Income Inequality, Social Mobility, and the Decision to Drop-Out of High School

Kearney, Melissa and Phillip Levine , Brookings Papers on Economic Activity , March 2016.

It is widely documented that places with higher levels of income inequality have lower rates of social mobility. But it is an open question as to whether or how higher levels of inequality actually lead to lower rates of mobility, We propose that one channel by which higher rates of income inequality might lead to lower rates of upward mobility is through lower rates of human capital investment among low-income individuals. Specifically, we posit that greater levels of income inequality could lead low-income youth to perceive a lower return to investment in their own human capital. Such an effect would offset any potential “aspirational” effect coming from higher educational wage premiums. The data are consistent with this prediction: individuals for low socioeconomic backgrounds are more likely to drop out of school if they live in a place with a greater gap between the bottom and middle of the income distribution. This finding is robust to a number of specification checks and tests for confounding factors. This analysis offers an explanation for how income inequality might lead to a perpetuation of economic disadvantage and has implications for the types of interventions and programs that would effectively promote upward mobility among low-SES youth. 

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