Inequality and expectations

Income mobility is a key element of what many consider the “American Dream,” an idea that in large part depends upon the opportunity for an individual to move up the social and economic ladder. Data from the last few decades have suggested a decline in economic mobility and increasing income inequality. While these trends are becoming clearer, their implications are not. Our analysis seeks to understand whether increasing inequality and declining economic mobility results in a “culture of despair.” The culture of despair represents a negative feedback loop, where low mobility results in declines in youths’ expectations of their future success, and perhaps the expectations of their guardians as well. These lower expectations then affect the investment these youths make in education and other skills that would lead to their being more economically mobile in the future. Using a nationally representative long panel of youths, we use cross-sectional variation in income inequality and mobility across labor market zones to test whether a culture of despair exists. We find that there is a statistical relationship between the level of income inequality and the expectations of youth, as well as their parents, for education outcomes. In particular, higher levels of inequality negatively affect the expectations of youths’ educational success for youth from low income households, but increases expectations of success from high income households. The same pattern emerges when we replace the income distribution with the wealth distribution or the parental education distribution. Thus, we find support for the theory of a culture of despair. Measures of mobility do not result in the same statistical relationship with expectations as do measures of inequality, likely due to the fact mobility is longer term and more difficulty to discern than is inequality. Using an instrumental variables approach, we also confirm that economic inequality, income mobility, parental expectations, and self-expectations all serve as determinants of educational outcomes.