Wednesday, January 12, 2011

Opportunity and Inequality

Greg Mankiw picked up on this topic with a response to an interesting Paul Krugman blog post on economics and morality. Here's the key passage from Mankiw:
According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son's income with respect to father's income is about 0.5 in the United States. How do you interpret this fact?

Some people might be tempted to see it as evidence against equality of opportunity. After all, it shows that it matters where you started. Rich parents can buy better schools, expensive tutors, fancy summer camps, and all sort of other great stuff for their kids. How fair is that?

But what strikes me about that 0.5 number is not how large it is but how small it is. As I understand it, that 0.5 estimate is roughly the correlation between father and son income. That means that the percentage of variance of son's income explained by father's income--that is, R-squared--is only 0.25. This last number is sometimes called the "heritability" of a characteristic.


The bottom line: In light of the heritability of talent, it would be shocking if we did not find some significant heritability of income. And that would be true even if equality of opportunity were perfect.
Here's Krugman from his original post:
Now, inequality of opportunity is only one reason for the inequality in outcomes we actually see. But of what remains, how much reflects individual effort, how much reflects talent, and how much sheer luck?
These questions are worth pondering, and both Mankiw's and Krugman's full posts are worth a read. For some related pondering, here's a link to Heckman's initiative on human potential. There is a lot of related research on this topic, but that's a readable starting point.

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