Income Mobility in California Across Generations

Income Mobility in California Across Generations MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • JANUARY 2017 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY Intergenerational Income Mobility. Intergenerational income mobility is the extent to which children move up (or down) in the income distribution relative to their parents. Many factors can affect children’s income mobility. These include geographic factors—like the safety of their neighborhoods or the quality of their schools—their parents’ decisions, and their own characteristics. In this report, we examine intergenerational income mobility in California using estimates published by researchers Raj Chetty, Nathaniel Hendren, and their coauthors. Californians’ Income Mobility Somewhat Higher Than National Average. Rates of intergenerational income mobility in California are somewhat above the national average. This means that, on average, children born to low-income parents in California earn slightly higher incomes as adults than their peers in other states. Outcomes Among Children Born Into Bottom Fifth of Incomes. The figure below displays outcomes for Californian children born into households in the bottom 20 percent of national incomes. Over half of these children remain in the bottom two-fifths as adults, while about one-fourth end up in the top two-fifths as adults. Compared to their peers nationwide, this group of Californians has greater upward mobility. Nationally, 21 percent of those born in the bottom fifth end up in the top two-fifths. Californians’ Higher Mobility Not Due to Living in California. The evidence in this report suggests that Californian children have higher rates of income mobility because of their parents’ and their own characteristics, not because growing up in California results in more mobility. On average, growing up in California results in somewhat lower adult earnings for children compared to living elsewhere in the United States. “Growing up in California” includes all geographic factors that affect a child’s OOuuttccoommeess AAmmoonngg CCaalliiffoorrnniiaa CChhiillddrreenn BBoorrnn IInnttoo BBoottttoomm FFiifftthh ooff IInnccoommeess income mobility, including school quality, neighborhood safety, and community Share of People. . . interactions. According to the Chetty and 35% Hendren estimates, had these children 30 grown up somewhere else, they would have experienced slightly greater upward 25 income mobility. 20 Effects Vary Within California. While 15 growing up in California results in lower future earnings for low-income children 10 on average, there is a great deal of variation 5 in these outcomes at a local level. Within With California, growing up in a particular Incomes Bottom Second Third Fourth Top in the. . . Fifth Fifth county can increase or decrease a child’s Note: If each child had an equal chance of ending up anywhere in the income future annual income by a couple of distribution, each of these five bars would be 20 percent. thousand dollars. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT Traits of Places That Produce More Income Mobility. The fact that different places produce more or less intergenerational income mobility leads to a natural question: What causes these differences? As a first step in answering this difficult question, we highlight some of the characteristics of places that produce more income mobility. These include: lower rates of violent crime, better performance on some school metrics, stronger social networks, higher shares of middle-income households, and larger shares of two-parent households. However, these do not necessarily reflect cause-and-effect relationships. 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Equality of opportunity—the idea that all than their parents. In this report, we use estimates children should have a chance to succeed as from academic studies to assess intergenerational adults—is a key motivation for many state policies. income mobility in California. In general, we However, this abstract idea is difficult to quantify, expect to observe more mobility if opportunities so researchers investigate it indirectly by examining are more equal. Consequently, these estimates other related concepts. One such related concept is may signal how effectively California is promoting “intergenerational income mobility”—the extent equality of opportunity for its residents. to which children attain higher (or lower) incomes DEFINING AND MEASURING INCOME MOBILITY Definition of Intergenerational Income places results in better economic outcomes for Mobility. Intergenerational income mobility is the children later in life. extent to which individuals move up (or down) in . . . But Other Factors Also Influence Children’s the income distribution relative to their parents. As Mobility. Many other features of childhood shown in Figure 1, the child who moves further in and upbringing also influence income mobility. the income distribution, relative to her parents, has Children’s own characteristics, as well as their greater income mobility. For simplicity, throughout this report, we often refer to this concept as Figure 1 “income mobility” or just “mobility.” (While Income Mobility greater mobility leads to movement both up and down the income distribution, this report focuses primarily on upward mobility for low-income children.) Income Mobility Varies Across Places. In some c ch it i i l e d s r , e c n o u te n n ti d e s to , a e n a d r n n e m ig u h c b h o h rh ig o h o e d r s i , n l c o o w m -i e n s c r o e m la e t ive More Income Mobility to their parents. In other places, low-income children tend to attain outcomes similar to—or sometimes worse than—their parents’ outcomes. Places Influence Children’s Mobility . . . Less Income Mobility The places (neighborhoods, cities, counties, states, or countries) where children grow up can influence their earnings later in life. For example, some neighborhoods have relatively low crime rates, and some school districts have relatively First Second high-performing public schools. These or other Generation factors could mean that growing up in certain www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT parents’ characteristics, resources, and childrearing example, the safety of the neighborhood decisions influence children’s later-life outcomes where a child grows up. In other words, this regardless of where they grow up. For example, measure shows the effect on mobility of parents influence their children’s economic growing up in a particular place. outcomes by teaching them reading skills or helping About the Estimates. The estimates in this them build grit or willpower. Parents and children’s report come from research published by Raj Chetty, own characteristics may be even more important to professor of economics at Stanford University, children’s mobility than the effect of places. Nathaniel Hendren, assistant professor of Two Measures of Income Mobility. In this economics at Harvard University, and their team report, we consider two ways to measure income of researchers. (Throughout, we refer to this group mobility. The first is broad and the second is place- as “Chetty and Hendren” or “the researchers.”) specific. Specifically: Chetty and Hendren used two decades of tax return • The broad measure of mobility reflects data from 5 million families to assemble a uniquely all of the factors that affect children’s rich data set. They measure income using pre-tax outcomes—including geographic factors, income from labor market earnings and capital parenting decisions, and a child’s own (for example, from the sale of stocks or bonds), characteristics. as well as unemployment, social security, and disability benefits. Together, these form the most • The place-specific measure of mobility important sources of income for a large majority of attempts to isolate just one set of factors Californians. The researchers have published their that affect mobility—the effect of growing estimates of income mobility at the county level for up in a particular place, holding other, nearly all counties in the United States. For more non-geographic factors constant. These methodological information on these estimates, see geographic factors may include, for the technical appendix. BROAD INCOME MOBILITY IN CALIFORNIA In this section, we present two broad measures on estimates by researchers Chetty and Hendren. of intergenerational income mobility for children In constructing this measure, the researchers who grew up in California in the 1980s and 1990s. follow children who were born between 1980 and First, we describe broad income mobility focusing 1991 and whose families had incomes at the 25th only on children born to low-income families. Then, percentile of the national income distribution. (In we examine broad income mobility throughout the our analysis, we focus on the researchers’ results income distribution, including for children born to for those children who grew up in California.) The middle- and high-income families. researchers measure these children’s household earnings when they are in their early thirties and Mobility for Low-Income Children rank them in the national income distribution. Measuring Broad Income Mobility for As a result, the estimates presented here capture Low-Income Children. The broad measure of mobility for children growing up in California in mobility presented in this section primarily relies the 1980s and 1990s. 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Hypothetical Example. Consider the example Figure 2 of a girl who was born in 1982 and grew up in Income Mobility Nationwide San Jose. When she was young, her family’s income was in the 25th percentile of the income distribution. As an adult, she moved up to the 46th percentile of the national income distribution. In the 2012 income distribution (to illustrate these figures in dollar terms), her family’s annual income 53rd Percentile $56,000 would have been $26,000, and her adult annual North Dakota (Highest State) income would be $48,000. 43rd Percentile Income Mobility Nationwide. In the United $44,000 U.S. Average States, income mobility for children born to 37th Percentile parents in the 25th percentile varies greatly in 25th Percentile $37,000 $26,000 North Carolina dollar terms. As displayed in Figure 2, on average, (Lowest State) U.S. children born to parents in the 25th percentile First Generation Second Generation move up to the 43rd percentile as adults. This is the equivalent of moving from an annual income of $26,000 to $44,000 in 2012 dollar terms. On a state level, the average adult income rank for these Figure 3 children ranges from the 37th percentile (in North Broad Measure of Income Carolina) to the 53rd percentile (in North Dakota). Mobility in the United States The corresponding range of annual household Average Income Rank of Children Born to Parents With incomes is $37,000 to $56,000. Incomes in the 25th Percentile of the Income Distribution Income Mobility in California. Low-income Californians experience rates of income mobility that are somewhat greater than the rest of the United States. In California, the average child born to parents in the 25th percentile moves up to the 44th percentile (with an annual household income of $45,000) as an adult. Figure 3 shows how, on this measure of mobility, California compares to other U.S. states. While mobility is higher in some parts of the Mountain West and Midwest, income mobility in California is high compared to Southern states, and comparable to some other Less than 40th percentile Western states, the Mid-Atlantic, and much of 40th to 43rd percentile New England. 43rd to 46th percentile Greater than 46th percentile www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT Mobility in California Figure 4 From the Top, Middle, and Bottom Average Household Income by In this section, we provide a more complete Quintile in the United States picture of income mobility in California. 2012 $181,455 Specifically, we describe how mobility varies throughout the income distribution, including for children born in the bottom, middle, and top. (While this section focuses on outcomes in California, the figures below refer to quintiles in the $81,953 national income distribution.) $51,590 Outcomes Among Children Born Into $30,226 Bottom Fifth of Incomes. Figure 4 displays average $11,361 household earnings by quintile in 2012. Households Bottom Second Third Fourth Top in the bottom fifth earned an annual average income of $11,361 in 2012. Figure 5 displays adult income outcomes for children born to households in the Figure 5 bottom quintile. Over half of California children Outcomes Among California Children born to parents in the bottom fifth remain in the Born Into Bottom Fifth of Incomes bottom two-fifths as adults. About one quarter of Share these children end up in the top two-fifths as adults. of People. . . 35% Mobility among this group in California is greater than in the United States. Nationally, about 30 60 percent of those born in the bottom fifth remain 25 in the bottom two-fifths. Just over 20 percent of 20 these children end up in the top two-fifths as adults. Outcomes Among Children Born Into Top 15 Fifth of Incomes. Figure 6 shows that 53 percent of 10 Californian children born in the top fifth remain in 5 the top two-fifths as adults. Meanwhile, 30 percent end up in the bottom two-fifths as adults. Compared With Incomes Bottom Fifth Second Third Fourth Top Fifth to the country as a whole, Californians born in the in the. . . top fifth of the income distribution are less likely to Note: If each child had an equal chance of ending up anywhere in the income distribution, each of these five bars would be 20 percent. remain in the top two-fifths (53 percent rather than 58 percent) and more likely to end up in the bottom measured precisely), 20 percent of those born in two-fifths (30 percent rather than 24 percent). each quintile would remain in the same quintile. Those Born at the Top and Bottom Are Less As the figure indicates, those born in the middle Mobile. Figure 7 displays the share of Californians experience substantial mobility. Just over 20 percent born into each fifth of the income distribution of those born in each of the three middle fifths of who remain in the same part of the distribution as the income distribution remain in those respective adults. For reference, if children’s outcomes were fifths as adults. By contrast, there is less mobility completely unrelated to their parents’ incomes (and 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Figure 6 Figure 7 Outcomes Among California Children Less Mobility in the Born Into(cid:31)Top Fifth of Incomes Bottom and Top of Income Distribution Share Share of Californians Born Into Each Quintile of People. . . Who Remain in Same Quintile as Adults 35% 35% 30 30 25 25 20 20 15 15 10 10 5 5 With Incomes Bottom Second Third Fourth Top Bottom Second Third Fourth Top in the. . . Fifth Fifth Note: If each child had an equal chance of ending up anywhere in the income Note: If each child had an equal chance of ending up anywhere in the income distribution, each of these five bars would be 20 percent. distribution, each of these five bars would be 20 percent. at the top and bottom of the income distribution. United States Has More Stickiness Than Other More than 30 percent of those born in the bottom Developed Counties. Another report compares fifth or top fifth remain there as adults. mobility statistics in the United States to a handful Similar Pattern Nationwide. The mobility of other industrialized nations. Using different data pattern described in Figure 7 for California is (and different methods to make the data comparable similar to the pattern nationally. The Chetty and across countries), these researchers found that Hendren data suggest that, nationally, 33 percent of children born in the bottom fifth in Denmark, those born in the bottom stay there while 35 percent Finland, Sweden, Norway, and the United Kingdom of those born at the top stay there. Some researchers are much more mobile than children born in the have referred to this phenomenon as “stickiness” at bottom fifth in the United States. the ends of the income distribution. PLACE-SPECIFIC INCOME MOBILITY IN CALIFORNIA In this section, we present the place-specific suggests that the place a child grows up affects his measure of income mobility in California. The or her later-life income mobility. The longer a child place-specific measure attempts to isolate just spends in a place, the larger the effect. the effect of growing up in a particular place on How Place Can Influence Mobility. Many mobility. That is, the measure aims to capture the geographic factors can affect mobility. Some extent to which different places produce more (or of these factors are relatively recognizable. For less) mobility for the children who grow up in example, the quality of children’s education, the them, setting aside non-geographic factors such strength of social networks around them, and the as parental characteristics and children’s abilities. extent to which they are exposed to violent crime The evidence presented by Chetty and Hendren all could affect their future earnings. However, www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT growing up in a particular place may affect future explanation of how the researchers estimated these earnings for a wide variety of other reasons. For place-specific measures of income mobility, see the example, a child who grows up in San Francisco— technical appendix.) which has a strong job market—may be more likely An Interpretation: Parents’ Location Choices. to stay in San Francisco as an adult. Growing up Here is one way to interpret this measure. Where in San Francisco, therefore, may benefit the child could low-income parents move in order to through her adult labor market opportunities. maximize their children’s future earnings? (We note Measuring Place-Specific Income Mobility that parents move for many other reasons as well.) for Low-Income Children. Like the broad measure To answer this question, the parents would need to discussed above, the place-specific measure of know which place provides the best opportunities income mobility uses the average adult income for their children to succeed—not necessarily which of children born to parents in the 25th percentile place’s residents happen to have the highest rate of of the national income distribution. In dollars, it mobility. estimates how much more (or less) a child could Hypothetical Example. To explain the place- expect to earn as an adult annually if her parents specific measure of mobility, we refer back to the chose to move to a particular state early in her life. hypothetical child who grew up in San Jose discussed Throughout this section (including in Figures 8 earlier. Her parents’ annual income was $26,000 and 9), we report this effect assuming children have and, as an adult, her annual household income is spent at least ten years of childhood in a particular $48,000. How much of this gain can we attribute place. We also refer to this place-specific measure to the fact that she grew up in San Jose (rather than of income mobility as the “effect of growing other advantages like her own skills or her parents’ up” in a particular place. (For a more complete efforts)? The effect of growing up in San Jose answers Figure 8 Place-Specific Mobility in California Compared to Other States Expected Change in Annual Adult Earnings $500 to $2,500 $0 to $500 $0 to -$500 -$500 to -$2,500 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT this question. Suppose that she spent ten years of her counties with effects below -$1,000, many counties childhood in San Jose and that the effect of growing with small positive or negative effects, and several up in San Jose (instead of a nationally average place) counties with effects above $1,000. Figure 9 is an annual earnings gain of about $30 for each displays the effect of growing up in each county year the child spends there. In that case, her annual for children born to low-income parents. For earnings as an adult are $300 higher because she example, assuming a child spends at least ten years grew up in San Jose—while the remainder of the of childhood there, the map shows low-income difference is the result of other factors. parents would increase their child’s expected Place-Specific Mobility Lower in California annual adult earnings by about $700 by moving Than Rest of Nation. Earlier, we noted that to San Mateo County (relative to moving to the compared to the nation, Californians’ broad average county nationwide). This map represents a measure of income mobility (which considers change in annual earnings that ranges from -$1,761 both geographic and non-geographic factors) is to $1,963 per year. Nationwide (among counties relatively high. By contrast, as shown in Figure 8, that are at least as large as those for which we have California’s place-specific measure of mobility is data in California) the effects range from -$4,840 low. Low-income parents who move to California to $4,805. can expect to reduce their Figure 9 child’s future annual Place-Specific Mobility in California's Counties earnings by $407, relative to moving to an average place nationally. As above, Expected Change in this estimate assumes Annual Adult Earnings children spend at least ten $500 to $2,000 years of their childhood $0 to $500 in California. This $0 to -$500 number represents the best statistical “bottom -$500 to -$2,000 line” for the state, but it No Data obscures a great deal of variation across different parts of California. Place-Specific Mobility Varies Widely Across California’s Counties. California’s place-specific mobility is a statewide average of the effect of growing up in each of California’s counties. This -$407 Note: Estimates are more robust for more populous counties, as discussed in the text of this report. average reflects several www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT Effects Very Likely Vary Within Counties. Measurement Problems in Rural Counties. There is likely a great deal of variation in place- The place-specific measure of mobility relies on specific mobility within a county, city, or even a people moving from one county to another. During neighborhood. For example, two children in San the study period, tens of thousands of people Francisco can grow up a mile apart but experience moved between California’s populous counties, dramatically different childhood environments. like Los Angeles, Fresno, and Santa Clara. As a Ideally, we would like to observe place-specific result, there are relatively robust estimates available mobility at a smaller geographic level than the for these counties. Fewer people, however, moved county. However, counties are the smallest level to or between California’s less populated, rural provided by the researchers’ estimates. In fact, counties like Modoc and Mariposa. As a result, the for California, these are the most geographically estimates for these counties are less reliable. detailed estimates available from any source. WHAT KINDS OF PLACES PRODUCE MORE MOBILITY? Traits of Places That Produce More Mobility. • Stronger Social Networks. Places that The fact that different places produce more or less produce greater mobility tend to have income mobility leads to a natural question: What greater social cohesiveness or stronger are the features of places that cause these differences? social connections. Although social This is a very difficult question to answer. As a first networks cannot be observed directly, step in the process of answering it, the researchers researchers have developed other indicators examine a list of factors that may be associated with to measure these attributes indirectly higher rates of place-specific mobility. From this (for example, by measuring membership list, they identify several common characteristics in community, religious, and other of places that produce greater mobility. (They study organizations). these traits at a national level, so some of these • Higher Share of Middle-Income findings may apply to California and others may Households. Places that produce greater not.) These characteristics include: mobility tend to have larger shares of • Lower Rates of Violent Crime. Places that middle-income households, and they produce greater mobility tend to have fewer have smaller income differences between murders, rapes, robberies, and aggravated the highest-income and lowest-income assaults. households. • Better Performance on Some School • Larger Shares of Two-Parent Households. Metrics. Places that produce greater Places that produce greater mobility tend mobility tend to have schools with higher to have smaller shares of single-parent student test scores, lower student dropout households, smaller fractions of divorced rates, smaller class sizes, and more adults, and higher fractions of adults that expenditures per student. are married. 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Together these factors are a good starting relationships. For example, the fact that places that point for further investigation, but they do produce more mobility tend to have lower crime not necessarily reflect direct cause-and-effect rates does not necessarily mean that reducing crime would lead to greater mobility. CONCLUSION Broad Mobility Somewhat Above Average. The mobility also certainly varies within counties, but broad measure of mobility in California reflects within-county data are not available. all of the characteristics of California and its Californians’ Higher Mobility Not Due residents—including geographic factors, parenting to Living in California. California has above decisions, and Californians’ own characteristics. average broad mobility, but below average California performs somewhat above the national place-specific mobility. This finding suggests average on the broad measure of mobility. that Californian children have higher rates of Place-Specific Mobility Addresses Some income mobility because of their parents’ and Additional Questions. Following the broad their own characteristics, not because growing measure of mobility, a natural next question to up in California results in more mobility. This ask is: To what extent does California’s above- means that, had these Californian children grown average mobility reflect the effect of growing up in up somewhere else, they likely would have done California versus the characteristics of people who even better as adults, according to the Chetty and happen to live in California? The measure of place- Hendren estimates. specific mobility addresses this question. Policy Relevance of Place-Specific Mobility. Place-Specific Mobility Generally Lower in By its construction, place-specific mobility California Than National Average. The place- measures—albeit imperfectly and indirectly—the specific measure of mobility aims to capture the extent to which some places create opportunities or extent to which the state produces more (or less) remove barriers for low-income children to attain income mobility than other places, setting aside higher incomes. This means place-specific mobility non-geographic factors such as parental influence is a better measure of how effectively the state is and children’s abilities. As discussed earlier, producing income mobility—either through public California’s place-specific income mobility for policy or otherwise. As such, it may be of keener low-income children is below average. Although interest to policymakers. this is not necessarily an outcome of public policy, Available Evidence Leaves Some it does suggest improvement is possible. Key Questions Unanswered Some California Counties Have Higher Place- Specific Mobility Than the National Average. The Relative Measures Alone Do Not Demonstrate place-specific measure of mobility for the entire Success or Failure. Note that the measure of state is an average of this measure for each county. place-specific mobility presented here does not Some counties in California have higher—in some compare California to any absolute, or ideal, cases much higher—place-specific mobility than standard. Rather, it compares California to the the national average. Others have lower place- national average. As a result, it can lead to a specific mobility. As noted earlier, place-specific variety of conclusions, depending on one’s own www.lao.ca.gov Legislative Analyst’s Office 13 AN LAO REPORT views regarding opportunities and barriers incomes in the 25th percentile. Estimates for other nationwide. Clearly, those who are dissatisfied parts of the income distribution—which clearly with opportunities at the national level should are also of interest to policymakers—would yield also find California’s below-average performance different results. For example, the place-specific unsatisfactory. For those with a more positive view measure of mobility could be substantially lower of nationwide opportunities, assessing California is or higher for those born, say, at the 10th percentile more difficult. For those with this view, California’s or 30th percentile. Such findings could significantly below-average performance may be unsatisfactory, alter assessments of economic opportunity in or may be close enough to the average that it is still California. acceptable. Income Is Just One of Many Outcomes to Analysis Examines Relative, Not Absolute, Consider. The estimates in this report focus on one Income Mobility. Relative mobility is the extent to long-term outcome for low-income children: their which children move up (or down) in the income incomes as adults. However, both policymakers distribution relative to their parents. Absolute and parents typically are interested not only in mobility, meanwhile, considers underlying children’s future incomes, but also in other aspects economic growth that affects standards of living. of well-being, such as health, leisure time, and job For example, parents and their children may all satisfaction. Parents may move to a different place be at the 50th percentile, but the children may be to enjoy better weather, to be able to afford a larger better off if incomes have increased. The analysis house, or to be close to activities and recreational presented in this report focuses on relative, not opportunities that improve their family’s quality absolute, income mobility. Estimates of absolute of life. Places that perform well along these other mobility are not available at a comparable level of dimensions—for example, places that produce geographic detail. longer life expectancies for low-income children— Estimates Limited to Specific Part of Income may not be the same as the places that produce Distribution. The place-specific measure of more income mobility. Consequently, places that mobility only considers one narrow slice of the produce greater mobility are not necessarily more income distribution: those born to parents with desirable places to live. 14 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT TECHNICAL APPENDIX This report presents estimates of a variety of To reduce noise in the estimates, the measures of intergenerational income mobility, as researchers blend the place-specific measure of estimated by researchers Raj Chetty and Nathaniel mobility with the broad measure of mobility. In Hendren. This appendix provides more details about particular, they weight the broad measure more how these researchers produced the estimates of the heavily when less reliable data are available for place-specific measures of mobility, as well as some the place-specific measure. This means that, for strengths and weaknesses of their approach. counties with small populations, the estimates to a large degree reflect the broad, rather than the Estimation of the Place-Specific Measure of place-specific, measure of mobility. This blended Income Mobility in California approach creates an arguably more credible Estimates of the place-specific measure of estimate than either approach alone. mobility attempt to isolate the effect of growing The researchers also use a variety of other up in California on a child’s future earnings. In techniques to validate these individual estimates. principle, the best way to estimate this effect would For example, they compare the outcomes of siblings be to examine outcomes in two hypothetical worlds: to one another. They also study community-level one where a set of individuals grew up in California moves triggered by external events, such as a and another where those same individuals grew natural disaster or the closure of a large plant. up somewhere else. However, in the real world, Simplified Estimation Example. Suppose the researchers must estimate these effects using researchers want to measure the difference between observed data on people in California and elsewhere. the effect of growing up in San Francisco and the Method of Estimation. At the most basic effect of growing up in Oakland. The researchers level, Chetty and Hendren estimate the place- compare the outcomes of many children who move specific measure by comparing outcomes among to San Francisco from Oakland at various ages. parents who move to a particular place when For example, they compare the adult earnings of their children are different ages. In our view, this children who move at age 6 and demographically comparison generates a more credible estimate of similar children who move at age 5. Suppose they causal relationships than the broad measure alone. find that children who move at age 5 can expect The researchers assume that parents who move to make about $400 per year more than children to California are similar, regardless of the age of who move at age 6. The researchers conclude their children when they move. This assumption is that this $400 difference is the result of spending reasonable even if different places attract different an additional year in San Francisco rather than types of people—as long as those differences remain Oakland. (Note that a place that produces greater constant over the time period studied. Using this mobility is not necessarily more desirable overall.) assumption, the researchers can measure the effect These Measures Are Not Adjusted for Cost of of spending a year in a particular place as the Living. Throughout this series, we use estimates difference between outcomes of demographically of income mobility that have not been adjusted similar movers who move when their children are a for the cost of living. With a few exceptions, such year apart. an adjustment does not substantially affect these www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT estimates. In general, adjusting for prices in a Focus on Specific Birth Cohorts. Both the high-priced area like San Francisco reduces both broad and place-specific measures of income the child’s income rank and the parents’ income mobility reflect data on the adult earnings of rank. As a result, a child’s rank in the income children born between 1980 and 1991. As a result, spectrum does not change much relative to the these estimates capture the effect of growing up parents’ rank. This result holds if the child remains in California in the 1980s and 1990s. However, in the same city as an adult or moves to a similarly conditions in California have changed and will high-priced area. As a result, income mobility— continue to change over time. The data do not tell that is, the difference between the child’s and the us how income mobility has evolved over time or parent’s rank—is largely unaffected. what the effect of growing up in California is today. Aggregate Measures Do Not Apply to All Strengths and Weakness of This Approach Individual Cases. The aggregate measure of place- Estimation Issues. The place-specific estimates specific mobility presented in this report does not of mobility may be misleading if: (1) few people apply to all individual cases. Many people who move to a given place, limited data are available, move to California will experience outcomes that making the estimates less reliable; (2) people who are different than these averages. move to a certain place are different from people Overall Patterns Are Informative. On the who already live there; or (3) parents who move whole, Chetty and Hendren’s research lends with young children are different from parents credibility to the idea that the places children grow who move with older children. If parents are up affects their adult earnings later in life. They different, then these estimates would not reflect a also indicate that conditions at a local level—and true cause-and-effect relationship. This is because therefore local and state-level policies—may be these estimates are generated by comparing parents important determinants of income mobility. As a who move with children at different ages. If these result, the estimates presented in this report are parents are dissimilar, then they do not serve as a potentially useful starting point for considering appropriate comparisons. If parents who move are a wide range of policy issues. However, the fundamentally different from those who do not, the caveats above should make the reader cautious. In findings of this study may not be generalizable to particular, the reader should not place too much those who do not move, because the estimates do confidence in any single estimate of the place- not incorporate their outcomes directly. specific measure of mobility, particularly for small and rural counties. 16 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT LAO Publications This report was prepared by Ann Hollingshead, and reviewed by Seth Kerstein and Jason Sisney. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. 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