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Spring 2019

Using Big Data to Solve Economic and Social Problems Professor Raj Chetty Head Section Leader: Gregory Bruich, Ph.D. Spring 2019. Part 1 Local Area Variation in Upward Mobility. The American Dream in Historical and International Perspective. Trends in Mobility Over Time.

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Spring 2019

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  1. Using Big Data to Solve Economic and Social Problems Professor Raj Chetty Head Section Leader: Gregory Bruich, Ph.D. Spring 2019

  2. Part 1Local Area Variation in Upward Mobility The American Dream in Historical and International Perspective

  3. Trends in Mobility Over Time • Thus far, we have focused primarily on a snapshot of rates of upward mobility for children growing up in America today • As we just discussed, a historical perspective is often useful in understanding determinants of current outcomes • We cannot yet study trends in mobility by neighborhood, but we have made progress in understanding mobility over time at the national level

  4. A Historical Perspective on the American Dream • Historically, American Dream has been defined as the aspiration that children should have higher standards of living than their parents • When asked to assess economic progress, children frequently compare their earnings to their parents [Goldthorpe 1987] • Obama (2014): “People’s frustrations are partly rooted “in the fear that their kids won’t be better off than they were” • What fraction of children earn more than their parents, and how has this changed over time? Reference: Chetty, Grusky, Hell, Hendren, Manduca, Narang. “The Fading American Dream: Trends in Absolute Income Mobility Since 1940.” Science 2017.

  5. Measuring the American Dream • Key challenge: don’t have data linking parents to kids historically • Chetty et al. (2017) develop a method of estimating historical rates of mobility even in the absence of parent-child links • First describe basic results and then explain methodology

  6. Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 60 Pct. of Children Earning more than their Parents 40 20 0 0 20 40 60 80 100 Parent Income Percentile

  7. Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 Pct. of Children Earning more than their Parents 40 20 0 0 20 40 60 80 100 Parent Income Percentile

  8. Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 1960 Pct. of Children Earning more than their Parents 40 20 0 0 20 40 60 80 100 Parent Income Percentile

  9. Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 1960 Pct. of Children Earning more than their Parents 1970 40 20 0 0 20 40 60 80 100 Parent Income Percentile

  10. Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 1960 Pct. of Children Earning more than their Parents 1970 40 1980 20 0 0 20 40 60 80 100 Parent Income Percentile

  11. Percent of Children Earning More than Their Parents, by Birth Cohort 100 90 80 Pct. of Children Earning more than their Parents 70 60 50 1940 1950 1960 1970 1980 Child's Birth Cohort

  12. Methodology: Constructing Historical Estimates of Mobility • We are able to get reliable estimates of mobility even though we do not have historical data linking kids to parents • Fundamental reason: almost allkids born in 1940 earned more than all parents  does not matter which kids are born to which parents

  13. Density Parents Children 0 27k 50k 100k 150k Income (Measured in Real 2014$) Household Income Distributions of Parents and Children at Age 30 For Children in 1940 Birth Cohort

  14. 80th percentile of parents distribution Density Parents Children 0 27k 50k 100k 150k Income (Measured in Real 2014$) Household Income Distributions of Parents and Children at Age 30 For Children in 1940 Birth Cohort

  15. 80th percentile of parents distribution Density 14th percentile of children's distribution Parents Children 0 27k 50k 100k 150k Income (Measured in Real 2014$) Household Income Distributions of Parents and Children at Age 30 For Children in 1940 Birth Cohort

  16. Methodology: Constructing Historical Estimates of Mobility • We are able to get reliable estimates of mobility even though we do not have historical data linking kids to parents • Fundamental reason: almost allkids born in 1940 earned more than all parents  does not matter which kids are born to which parents • This is not the case for kids born in 1980s, but fortunately we have data linking kids to parents for that generation

  17. Household Income Distributions of Parents and Children at Age 30 For Children in 1980 Birth Cohort 80th percentile of parents distribution Density 74th percentile of children's distribution Parents Children 0 50k 80k 100k 150k Income (Measured in Real 2014$)

  18. What Policies Can Increase Absolute Mobility? • Two major changes in American economy since 1940: lower total economic growth rates and less equal distribution of growth

  19. Growth in Real Mean Family Income by Income Quintile 1947– 1973 3 2 Percent Per Year 1 0 Bottom Second Middle Fourth Top Top 5 Percent Source: Goldin and Katz (2007)

  20. 3 2 Percent Per Year 1 0 Bottom Second Middle Fourth Top Top 5 Percent Growth in Real Mean Family Income by Income Quintile 1947– 1973 vs. 1973-2013 1947-1973 1973-2013 Source: Goldin and Katz (2007)

  21. Source: Piketty, Saez, and Zucman (2017); Leonhardt (2017)

  22. Share of Income Going to Households in the Top 1%, by Year 24 22 20 18 16 Top 1% Share of Total Income 14 12 10 8 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Year

  23. What Policies Can Revive Absolute Mobility? • Two major changes in American economy since 1940: lower total economic growth rates and less equal distribution of growth • Consider two hypothetical scenarios for children born in 1980: • Higher growth: growth rate since birth corresponding to 1940 cohort, with income distributed as it is today • More broadly shared growth: Same growth rates as today, but distributed across income groups as in 1940 cohort

  24. 100 Average:91.5% 1940 80 60 Pct. of Children Earning more than their Parents 40 Average:50.0% 1980 20 0 0 20 40 60 80 100 Parent Income Percentile (conditional on positive income) Percent of Children Earning More than Their Parents: Hypothetical Scenarios

  25. 100 Average:91.5% 1940 80 60 Average:61.9% Pct. of Children Earning more than their Parents 40 Average:50.0% 1980 20 Higher growth: 1940 GDP growth rate, 1980 shares 0 0 20 40 60 80 100 Parent Income Percentile (conditional on positive income) Percent of Children Earning More than Their Parents: Hypothetical Scenarios

  26. 100 Average:91.5% 1940 80 Average:79.6% 60 Average:61.9% Pct. of Children Earning more than their Parents 40 Average:50.0% 1980 20 More broadly shared growth: 1980 GDP growth, 1940 shares Higher growth: 1940 GDP growth rate, 1980 shares 0 0 20 40 60 80 100 Parent Income Percentile (conditional on positive income) Percent of Children Earning More than Their Parents: Hypothetical Scenarios

  27. Trends in Upward Mobility: International Comparisons • Recap of last lecture: fraction of children earning more than their parents fell from 90% for those born in 1940 to 50% for those born in 1980 • Two-thirds of this decline was due to changes in the distribution of growth and one-third was due to slowing overall growth rate of American economy • How does the American experience compare to other countries? • Berman (2018) applies methodology of Chetty et al. (2017) in other countries to answer this question

  28. Source: Berman (2018)

  29. Source: Berman (2018)

  30. Source: Berman (2018)

  31. Source: Berman (2018)

  32. Restoring the American Dream • Main lesson: restoring the American Dream of high rates of upward mobility will require more broadly shared economic growth • Need policies that will increase incomes in the bottom and middle of the income distribution

  33. Restoring the American Dream • Two broad approaches: redistribution (taxes/transfers, min wages) or increasing skills of lower-income Americans (“human capital”) • Piketty and Saez: reductions in top income taxes and erosion of unions and minimum wages have led working-class Americans to fall behind • Goldin and Katz: race between education and technology – need education to keep pace with technological change to increase wage rates

  34. Restoring the American Dream • We will discuss both tax policy and education in greater detail in later lectures • Important note: “education” is not just about technical skills • Deming (2018) demonstrates this by investigating how wage rates vary with technical and social skills over time

  35. 30 20 Percentage Change 10 0 -10 1980 1990 2000 2010 Growth in Real Hourly Wage Rates by Occupation Task Intensity Cumulative Percent Change Between 1980 and 2012, Relative to 1980 Baseline High Social, High Math High Social, Low Math Low Social, High Math Low Social, Low Math Source: Deming (2017)

  36. 30 20 Percentage Change 10 0 -10 1980 1990 2000 2010 Growth in Real Hourly Wage Rates by Occupation Task Intensity Cumulative Percent Change Between 1980 and 2012, Relative to 1980 Baseline High Social, High Math High Social, Low Math Low Social, High Math Low Social, Low Math Source: Deming (2017)

  37. 30 20 Percentage Change 10 0 -10 1980 1990 2000 2010 Growth in Real Hourly Wage Rates by Occupation Task Intensity Cumulative Percent Change Between 1980 and 2012, Relative to 1980 Baseline High Social, High Math High Social, Low Math Low Social, High Math Low Social, Low Math Source: Deming (2017)

  38. Restoring the American Dream • We will discuss both tax policy and education in greater detail in later lectures • Important note: “education” is not just about technical skills • Deming (2018) demonstrates this by investigating how wage rates vary with technical and social skills over time • Policies to improve such skills could range from changes in education and training programs to housing voucher policies

  39. Is Increasing Social Mobility Desirable? • Thus far we have assumed that our goal should be to increase mobility • But policies that increase mobility may not be desirable from an efficiency perspective • Random college admissions would maximize social mobility • But would violate principle of meritocracy and would likely reduce total economic output and growth • Next, assess tradeoff between mobility and growth, focusing on innovation as a driver of growth

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