The Mechanism Of Family Wealth On The Next Generation’s Labor Income

Intergenerational issues are the most important issues in economics and sociology research area. In China, seriously income inequality makes intergenerational issues more complex. The two phenomena of "children from poor families will have no promising future" and "Clogs to clogs in three generations" have been most discussed. From the perspective of labor income, these two phenomena mean excessive wealth or too little wealth are both negative for the next generation’s labor income. However, the mechanism behind is unclear.Labor income is determined by wage rate and working time. Wage rate is mainly affected by human capital, and working time is the result of utility maximizing choice, both of which have close ties with family wealth. Becker and Tomes (1979,1986) discussed the wage rate part, while there is little study on theoretical and empirical analysis. So, the purpose of this paper is to build a new theoretical model to explain how household wealth affect the next generation’s labor income by comprehensiving wage rate and working time two parts, then analyze their impact effect through empirical studies.The results showed that income quintile of 75%-90% household’s educational expenditure elasticity is much bigger than other housholds, which means their children have a high level human capital and wage rate, and parents’wealth gift will significantly reduce children’s working time. These results mean, on labor income, the next generation of relatively better-off families are best, because they have a high level wage rate and working time. Details are as follows:First, by building a double-selection behavior model of intergenerational mobility, this paper deduced the relationship of household wealth and the next generation’s labor income is "long tail inverted U-shaped". According to the common phenomenon of wealth gifts from parents in China, this paper extended Becker and Tomes (1979,1986) theoretical model. In addition to considering the human capital investment behavior of parents for their children, the new model increased the direct wealth transfer behavior of parents for their children, and both parents and children made the utility-maximizing choice between labor and leisure according to their own constraints. That is why the model named double-selection behavior model.The model’s internal mechanisms is:in non-perfect market conditions, the human capital investment behavior of parents for their children restricted by family wealth, increased household wealth will increase investment in human capital, which raise the offspring’s human capital, then the corresponding wage rate will raise, so the offspring’s labor income will increase until the investment in human capital reached saturation. If household wealth continues to grow, parents will give their children wealth girfts, which would reduce children’s labor supply. Given the level of human capital (or wage rate), the reduction of the labor supply will lead to the decline of labor income. However, a high human capital individual’s working time is generally not so few, so the labor income will eventually become stable. Therefore, the relationship between household wealth and offspring’s labor income is "long tail inverted U-shaped".Second, verifies the "long tail inverted U-shaped" relationship by using 1989-2011 panel data of CHNS, and re-measure the intergenerational income elasticity, intergenerational income correlation and income transition matrices on the basis of addressing the problem of sample selection. The results show that IGE of 60-70 generations is 0.518, and IGE of 70-80 generations is 0.427, which means the economic reform and opening-up improved China’s intergenerational income mobility.The transition matrices show that the offspring of the middle class have a greater probability of becoming middle class and have a certain probability to become wealthy, while offspring of poor family are likely to remain poor, and the offspring of wealthy family are difficult to maintain wealthy. These results show that an "olive" structure, which dominated by middle-class, is a reasonable social structure. In such a social structure, household wealth can be effectively used and social mobility is higher.Third, reveals the impact of family income on offspring’s human capital through lots of empirical analysis. The panel data random effects model showed that, after controlling variables such as parents’ education level, household income increased by 1%, the spending on education will increase by an average of 0.25%, of which 75%-90% income quintile family is 1.028%, while income less than 50% quantile is not significant. The increase of spending on education can significantly improve the academic performance of offspring, instrumental variables regression results show that spending on education increased by 1%, the word test scores increase 1.204 points, and math test scores can increase 0.662 points, but both were concave, which means the academic performance will remain stable when education spending reaches a certain level.In addition, the increase in education spending can raise expectations for the future education of the next generation. The panel data probit model random effects regression results show that, household income increased by 1%, the probability of entering key schools increased by about 2.6%, the probability of participating in remedial classes increased 1.97%, and the Tobit model results indicates that remedial classes spending increased 0.338%, which means children from wealthy family can get better education resources.Fourth, analyze the influence of family wealth to offspring’s labor supply by occupation and working time two dimensions. Giving the same level of human capital, the low labor supply intensity means low labor income. According to weekly working hours in various occupations, the probit model and ordinal probit model both showed that the offspring from wealthy family prefer having a relaxed job such as government departments, after controlling for education levels and other variables.In addition, analyze the effect of direct wealth transfer on offspring’s labor supply by using the three-stage Heckman estimation method. The results showed that after controlling for other factors, the offsprings who get a house from parents worked less 3.619 hours per week. The Tobit model and OLS regression have the consistent conclusion.Overall, this paper constructs a double-choice behavior theoretical model to describe the mechanism of family wealth on the next generation’s labor income, and uses individual data to verify the model results. The results showed that family wealth and next generation’s labor income in a "long tail inverted U-shaped" relationship, and the next generation of middle class may be the best, because their wage rate and working time both high. Therefore, I propose the government needs to help poor families invest their children, reduce institutional discrimination so that the human capital can get equivalent reward, and strive to build an "olive" social structure to improve social mobility.Compared to similar studies, the contribution of this paper are:(1) Built a new theoretical model to discuss the mechanism of family wealth on the next generation’s labor income, which enrich the theory of intergenerational mobility. (2) Recalculated China’s intergenerational income elasticity and measured the intergenerational income correlation coefficient by solving the sample selection bias problem, which improved the accuracy of China’s IGE. (3) Analyzed the mechanism by lots of empirical analysis, such as the three-stage Heckman method, panel data ordinal probit model, multivariate logit regression, which not only to test the theoretical model, but also provided empirical data for further research. However, due to the complexity of intergenerational issues and lack of data, more study is needed.