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

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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.