Intergenerational transmission of human capital: implications for poverty, inequality and policy

Family circumstances changed significantly over the past 50 years on key dimensions such as mother's education, employment and earnings, father's involvement in raising children, and the prevalence of lone-motherhood. These changes increased inequality in home environments, particularly by maternal education. Less educated mothers are now more likely to divorce and have children out-of-wedlock; more educated mothers are now more likely to work continuously and their wages have increased steadily. These trends raise great concerns about their implications for child development and inequality because child outcomes and parental choices are related. Growing evidence links socio-economic background and broader differences in childhood experiences to child development from early infancy and to life-long outcomes such as education, employment, income, family formation and crime.
The degree to which child outcomes are related to those of parents is a measure of the inequality of opportunities in a society, the focus of much policy debate. Although the importance of family characteristics and choices for the abilities and opportunities of children is clearly established, the mechanisms that drive these relations remain largely unexplored. Since policy can influence parental choices, understanding the interplay between child outcomes and parental characteristics and choices is critical to inform the design and evaluation of policies aiming to improve child wellbeing, reduce poverty and shape inequality in the long-term.
The aim of this project is to fill this gap by investigating the interactions between parental characteristics, investments in children and child outcomes, and studying the implications of these interactions for poverty, inequality, and the design of childcare, education and welfare policies. It focuses on the inter-generational transmission of human capital (HC), a key determinant of economic wellbeing.
Studying the importance of family characteristics and investments in children for child development and its policy implications faces two key difficulties. First, investments in children and lifetime decisions driving family characteristics are closely related. E.g., altruistic parents take their offspring expected outcomes into account when deciding about their own education, marriage and labour supply because these decisions affect family resources and their value in raising children. Second, quantifying empirically these relationships requires long longitudinal data, linking parents' lifetime decisions and its determinants with child outcomes.
This project combines rich longitudinal data from several sources for the UK and the US with a model of intergenerational transmission of HC to advance knowledge on the roots of inequality and the role of policy in promoting equal opportunities. The model has four main building blocks: 1. a process of HC formation in childhood, accumulated through sequential investments of both parent's time, childcare and other investments; 2. a model of the life course, formalising parental education, marriage, divorce, working and the intra-household allocation of resources; 3. the market for marriage; 4. a detailed description of the tax and welfare system.
The project will produce new empirical evidence on the mechanisms linking parental characteristics and choices with child outcomes. It will account for the interplay between the HC of both parents for family wellbeing and child development, helping to explain the value of HC for marriage. It will measure the dynamic links between education, marriage, divorce and family resources, and their implications for inequality in resources and investments in children. Understanding these links is key to assess responses to policy reforms in their entirety; this project is the first to explore the links between lifetime decisions to study the effects of policy on the transmission of HC.

This project will develop a framework to investigate the mechanisms underlying the intergenerational transmission of economic wellbeing and assess how tax and welfare policies can be designed to promote the outcomes of children and influence inequality and poverty in the long run. We will build on results from our earlier research linking pre-marital investments, marital sorting in an equilibrium framework and labour supply after marriage. We can now develop such framework further, to investigate empirically the determinants of the opportunities faced by children, their role in driving inequality and their implications for the design and evaluation of tax and welfare policies for families.
While strongly academic in nature, this project and its results are relevant to those interested in understanding the determinants and consequences of poverty and inequality and how can public policy best tackle these. We expect this project to benefit a large community outside the academia, including:
1. Civil servants and policy-makers working in or close to the HM Revenue and Customs, HM Treasury, the Department for Work and Pensions and the Department for Education;
2. Think-tanks such as the Resolution Foundation, the Institute for Public Policy Research, and the Centre for Social Justice;
3. Charities aiming to advance understanding of the roots of inequality, poverty and social problems, and to contribute to the public policy debate and the development of solutions to these problems, such as the Joseph Rowntree Foundation or the Nuffield Foundation;
4. Other NGOs committed to contribute to the debate on child poverty, family wellbeing and public policy, and act to improve the opportunities of children, such as Barnardos, the Child Poverty Action Group, the Family and Childcare Trust and the Early Intervention Foundation;
5. International organisations supporting actions in the developing world and funding research on the behaviour of families and the design and evaluation of policies aimed to tackle the roots and consequences of poverty, such as the World Bank, the European Bank for Reconstruction and Development or the Organisation for Economic Co-operation and Development;
6. The media and the general public, as we address issues at the centre of public debate.
We expect these groups to benefit from a better understanding of: 1. the process of human capital formation during childhood; 2. the role of families for the wellbeing of children and their outcomes during childhood and beyond; 3. the roots of unequal opportunities and their long-term consequences for economic inequality and poverty; 4. the implications of all these for the design and evaluation of public policy aiming to tackle poverty and promote social mobility. These groups will also benefit from the availability of a new empirical framework specifically designed to study policies for families. Such framework can continue being improved and used to learn about other policies, beyond the duration of this project.
We expect results on the accumulation of human capital during childhood and later outcomes to become available during the second year of the project. Work on the intra-household allocation of resources, pre-marital investments and the marriage market will be underway during the second and third years of the project, and empirical results on the inter-generational transmission of skills and policy analysis will become available during the third and fourth years of the project.
With our continuous interactions with these groups (as discussed in Pathways to Impact) we hope such benefits to be mutual as we draw from the insights of experienced social scientists, practitioners and policymakers on what matters and what needs to be learned in ways that can steer our project. Our past experience shows that these interactions tend to outlast the project as they lead to further research on mutually interesting issues.