Non-Technical Summary:
It’s long been known that children growing up in some areas tend to do better than those growing up in others. A crucial question for policy is why. Do places with better outcomes just have more able and motivated families, for example? Or is it better schools or jobs allowing kids to flourish?
Past research has delivered mixed results, yet a wave of recent work has provided much clearer evidence that neighbourhoods do matter. I examine this question in the Australian setting, and look beyond whether place matters, to when in childhood it matters most, and why.
Following the innovative approach of Chetty and Hendren (2018a) I look at children who move neighbourhoods and see whether their outcomes, as measured by their rank in the income distribution at age 24, mirror the children they left behind or the children they joined. If neighbourhoods matter, then the earlier a child moves, the more they should end up looking like those they join, relative to those they left behind.
Indeed, moving earlier makes a difference, with the results suggesting an individual moving at birth would receive around 70% of any benefit associated with their destination. Most of the differences between places in Australia are due to the effect they have on the children, rather than being driven by the families themselves. Further, place appears to be most influential in the teenage years. Each year in a destination in your teens moves your expected outcomes around 4% closer to those in your destination (relative to your origin).
So why does it matter where you grew up? Answering this is central to thinking about if and how policy may help level the playing field.
First, where you grow up matters because it is often where you end up working, which could be a booming or busting region. Anywhere from 15-55% of the effect of place is explained by the local labour market an individual ends up working in.
Second, where you grow up matters because it influences who you grow up with. If the other kids born in your postcode and year happen to come from richer families, you tend to do better. More specifically, if an individual’s peers’ parents are 10 percentile rank points higher in the income distribution, then they tend to end up 0.2-0.3 points higher themselves by age 24. This is around a fifth of the influence of parents at this age. Why might your peers’ parents matter? Perhaps they simply reflect the aspirations, abilities and behaviours you’re likely to find in your peers. But they may also serve as role models, mentors or job contacts themselves.