To a degree, this residential segregation has been perpetuated by our system of school financing that relies heavily on local property tax funding. Local financing of public schools leads to a bundling of two distinct choices – residential choice and school choice – and increases the degree of socioeconomic segregation across school districts. We can promote greater income mobility by unbundling the residential and school choices. This can be done in one of two ways. The first is to work to equalize school quality across location, while the second is to allow parents more choice of schools from a given location. Along the lines of the first approach, New York Fed research has shown that school finance reforms that seek to equalize funding across school districts by reducing the role of local property taxes can go a long way in decreasing residential segregation and equalizing quality of education.6 The key mechanism is that such reforms make underperforming neighborhoods more attractive, thus reducing socioeconomic segregation and leading to consequent gains in peer quality in previously-challenged enclaves. This in turn reduces disparities in school quality stemming from reduced socioeconomic segregation. On the second approach, there exists research indicating that school vouchers that enable students to move to private schools or better-quality public schools can lead to improvements in public school quality and student performance by increasing competition among schools.7 It is important to note, though, that not all voucher programs are created equally, and the design of the program matters in how vouchers impact school quality.
It is a foundational element for a well-functioning democratic society and provides evidence about the ability of an economy to provide opportunities for its citizens. A standard approach to measuring income mobility is to compare where a child is in the income distribution relative to where the parents were in the income distribution. A striking result is that intergenerational income mobility in the U.S. – a child’s chances of moving up in the income distribution relative to her parents – has remained stable over the past half century. However, because of the increase in income inequality, the consequences of being born to low-versus high-income parents are larger today than in the past. One explanation for the lack of a correlation between income inequality and income mobility in the U.S. is that income inequality is strongly influenced by the top one percent of the income distribution, but there is little correlation between income mobility and this top income percentile.2 While income mobility in the United States has been relatively unchanged, it remains well below several other nations. According to Stanford economist Raj Chetty, the probability of moving from the bottom quintile to the top quintile is 7.5 percent in the United States, as compared to 11.7 percent in Denmark and 13.5 percent in Canada – two countries with relatively high levels of intergenerational mobility.3 So effectively the chance of achieving the American Dream is not the highest for children born in America.