No More 10 Minute Breaks: Demographics Give a Big Head Start for Family Income and Wealth

Where you start out in life foreshadows where you will finish.

New research from the Federal Reserve Bank of St. Louis shows how a parent’s level of education, race and age shape economic opportunities and outcomes across the U.S. Notably, having white skin and a parent who graduated from college create a big demographic head start.

“Inherited demographic characteristics are key aspects of one’s identity over which one exerts no control,” authors Ray Boshara, William Emmons, Lowell Ricketts and Ana Hernández Kent write. “The view we take is that any adult outcomes that are systematically related to these inherited characteristics likewise are inherited or granted, rather than earned in any meaningful sense.”

Economic inequality, and the resentment it engendered, was an important theme during the last U.S. presidential election. Americans have long aspired to be a nation of great economic mobility, where anyone who works hard and has talent can rise to the top of the income ladder. While some degree of disparity isn’t surprising, the St. Louis Fed study arrives at hard numbers to show a stark divide.

For example, a financial snapshot of income and wealth among middle-aged (40-61 years old) Americans illustrates how not everyone is starting on the same rung—in fact, it’s not even close. It’s well-documented that people with a bachelor’s degree or higher tend to earn more than those without such a credential. But there are also apparent advantages from race and a parent’s level of education.

For example, the authors show the median income of a white, middle-aged nongrad with at least one college-educated parent was $76,758 in 2016. The median for a minority who did graduate from college but didn’t have a parent with a degree had a median family income of $70,479.

“College clearly is important, but contrary to conventional wisdom, your own college education does not completely level the playing field. The birth advantage (or disadvantage) remains,” the authors said. “In this comparison, inherited demographics—including the college education of the parents’ generation—outweighed the benefits of obtaining a college education.”

Inherited benefits compound with education and accumulate through wealth. (Wealth is the excess of assets like bank accounts and real estate, less debts including mortgages and student loans.) Middle-aged, white college graduates with a parent who also graduated from a four-year college had a median net worth of $629,900 in 2016. Minorities with the same educational pedigree came in at $347,586. Whites without college grads in the family had a median net worth of $97,572, and minorities with no college grads $18,500.

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That snapshot only captures part of the picture. Income and wealth gaps between college grad and nongrad families are growing.

Why does having a parent with college education matter? The authors posit that it’s partly because such parents invest more in their children through education, gifts, inheritance and the like—but also by teaching financial behaviors. For example, children of college grads are more likely to have safe and liquid assets on hand, are more willing to take some risks to earn a higher return on investments, and have better financial literacy.

To be sure, it’s also possible to squander a head start. Children of a college grad parent who don’t get at least a bachelor’s degree end up downwardly mobile. That group has both median income and wealth well below their parents.

Fed’s Brainard Warns Economic Inequality Could Hurt U.S. Growth (Sept. 26, 2017)

U.S. Household Incomes Rose in 2016 to New Record (Sept. 12, 2017)

How Financial Knowledge Drives Wealth Inequality (Apr 9, 2017)

Why Wealth Inequality Is Way More Complicated Than Just Rich and Poor (Oct. 12, 2015)

Economic Mobility Trumps the Income Gap as Bigger Worry — WSJ/NBC Poll (May 4, 2015)

from Real Time Economics http://ift.tt/2oKTvUW