Intergenerational mobility in the UK

Abstract

National estimates of intergenerational earnings mobility Previous work has shown that intergenerational income mobility in England was lower for those born in 1970 than those born in 1958. Using administrative data on the most recent birth cohorts for whom earnings data are available, we find no evidence of recovery from that decline. National estimates of mobility of cohorts born in the late 1980s looks very similar to those of the 1970 cohort and education inequalities continue to be the dominant mediator. However, these estimates paint an incomplete picture for two reasons.Differences in income mobility across areas and across ethnic groups  First, there is a significant amount of heterogeneity in income mobility within England. We find important differences in mobility rates across different neighbourhoods and different ethnic groups for young people from disadvantaged backgrounds. Due to data limitations, our analysis is restricted to studying upward mobility among individuals who grew up in disadvantaged households. For men, the difference between the least and most mobile groups (Black Caribbean and Indian, respectively) is around 15 percentiles -equivalent to £8,000 or 54% of mean earnings at age 28 for men who were eligible for free school meals (FSM) in these cohorts -while between the most and least mobile Local Authorities (LAs; Nottingham in East Midlands and Havering in London), it is 17 percentiles. The difference between White and Indian women (the least and most mobile ethnic groups, respectively) is also 17 percentiles (equivalent to just over 82% of mean earnings at age 28 for FSM women in these cohorts); this is also the gap between Kingston upon Hull in Yorkshire and Redbridge in London, which are the least and most mobile LAs for women.The growing importance of 'unearned' sources of income  Second, existing research on intergenerational mobility has tended to focus on income from earnings. We find that 'unearned' sources of income, here meaning returns to wealth and wealth transfers received, look to be an important driver of the persistence across generations in total lifetime income (i.e. the sum of earnings and returns to wealth and wealth transfers received). These 'unearned' sources of income are likely to be of growing importance over time. van der Erve, L. et al. (2023), 'Intergenerational mobility in the UK', IFS Deaton Review of Inequalities 2 © Institute for Fiscal Studies, September 2023 Finally, there is significant room to improve data and methods for integrating more sophisticated measures of lifetime income that account for important unearned components.van der Erve, L. et al. (2023), 'Intergenerational mobility in the UK', IFS Deaton Review of Inequalities 3

Reforming inheritance tax

“…There are also important ethnic differences in parental wealth. Among those aged 25-39, around 75% of white individuals and around 85% of Indian individuals have homeowning parents, compared with less than 50% of black Caribbean young people (van der Erve et al, 2023).…”

“…Taking a longer-term view, the rapid growth of wealth compared with earnings over the past several decades has brought with it questions about the balance of taxation across generations and the growing role of parental wealth transfers in driving differences in life outcomes within today's working-age generations. Inheritances have grown, and are expected to continue to grow, faster than earnings, meaning that they are projected to have a growing negative impact on intergenerational mobility (van der Erve et al, 2023). Put simply, it is becoming harder to use savings from earnings to make up for a lack of inheritance relative to others born at the same time.…”