Skip to main content

Childhood Income Volatility and Adult Outcomes

Abstract

Using data linked across generations in the Panel Study of Income Dynamics, I estimate the relationship between exposure to volatile income during childhood and a set of socioeconomic outcomes in adulthood. The empirical framework is an augmented intergenerational income mobility model that includes controls for income volatility. I measure income volatility at the family level in two ways: (1) instability as measured by squared deviations around a family-specific mean; and (2) instability as percentage changes of 25 % or more. Volatility enters the model both separately and interacted with income level. I find that family income volatility during childhood has a modest negative association with educational attainment. Volatility has a smaller descriptive role in explaining intergenerational outcomes relative to permanent income. Across the income distribution, the negative association between volatility exposure and educational attainment is largest for young adults from moderate-income families.

This is a preview of subscription content, access via your institution.

Fig. 1

Notes

  1. 1.

    In unpublished results, I use an alternative specification substituting parental education for family income during childhood. The results are robust to this alternative specification.

  2. 2.

    I also analyzed the association between income volatility during childhood and adult educational outcomes for persons between ages 29 and 31 (results not shown). When I retained observations containing 15 of 16 childhood years, the sample fell to 645 observations. The general results are consistent across models with respect to both statistical significance and direction of the relationships in question, although in some instances, the magnitudes differ. I therefore elect to focus the discussion on results for 25-year-olds.

  3. 3.

    Before 1979, the top-code value of income was $99,999; by 1980, it is $999,999; and in 1981, it increases to $9,999,999. During 1968–1993, family income was bottom coded at $1; but after 1994, the definition allows for negative family income of –$999,999 from business or farm losses.

  4. 4.

    The SEO sample of the PSID or the 1979 National Longitudinal Survey of Youth, for example, might provide a richer intergenerational file of low-income families, although these data come with their own tradeoffs.

References

  1. Altonji, J., & Dunn, T. (2000). An intergenerational model of wages, hours, and earnings. Journal of Human Resources, 35, 221–258.

    Article  Google Scholar 

  2. Attanasio, O. P., & Weber, G. (2010). Consumption and saving: Models of intertemporal allocation and their implications for public policy. Journal of Economic Literature, 48, 693–751.

    Article  Google Scholar 

  3. Autor, D. H., Katz, L. F., & Kearney, M. S. (2008). Trends in U.S. wage inequality: Revising the revisionists. Review of Economics and Statistics, 90, 300–323.

    Article  Google Scholar 

  4. Becker, G., & Tomes, N. (1979). An equilibrium theory of the distribution of income and intergenerational mobility. Journal of Political Economy, 87, 1153–1189.

    Article  Google Scholar 

  5. Becker, G., & Tomes, N. (1986). Human capital and the rise and fall of families. Journal of Labor Economics, 4, S1–S39.

    Article  Google Scholar 

  6. Black, S. E., Devereux, P. J., & Salvanes, K. G. (2005). Why the apple doesn’t fall far: Understanding intergenerational transmission of human capital. American Economic Review, 95, 437–449.

    Article  Google Scholar 

  7. Blanden, J., Gregg, P., & Machin, S. (2005). Intergenerational mobility in Europe and North America (Report). London, UK: Centre for Economic Performance, London School of Economics.

  8. Blanden, J., Wilson, K., Haveman, R., & Smeeding, T. (2011). Understanding the mechanisms behind intergenerational persistence: A comparison of the United States and Great Britain. In T. M. Smeeding, R. Erikson, & M. Jäntti (Eds.), Persistence, privilege, and parenting (pp. 29–72). New York, NY: Russell Sage Foundation.

    Google Scholar 

  9. Blank, R. (2008, May). Economic change and the structure of opportunity for less-skilled workers. Paper presented at the conference “Changing Poverty,” Institute for Research on Poverty, Madison, WI.

  10. Blau, D. (1999). The effect of income on child development. Review of Economics and Statistics, 81, 261–276.

    Article  Google Scholar 

  11. Bloome, D., & Western, B. (2011). Cohort change and racial differences in educational and income mobility. Social Forces, 90, 375–395.

    Article  Google Scholar 

  12. Burkhauser, R. V., & Couch, K. A. (2009). Intra-generational inequality and intertemporal mobility. In W. Salverda, B. Nolan, & T. M. Smeeding (Eds.), The Oxford handbook of economic inequality (pp. 522–545). New York, NY: Oxford University Press.

    Google Scholar 

  13. Cancian, M., & Reed, D. (2001). Changes in family structure: Implications for poverty and related policy. In S. Danziger & R. Haveman (Eds.), Understanding poverty (pp. 69–96). New York, NY: Russell Sage Foundation.

    Google Scholar 

  14. Charles, K., & Hurst, E. (2003). The correlation of wealth across generations. Journal of Political Economy, 111, 1155–1182.

    Article  Google Scholar 

  15. Charles, K., & Stephens, M., Jr. (2004). Job displacement, disability, and divorce. Journal of Labor Economics, 22, 680–701.

    Article  Google Scholar 

  16. Chetty, R., Hendren, N., Kline, P., & Saez, E. (2014). Where is the land of opportunity? The geography of intergenerational mobility in the United States (NBER Working Paper No. 19843). Cambridge, MA: National Bureau of Economic Research.

  17. Coelli, M. B. (2009). Parental job loss, income shocks and the educational enrollment of youth (Working paper). Melbourne, Australia: Department of Economics, University of Melbourne.

  18. Conger, R. D., Elder, G. H., Jr., Lorenz, F. O., Conger, K. J., Simons, R. L., & Whitbeck, L. B., . . . Melby, J. N. (1990). Linking economic hardship to marital quality and instability. Journal of Marriage and the Family, 52, 643–656.

  19. Cunha, F., Heckman, J. J., Lochner, L., & Masterov, D. V. (2006). Interpreting the evidence on life cycle skill formation. In E. Hanushek & F. Welch (Eds.), Handbook of the economics of education (Vol. 1, pp. 697–812). Amsterdam, The Netherlands: Elsevier.

    Google Scholar 

  20. Currie, J., Stabile, M., Manivong, P., & Roos, L. L. (2010). Child health and young adult outcomes. Journal of Human Resources, 45, 517–548.

    Article  Google Scholar 

  21. Dahl, G., & Lochner, L. (2012). The impact of family income on child achievement: Evidence from the earned income tax credit. American Economic Review, 102, 1927–1956.

    Article  Google Scholar 

  22. Dahl, M., DeLeire, T., & Schwabish, J. (2011). Estimates of year-to-year volatility in earnings and in household incomes from administrative, survey, and matched data. Journal of Human Resources, 46, 750–774.

    Article  Google Scholar 

  23. Dohmen, T., Falk, A., Huffman, D., & Sunde, U. (2012). The intergenerational transmission of risk and trust attitudes. Review of Economic Studies, 79, 645–677.

    Article  Google Scholar 

  24. Duncan, G. J. (1988). The volatility of family income over the life course. In P. Baltes, D. Featherman, & R. Lerner (Eds.), Life-span development and behavior (Vol. 9, pp. 317–358). London, UK: Lawrence Erlbaum Associates.

  25. Duncan, G. J., & Brooks-Gunn, J. (2000). Family poverty, welfare reform, and child development. Child Development, 71, 188–196.

    Article  Google Scholar 

  26. Duncan, G. J., Brooks-Gunn, J., & Klebanov, P. K. (1994). Economic deprivation and early childhood development. Child Development, 65, 296–318.

    Article  Google Scholar 

  27. Duncan, G. J., Kalil, A., & Ziol-Guest, K. (2008). The economic costs of early childhood poverty (Issue Paper No. 4). Washington, DC: Partnership for America’s Economic Success.

  28. Duncan, G. J., Telle, K., Ziol-Guest, K. M., & Kalil, A. (2011). Economic deprivation in early childhood and adult attainment: Comparative evidence from Norwegian registry data and the U.S. Panel Study of Income Dynamics. In T. M. Smeeding, R. Erikson, & M. Jäntti (Eds.), Persistence, privilege, and parenting (pp. 209–236). New York, NY: Russell Sage Foundation.

    Google Scholar 

  29. Dynan, K. E., Elmendorf, D. W., & Sichel, D. E. (2012). The evolution of household income volatility. The B.E. Journal of Economic Analysis & Policy, 12(2, article 3). doi:10.1515/1935-1682.3347

  30. Eliason, M. (2012). Lost jobs, broken marriages. Journal of Population Economics, 25, 1365–1397.

    Article  Google Scholar 

  31. Eliason, M., & Storrie, D. (2007). Does job loss shorten life? Journal of Human Resources, 44, 277–302.

    Article  Google Scholar 

  32. Ermisch, J., & Pronzato, C. (2011). Causal effects of parents’ education on children’s education. In T. M. Smeeding, R. Erikson, & M. Jäntti (Eds.), Persistence, privilege, and parenting (pp. 209–236). New York, NY: Russell Sage Foundation.

    Google Scholar 

  33. Fitzgerald, J., Gottschalk, P., & Moffitt, R. (1998). An analysis of sample attrition in panel data: The Michigan Panel Study of Income Dynamics. Journal of Human Resources, 33, 251–299.

    Article  Google Scholar 

  34. Gottschalk, P., & Moffitt, R. (1994). The growth of earnings instability in the U.S. labor market. Brookings Papers on Economic Activity, 25(2), 217–272.

    Article  Google Scholar 

  35. Gottschalk, P., & Moffitt, R. (2009). The rising instability of U.S. earnings. Journal of Economic Perspectives, 23(4), 3–24.

    Article  Google Scholar 

  36. Gouskova, E., Andreski, P., & Schoeni, R. F. (2010a). Comparing estimates of family income in the Panel Study of Income Dynamics and the March Current Population Survey, 1968–2007 (Technical Series Paper No. 10-01). Ann Arbor: Survey Research Center, Institute for Social Research, University of Michigan. Retrieved from http://psidonline.isr.umich.edu/Publications/Papers/tsp/2010-01_comparing_estimates_of_fam.pdf

  37. Gouskova, E., Chiteji, N., & Stafford, F. (2010b). Estimating the intergenerational persistence of lifetime earnings with life course matching: Evidence from the PSID. Labour Economics, 17, 592–597.

    Article  Google Scholar 

  38. Grawe, N. D. (2006). Lifecycle bias in estimates of intergenerational earnings persistence. Labour Economics, 13, 551–570.

    Article  Google Scholar 

  39. Guldi, M., Page, M. E., & Stevens, A. H. (2007). Family background and children’s transitions to adulthood over time. In S. Danziger & C. E. Rouse (Eds.), The price of independence (pp. 261–277). New York, NY: Russell Sage Foundation.

    Google Scholar 

  40. Gundersen, C., & Ziliak, J. P. (2008). The age gradient in Food Stamp Program participation: Does income volatility matter? In D. Jolliffe & J. P. Ziliak (Eds.), Income volatility and food assistance in the United States (pp. 171–214). Kalamazoo, MI: W.E. Upjohn Institute.

    Google Scholar 

  41. Haider, S. (2001). Earnings instability and earnings inequality of males in the United States: 1967–1991. Journal of Labor Economics, 19, 799–836.

    Article  Google Scholar 

  42. Haider, S., & Solon, G. (2006). Life-cycle variation in the association between current and lifetime earnings. American Economic Review, 96, 1308–1320.

    Article  Google Scholar 

  43. Hankins, S., & Hoekstra, M. (2011). Lucky in life, unlucky in love? The effect of random income shocks on marriage and divorce. Journal of Human Resources, 46, 403–426.

    Article  Google Scholar 

  44. Hardy, B., & Ziliak, J. P. (2014). Decomposing rising income volatility: The “wild ride” at the top and bottom. Economic Inquiry, 52, 459–476.

    Article  Google Scholar 

  45. Haskins, R., Holzer, H., & Lerman, R. (2009). Promoting economic mobility by increasing postsecondary education (Report). Washington, DC: Economic Mobility Project, Pew Charitable Trusts.

  46. Hauser, R. M., Simmons, S. J., & Pager, D. I. (2000). High school dropout, race-ethnicity, and social background from the 1970s to the 1990s (CDE Working Paper No. 2000-12). Madison, WI: Center for Demography and Ecology, University of Wisconsin.

  47. Hertz, T., Jayaundera, T., Piraino, P., Selcuk, S., Smith, N., & Verashchagina, A. (2007). The inheritance of educational inequality: International comparisons and fifty-year trends. The B.E. Journal of Economic Analysis and Policy, 7(2, article 10), 1–48. doi:10.2202/1935-1682.1775

    Google Scholar 

  48. Hill, H. D., Morris, P., Gennetian, L. A., Wolf, S., & Tubbs, C. (2013). The consequences of income instability for children’s well-being. Child Development Perspectives, 7(2), 85–90.

    Article  Google Scholar 

  49. Huff Stevens, A. (1997). Persistent effects of job displacement: The importance of multiple job losses. Journal of Labor Economics, 15, 165–188.

    Article  Google Scholar 

  50. Huff Stevens, A., & Schaller, J. (2011). Short-run effects of parental job loss on children’s academic achievement. Economics of Education Review, 30, 289–299.

    Article  Google Scholar 

  51. Hyslop, D. R. (2001). Rising U.S. earnings inequality and family labor supply: The covariance structure of intrafamily earnings. American Economic Review, 91, 755–777.

    Article  Google Scholar 

  52. Jaimovich, N., & Siu, H. (2012). The trend is the cycle: Job polarization and jobless recoveries (NBER Working Paper No. 18334). Cambridge, MA: National Bureau for Economic Research.

  53. Johnson, R. C., Kalil, A., & Dunifon, R. E. (2012). Employment patterns of less-skilled workers: Links to children’s behavior and academic progress. Demography, 49, 747–772.

    Article  Google Scholar 

  54. Kane, T. J., & Ellwood, D. T. (2000). Who is getting a college education? Family background and the growing gaps in enrollment. In S. Danziger & J. Waldfogel (Eds.), Securing the future (pp. 283–324). New York, NY: Russell Sage Foundation.

    Google Scholar 

  55. Keys, B. (2008). Trends in income and consumption volatility, 1970–2000. In D. Jolliffe & J. P. Ziliak (Eds.), Income volatility and food assistance in the United States (pp. 11–34). Kalamazoo, MI: W.E. Upjohn Institute.

    Google Scholar 

  56. Lee, C., & Solon, G. (2009). Trends in intergenerational income mobility. Review of Economics and Statistics, 91, 766–772.

    Article  Google Scholar 

  57. Lillard, L. A., & Willis, R. J. (1994). Intergenerational educational mobility: The effects of family and state in Malaysia. Journal of Human Resources, 29, 1126–1166.

    Article  Google Scholar 

  58. Lochner, L. (2005). Education, work, and crime: A human capital approach. International Economic Review, 45, 811–843.

    Article  Google Scholar 

  59. Lochner, L., & Monge-Naranjo, A. (2012). Credit constraints in education. Annual Reviews in Economics, 4, 225–256.

    Article  Google Scholar 

  60. Long, J. S., & Freese, J. (2005). Regression models for categorical outcomes using Stata (2nd ed.). College Station, TX: Stata Press.

    Google Scholar 

  61. Loury, G. C. (1981). Intergenerational transfers and the distribution of earnings. Econometrica, 49, 843–867.

    Article  Google Scholar 

  62. Ludwig, J., & Miller, D. L. (2007). Does Head Start improve children’s life chances? Evidence from a regression discontinuity design. Quarterly Journal of Economics, 122, 159–208.

    Article  Google Scholar 

  63. Magnuson, K., & Votruba-Drzal, E. (2009). Enduring influences of childhood poverty. In M. Cancian & S. Danzinger (Eds.), Changing poverty, changing policies (pp. 153–178). New York, NY: Russell Sage Foundation.

    Google Scholar 

  64. Mason, P. L. (2007). Intergenerational mobility and interracial inequality: The return to family values. Industrial Relations, 46, 51–80.

    Google Scholar 

  65. Mayer, S. E. (1997). Income, psychological well-being, and parenting practices. In What money can’t buy: Family income and children’s life chances (pp. 114–124). Cambridge, MA: Harvard University Press.

    Google Scholar 

  66. Mazumder, B. (2005). Fortunate sons: New estimates of intergenerational mobility in the United States using Social Security earnings data. Review of Economics and Statistics, 87, 235–255.

    Article  Google Scholar 

  67. Mazumder, B., & Davis, J. M. V. (2012). Parental earnings and children’s well-being: An analysis of the Survey of Income and Program Participation matched to Social Security Administration earnings data. Economic Inquiry, 51, 1795–1808.

    Article  Google Scholar 

  68. McGonable, K., & Schoeni, R. (2006). The Panel Study of Income Dynamics: Overview and summary of scientific contributions after nearly 40 years (Technical Series No. 06-01). Ann Arbor: Survey Research Center, Institute for Social Research, University of Michigan.

  69. Meghir, C., & Palme, M. (2005). Education reform, ability, and family background. American Economic Review, 95, 414–424.

    Article  Google Scholar 

  70. Mincer, J. A. (1974). Schooling, experience, and earnings. Cambridge, MA: National Bureau of Economic Research.

    Google Scholar 

  71. Nunley, J. M., & Seals, A. (2010). The effects of household income volatility on divorce. American Journal of Economics and Sociology, 69, 984–1010.

    Article  Google Scholar 

  72. Oreopolous, P., Page, M., & Huff Stevens, A. (2008). The intergenerational effects of worker displacement. Journal of Labor Economics, 26, 455–500.

    Article  Google Scholar 

  73. Oreopoulos, P., Page, M. E., & Huff Stevens, A. (2006). The intergenerational effects of compulsory schooling. Journal of Labor Economics, 24, 729–760.

  74. Page, M., Huff Stevens, A., & Lindo, J. M. (2009). Parental income shocks and outcomes of disadvantaged youth in the United States. In J. Gruber (Ed.), The problems of disadvantaged youth: An economic perspective (pp. 213–235). Chicago, IL: University of Chicago Press.

    Chapter  Google Scholar 

  75. Polachek, S. W. (2008). Earnings over the life cycle: The Mincer earnings function and its applications. Foundations and Trends in Microeconomics, 4, 165–272.

    Article  Google Scholar 

  76. Pronzato, C. (2010). An examination of paternal and maternal intergenerational transmission of schooling. Journal of Population Economics, 25, 591–608.

    Article  Google Scholar 

  77. Rothstein, J., & Wozny, N. (2013). Permanent income and the black-white test score gap. Journal of Human Resources, 48, 510–544.

    Article  Google Scholar 

  78. Ruhm, C. (2005). Healthy living in hard times. Journal of Health Economics, 24, 341–363.

    Article  Google Scholar 

  79. Shin, D., & Solon, G. (2011). Trends in men’s earnings volatility: What does the Panel Study of Income Dynamics show? Journal of Public Economics, 95, 973–982.

    Article  Google Scholar 

  80. Shore, S. (2012). The intergenerational transmission of income volatility: Is riskiness inherited? Journal of Business and Economic Statistics, 29, 372–381.

    Article  Google Scholar 

  81. Solon, G. (1992). Intergenerational income mobility in the United States. American Economic Review, 82, 393–408.

    Google Scholar 

  82. Solon, G. (1999). Intergenerational mobility in the labor market. In O. C. Ashenfelter & D. Card (Eds.), Handbook of labor economics (pp. 1761–1800). Amsterdam, The Netherlands: Elsevier.

    Google Scholar 

  83. Solon, G. (2004). A model of intergenerational mobility variation over time and place. In M. Corak (Ed.), Generational income mobility in North America and Europe (pp. 38–47). Cambridge, UK: Cambridge University Press.

    Chapter  Google Scholar 

  84. Weiss, Y. (1986). The determination of lifecycle earnings: A survey. In O. C. Ashenfelter & D. Card (Eds.), Handbook of labor economics (pp. 603–640). Amsterdam, The Netherlands: Elsevier.

    Google Scholar 

  85. Woock, C. (2009). Earnings losses of injured men: Reported and unreported injuries. Industrial Relations, 48, 610–628.

    Google Scholar 

  86. Ziliak, J. P., Hardy, B., & Bollinger, C. (2011). Earnings and income volatility in America: Evidence from matched CPS. Labour Economics, 18, 742–754.

    Article  Google Scholar 

  87. Zimmerman, D. J. (1992). Regression toward mediocrity in economic stature. American Economic Review, 82, 409–429.

    Google Scholar 

Download references

Acknowledgments

I thank Jim Ziliak, Chris Bollinger, Ken Troske, Scott Hankins, Bill Hoyt, Seth Sanders, Ngina Chiteji, Darrick Hamilton, Tim Smeeding, Tom DeLeire, Pamela Smock, Alison Jacknowitz, Laura Langbein, anonymous reviewers, and seminar participants at the University of Kentucky, University of Wisconsin–Madison Institute for Research on Poverty, Western Kentucky University, Mathematica Policy Research, and American University for helpful feedback and suggestions. I also thank conference participants of the Kentucky Economic Association, the AEA Pipeline Program at UC-Santa Barbara, and the Southern Economic Association.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Bradley L. Hardy.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Hardy, B.L. Childhood Income Volatility and Adult Outcomes. Demography 51, 1641–1665 (2014). https://doi.org/10.1007/s13524-014-0329-2

Download citation

Keywords

  • Intergenerational mobility
  • Volatility
  • Economic risk
  • Educational attainment
  • Early human capital investment