Economic mobility – faring well, but not for all

18 September 2024

Do your parents’ economic fortunes dictate your own? If your parents earned decent money when you were a kid, does that mean you’ll do well too? And if you grew up poor, can you break free from poverty to become well-off as an adult?

These are the questions me and my colleagues at the Productivity Commission asked ourselves when we embarked on a project to examine Australia’s economic mobility.

For a country that sees the ‘fair go’ as a core part of our identity, the answers speak to whether Australia really is a nation where talent and hard work matter more than the circumstances of your birth in determining your lifetime economic outcomes.

The good news is the reality matches the mythology for many Australians.

For the so called ‘Xennial’ cohort – who are now mid-40s adults born on the Gen X/Millennial cusp – 67% make more than their parents did at the same stage of their lives, even after you account for rising living costs. For those with the lowest earning parents – in the bottom 10% of income earners – a whopping 97% earn more than their parents at a similar age.

This is partly because incomes across the board are higher now than they were when those Xennials’ parents were in middle age themselves. This is not so true for younger Millennials – a point I’ll return to. But this measure is also picking up a fair degree of ‘across generation mobility’: put simply, for most of us, our later life economic outcomes are only loosely tethered to those of our parents.

Indeed, our research finds Australia is a highly mobile country.

One way to measure the ‘stickiness’ of economic outcomes across generations is to measure how much higher parental income impacts children’s income later in life. We find that a 10% increase in parents’ income is associated with a less than 2% increase in their child’s income in middle age. Having well-off parents is more of a modest springboard than a rocket launcher for future economic success.

We find a similar positive but relatively modest relationship when we look at how parents’ ‘rank’ in the income distribution – whether they’re poor, middle income, or rich – affects where their children end up sitting relative to their peers in later life.

Comparing these measures internationally, it turns out Australia is one of the most mobile countries in the world. We sit just behind Switzerland and even slightly beat out the Nordic countries – Sweden, Denmark and Norway – with their comprehensive and egalitarian social welfare systems. And we significantly outperform the deeply immobile Brazil as well as economic powerhouses like United States and China.

Australia’s intergenerational mobility is even more notable given our relative income inequality.

The ‘Great Gatsby curve’ charts a strong relationship between a country’s inequality and the persistence of income across generations. It’s simply harder (and more notable) for a Gatsby to climb the income ladder in the highly unequal world of Gatsby’s West Egg than somewhere more egalitarian.

Australia is pretty much ‘middle of the pack’ internationally when it comes to income inequality. So our much higher mobility makes us somewhat of an outlier on the Gatsby curve.

Good news for the fair go.

But amongst this overall optimistic picture of fairness and opportunity there are a couple of important notes of caution.

First, there is a lot more ‘stickiness’ in economic outcomes for people living at the top and bottom of Australia’s income distribution.

Children with high-income parents – those in the top 10% of earners in middle age – are much more likely to end up in the same group themselves (about 1 in 5 stay in this group). Indeed, there is greater income persistence for this group than any other.

This persistence at the top is even more pronounced if we expand the picture to include wealth.

Previous studies have found quite high persistence amongst parents and children in their 40s, 50s and 60s when it comes to wealth. This probably reflects that wealthier parents have scope to make larger investments in their children’s education and human capital development, which yields financial returns later in life. Increasingly too, direct wealth transfers through gifts, ‘bank of mum and dad’ support for property purchases and inheritances, feed into wealth persistence.

And given that an estimated $3.5 trillion in assets will be transferred between generations in Australia by 2050 – it is likely that wealth persistence in the future will look more pronounced.

Incomes are also more persistent at the bottom. The second stickiest group are those with parents who were amongst the lowest 10% of earners. This reflects the fact that poverty can become a trap that is hard to escape.

In 2022, about one in 7 Australians, including many children, lived below the relative poverty line – meaning their incomes were less than half of the median or ‘typical’ Australian household.

And the experience of poverty earlier in life is associated with an increased risk of poverty in adulthood. For example, children who grew up in a family that received government support payments are twice as likely to receive such payments as adults, compared with children who grew up in a family that never received any type of government payments.

While most people exit poverty after just a year, the longer a person stays in poverty the less likely they are to escape it, and if they do, the more likely they are to fall back into poverty at a later date.

This seems partly to do with the ‘lead in the economic saddlebags’ that can come from low education levels, poor health, or living in a disadvantaged neighbourhood. But these things are also part of the ‘cycle’ of poverty, with economic insecurity contributing to poor physical and mental health, and cutting off options to move to areas with greater opportunity.

With its high overall mobility but stickiness at the top and bottom Australia might best be described as a little bit Downtown Abbey but with a large egalitarian middle.

The second point of caution is that our analysis focusses on mobility for one cohort.

The Xennials reached mid-adulthood with greater mobility tailwinds than those who have come after them. There’s no guarantee the winds will be as favourable for the next generation.

Australia has historically had a strong system of school education that has supported mobility.

But data from the OECD suggest that the performance of Australian school students in reading and maths is going backwards, with significant falls in our levels of achievement since 2000, when the last of the Xennials was finishing high school.

And disadvantaged kids are particularly being left behind. More than half of the most economically disadvantaged 15-year-old students in Australia are not proficient readers. Analysis from the Grattan Institute shows that the disparity in outcomes was worse in Australia than in Canda or the UK and on par with the less mobile US.

Given the importance of education as a vector for opportunity, these numbers are at least a red flag for future mobility.

The Xennial cohort also enjoyed relatively healthy income growth across the crucial first decade of their career. This was a continuation of what has been a generation-on-generation progress in living standards – with those born in each decade earning more on average than the one before them at the same age.

However, this has come to a stop with the later Millennials and early Gen Zs, due to slow income growth and weak labour markets in the decade between the GFC and COVID. The average income of people between the ages of 25 to 30 today is almost the same as it was for 25- to 30-year-olds in the 90s.

This kind of stagnation can put a handbrake on mobility and is one reason that rebuilding productivity growth and dynamism in the post COVID economy is so important. Ultimately a growing economy is an economy with greater opportunity for all.

The final difference is that home ownership has shot even further out of reach for younger people today. Xennial households buying a home in their 20s and early 30s could typically expect to pay about 10 per cent of their lifetime disposable income on interest and principal repayments over their working lives. Not as good as the 4 or 5 percent paid by their parents’ generation, but also nowhere near as bad as the more than 16 percent faced by younger households today.

While home ownership doesn’t impact income mobility directly, it does impact on incentives to save and build wealth, as well as opportunities to take a risk on a career change or starting a business which can be jumping off points for future mobility.

Our research suggests to me that Australia holds the recipe for the fair go.

Many of my generation have benefited from an education system and economic opportunities that allowed us to forge our paths unshackled by the relative economic position of our parents.

Addressing disadvantage in education; policies to help those stuck in poverty traps; boosting housing supply to improve affordability; and ensuring that we achieve stronger growth are priorities to ensure that future generations of Australians can enjoy the same opportunities.