4.2 Mediation of parental income effects through education

Some of the effects of parents' incomes on the incomes of their children occur because children from better-off families tend to spend more time in the education system. In model eight of Table 1, we followed overseas studies by adding variables for people's educational qualifications (Blanden, et al., 2004, p. 139; Ng, 2007, p. 18). This resulted in a lower intergenerational income elasticity point estimate, with the results indicating that in our model on average about 47% of the effects of family background on income were mediated through educational qualifications, and about 53% occurred because of other influences. Whereas having School Certificate in one or more subjects did not result in a statistically significant increase in a person’s income compared to having no qualifications, finishing secondary school, having a degree or having a higher degree all resulted in progressively larger increases in a person’s income. For instance, the results imply that a man from an average income family with a higher degree would earn approximately $41,000 more per year at age 32 than a man from an average income family who had only finished secondary school. A woman from the same background with a higher degree would earn $22,000 more than a woman who had only completed secondary school.[21] Adding variables for other important factors that influence income might diminish the effect of parental income and of a person's educational qualifications and gender.

Model eight has the advantage of providing an estimate of the effect of each qualification on a person's income. Because of collinearity between variables,[22] however, we have also used other methods to calculate the extent to which educational achievement mediates parental income effects. Table 2 shows how we calculated the magnitude of this effect using a series of regression equations. Equation one shows the total effect of parents' incomes on the incomes of people from Dunedin. Equation two shows the effect of people's years of education on their incomes, while equation three shows the effect of parents' incomes on children's years of education. In the next (fourth) column, the effect of years of education on the incomes of people from Dunedin was multiplied by the effects of parents' incomes on children's years of education. The final column shows the level of income persistence not explained by the previous column. Our point estimates suggest that about half the intergenerational income effect may occur because children from better-off families tend to continue their education for longer than children from less well-off families, and that about half is attributable to other factors. This is similar to our result for model eight in Table 1. A similar effect for persistence through factors other than education occurred when calculating this effect directly.[23]

Comparable results for men in Britain and Italy suggest that about one-third of the intergenerational income elasticity in these countries is attributable to children from better-off families continuing their education for longer than other children (Blanden, et al., 2005, p. 11; Piraino, 2007, p. 16). Although those estimates were lower than our point estimate for people from Dunedin, because of our large standard errors and the imprecise methods used we cannot say that the effects of educational qualifications on intergenerational income persistence are higher in New Zealand than in Britain or Italy.

We have to be cautious when trying to quantify the effects of education because years of education are an imperfect proxy for the quality of a person's education. Relying on this imperfect proxy may cause the effects of educational achievement to be underestimated.[24] However, adding additional control variables, such as physical and mental health, might diminish the apparent effects of education (Bowles and Gintis, 2002, p. 5).

Column entries are unstandardised linear regression coefficients. Values are for log income. Standard errors are in brackets. *=p<.10, **=p<.05, ***=p<.01.

We also cannot tell if coming from a high income family in itself results in people spending longer in the education system. Further research might show that other variables, such as parental education levels and a supportive home environment, are more important (Piraino, 2007, p. 17). Researchers have suggested that parental income effects that are not mediated through educational qualifications probably result from family dynamics and parenting, the formation of preferences and aspirations, labour market connections, investment in other aspects of their children’s lives, and genetic factors (Björklund, et al., 2007, p. 13; Roemer, 2004, p. 51).