The Intergenerational Transmission of Financial Shocks on Disparities in Economic Stability

• In Event: New Research on Long-term Trends in Income Poverty in the United States

Abstract

Economic inequality in America remains a persistent policy challenge. While previous research demonstrates that children from financially stable household perform better on economic outcomes in adulthood, less is known about how the timing and type of financial shocks during adolescence affect adult outcomes across education, health, and financial wellbeing. This paper examines how two types of financial shocks — income losses and parental unemployment — occurring during early teen (ages 11–14) and late teen (ages 15–18) years affect three dimensions of economic wellbeing in adulthood. Using data from the Panel Study of Income Dynamics (PSID) covering the period from 1968-2023, we follow 8,400 individuals from early teenage to age 45. Our main specification uses propensity score matching to match individuals who experience financial shocks during teen years to those that do not but are similar across an extensive battery of observable characteristics. We address endogeneity by estimating instrumental variables models using a fine-grained simulated income instrument constructed from the Current Population Survey (CPS). We find that financial shocks in early teenage years are associated with lower college completion, with effects statistically significant for both income shocks and unemployment. Unemployment shocks occurring in late teenage have particularly large effects, indicating that financial shocks close to college entry limit human capital accumulation. In the case of health outcomes, we find financial shocks during teenage years are associated with significantly higher psychological distress in adulthood, and effects persist through the mid-30s, particularly for unemployment shocks. Financial shocks during teenage years are especially harmful to financial trajectories in adulthood, savings accumulation in adulthood is nearly 40 percent lower, with unemployment shocks having larger effects than income loss shocks. Taken together, the findings shed light on the intergenerational transmission of negative financial shocks; financial losses that occur during key developmental years shape economic outcomes in adulthood. State policies such as unemployment insurance and social benefit policies can have long-term effects on household economic stability by mitigating the adverse effects of negative financial shocks on human capital, health, and financial outcomes in adulthood.

Author

• Manita C Rao, University of Southern California
  Presenting Author