Parents often expect that their kids will have a good shot at making more money than they ever did.

But young people entering the workforce today are far less likely to earn more than their parents when compared to children born two generations before them, according to a new study by Stanford researchers.

A new study co-authored by Stanford economist Raj Chetty describes an economic portrait of the fading American Dream; growing inequality appears to be the main cause for the steady decline. (Image credit: Steve Castillo)

The findings show that the fraction of kids earning more than their parents has fallen dramatically – from 90 percent for kids born in the 1940s to 50 percent for kids born in the 1980s.

“It’s basically a coin flip as to whether you’ll do better than your parents,” said economics Professor Raj Chetty, a senior fellow at the Stanford Institute for Economic Policy Research and one of the study’s authors.

One of the most comprehensive studies of intergenerational income mobility to date, the study used a combination of Census data and anonymized Internal Revenue Service records to measure the rate of “absolute income mobility” – or the percentage of children who earned more than their parents – for people born between 1940 and 1984.

What emerged from the empirical analysis was an economic portrait of the fading American Dream, and growing inequality appeared to be the main cause for the steady decline.

“One of the defining features of the American Dream is the ideal that children have a higher standard of living than their parents,” Chetty said. “We assessed whether the U.S. is living up to this ideal, and found a steep decline in absolute mobility that likely has a lot to do with the anxiety and frustration many people are feeling, as reflected in the election.”

The paper was co-authored by David Grusky, a SIEPR senior fellow, sociology professor and director of the Stanford Center on Poverty and Inequality; Maximilian Hell, a sociology doctoral student at Stanford; Professor Nathaniel Hendren and doctoral student Robert Manduca, both of Harvard; and Jimmy Narang, a former SIEPR predoctoral fellow who is currently a doctoral student at the University of California, Berkeley.

The study – and more information about the team’s research – can be found on The Equality of Opportunity Project website run by Chetty and Hendren.

The analytical framework

The researchers constructed an analytical framework to compare children’s household incomes at age 30 with their parents’ household incomes at age 30 for each birth cohort at every income level, adjusting for inflation, taxes and transfers, as well as changes in household size.

The findings pointed to a distinctive downward trend in absolute mobility that cut across all income levels, with the largest declines occurring for families in the middle class. The percentage of children earning more than their parents also fell in all 50 states, though the rate varied from state to state. A cluster of the largest declines was concentrated in the eastern Midwest, such as Michigan and Illinois.

The increasingly tough odds were more pronounced for males. When directly comparing sons with their fathers’ incomes, the drop in absolute mobility was especially steep: Nearly all men born in 1940 were better off than their fathers, but for those born in 1984, that rate dropped to 41 percent. For daughters, the rate went from 43 percent to 26 percent for the same period.

To gain insight behind the trends, researchers looked at surrounding macroeconomic factors and flushed out one main driver: growing inequality. Most of the decline was driven by a widening gap between rich and poor as opposed to the slowdown in the nation’s aggregate economic growth, or the Gross Domestic Product (GDP) growth rate.

The researchers compared the effects of declining growth and rising inequality by running their data through two simulated scenarios. One used higher GDP growth – which expands the size of the economic pie – and the other used a more broadly shared distribution of growth, where the slices of the pie are divided more evenly.

When the economic growth rate was raised to the higher levels experienced in the 1940s and 1950s but the economic distribution mirrored today’s highly uneven landscape, the estimated rate of absolute mobility rose to 62 percent.

In contrast, when the economic growth rate was held at the low levels of 2 to 3 percent of recent decades, but the pieces of the economic pie were distributed more evenly as it was in the mid-20th century, then the fraction of children who ended up doing better than their parents climbed to 80 percent.

That means the second hypothetical scenario reversed more than two-thirds of the decline between the 1940 and 1980 cohorts.

The bottom line?

“The finding of this study implies that if we want to revive the American Dream of increasing living standards across generations, then we’ll need policies that foster more broadly shared growth,” Chetty said.

But achieving those changes – and sharing growth more evenly – will be no small feat, as earlier groundbreaking studies by Chetty, Hendren and others on economic mobility and inequality have suggested, citing a complex web of reasons ranging from segregation and housing to education.

This latest research comes as economic and political uncertainties have recently rattled the nation.

“It’s sobering to see how sharp the decline has been over time, particularly since the odds were so much better for my parents,” said Robert Fluegge, a 22-year-old predoctoral fellow at SIEPR who assisted in the research. “I can see what my parents have been able to do for me, and it’s a bit scary to think that it’s a coin flip whether or not I’ll be able to provide the same things for my kids in the future.”