Intergenerational Mobility in the Presence of Informal Labor Markets

Presenter

Paula Cesana (Queen Mary University of London)

Abstract

This paper explores intergenerational mobility in the context of Chile, an economy with an important informal labor market. I start by documenting two key empirical facts. First, labor informality is associated with higher income uncertainty, even after controlling for education and occupation. Second, an individual’s labor informality is associated with their family background and, in particular, education and occupation intergenerational persistence account for a large portion of this association. Next, I propose a two period model of human capital investment and occupation choice under uncertainty. In the model, greater income uncertainty reduces parental investment, leading to lower human capital in children, which increases the likelihood of informal work in the next generation. A counterfactual exercise shows that reducing parental income risk improves upward mobility and reduces informality. These findings underscore the role of income uncertainty in shaping future labor market outcomes and perpetuating barriers to intergenerational mobility.