Board of Governors of the Federal Reserve System

September 1995

Economic Development and Intergenerational Economic Mobility

Murat F. Iyigun

Abstract:

This paper examines theoretically how economic growth affects intergenera­tional economic mobility. In the model developed in this paper, education is provided to the individuals free of cost, and admission to schools is competitive. The quantity of educational services available in any period depends on the total output of the economy in the same period. Individuals differ from each other in two respects. First, their innate mental abilities are determined by a stochastic process, and, second, their parents have different education levels. Individuals are admitted to schools based on their potential. An individual's potential is a function of her innate mental ability and her parent's education level.

In this model, economic growth increases intergenerational economic mobility if and only if the effect of having an educated parent on an individual's poten­tial is not large. Moreover, if the effect of having an educated parent is not large, then there exists a unique steady state equilibrium and all economies will progress toward increased mobility. The model also shows that economic growth reduces the income difference between educated and uneducated labor if and only if the effect of having an educated parent on an individual's potential is not large. And, although population growth reduces intergenerational economic mobility, techno­logical progress increases it.

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