Families at a Loss: The Asymmetric Relationship Between Income Changes and Child Human Capital

I here assess the link between distributional changes in family income and child human capital. Using a value-added model and data from a UK child cohort, I show evidence of an asymmetric effect of income gains and losses on child non-cognitive development. Only income losses are associated with a reduction in children’s socio-emotional health – with one-third of the effect operating through measures of maternal well-being – while no effect is found for income gains. This is consistent with a model of human-capital formation where the quality and quantity of parental inputs react to changes in family income asymmetrically.