In this edition of Class Notes, our top chart shows the latest data from CBO on tepid middle-class income growth. We summarize Gary Becker’s posthumous paper on the creation of a “human capital elite,” a paper showing that the benefits of education vary by ability, and a paper arguing that structural factors can influence economic mobility and income inequality. Plus, check out who called us “intrepid social scientists” in the choice opinion of the week.
The Journal of Political Economy has posthumously published Gary Becker’s paper (completed by several of his colleagues) developing a new model to explain how income inequality at a given point in time affects intergenerational economic mobility. Becker and his coauthors argue that inequality in human capital investments in children, even among families toward the top of the income distribution (who are assumed to have ample credit for human capital investment), creates a persistent “human capital elite.” They show that increasing inequality and decreasing mobility are not necessarily linked, but that educational returns disproportionately benefiting high-skilled individuals can decrease mobility in the short-run. Further, if markets offer disproportionate benefits to those with high human capital, then permanent economic classes can develop.
Who benefits most from what kind of education? To address this question, James Heckman and coauthors present a new dynamic model of educational choice and returns to estimate how education causally increases wages, improves health, and decreases smoking. They also show that the benefits of different schooling levels vary by cognitive and non-cognitive ability: high school graduation benefits everybody, but especially low-ability individuals; college graduation substantially helps high-ability individuals, but not low-ability individuals. Using their model, the authors conduct policy simulations to show that tuition subsidies increase college enrollment and graduation and that early intervention programs that help those at the bottom of the ability distribution improve wages, health, and smoking outcomes.
Structural factors influence levels of both intergenerational economic mobility and income inequality according to this paper from Gonzalo Schwarz. The rule of law, levels of corruption, and opportunities for innovation and entrepreneurship are all positively correlated with intergenerational economic mobility and income inequality. While not claiming causality, Schwarz highlights how this framework suggests there may be a tradeoffbetween high levels of income inequality and high levels of intergenerational mobility.
The middle class has seen slow income growth over the past 35 years, according to CBO’s newly released data. Belle Sawhill and Chris Pulliam have argued that recent tax policy exacerbates this trend and that the tax code should be reformed to help the middle class:
“The question of how to define the middle class is one of the perennial mysteries of American social life. Most people say they’re ‘middle class,’ so how can we know what this really means? Every few years some intrepid social scientists venture a new definition,” according to Caitlin Zaloom in The Atlantic.
Those intrepid social scientists include us (specifically Katie Guyot and I). Although disagreeing with our definitional approach, Zaloom provides an excellent overview of the challenges of defining class, and offers a reminder of the importance of job stability for middle class families.
How can the newly elected Congress help the middle class? We presented four policy ideas (and how to pay for them): a worker tax credit, a tax credit for first-time home buyers, paid family leave, and child savings accounts.
