Don't Dismiss the American Dream
Many have sounded the alarm that economic mobility in the United States has fallen behind that of our European peers. Some, including Princeton economist Alan Krueger and President Obama’s White House, blame income inequality. According to their arguments, the United States has a gap between rich and poor that makes it difficult for those not born into wealth to get ahead.
Elise Gould of the Economic Policy Institute also laments low levels of mobility. Her preferred measure of economic mobility, intergenerational earnings elasticity (IGE), shows that the United States falls behind its European peers. The United States has an IGE of 0.47, meaning that about 47 percent of the variation from the average in a child’s earnings can be explained by his parents’ earnings. Many, but not all, European countries have a lower IGE—France has an IGE of 0.40, and Denmark has an IGE of just 0.15.
Where the analysis cannot tell us, though, is how each country fares on absolute mobility. IGE is inherently a relative measure, which tells us how individuals are faring relative to the average of everyone else. But if that average is higher, then mobility can appear lower, even if the absolute income gains are held constant.
All else being equal, one would expect countries with higher inequality to have lower relative mobility. If you climb five feet on a ten-foot ladder and I climb five feet on a twenty-foot ladder, we have both made the same ascent, but your relative progress up the ladder appears much more impressive.
This is important because the United States has a much taller metaphorical ladder than most other countries. For an individual at the 10th percentile of the income distribution in the United States, there is a larger gap to cover before attaining the 50th percentile. The other side of that, of course, is that an American does not need to traverse nearly as many percentiles of the income distribution to achieve a given standard of living as does a Dane or a Swede.
This can be illustrated by the following example. Consider two countries, A and B, which have average incomes of $30,000 and $40,000, respectively. In each country, the average individual whose parents’ income is $10,000 earns $25,000 in adulthood. In other words, the absolute mobility of this individual is $15,000, and identical in both countries. In country A, the individual is $5,000 below the average, whereas his parents were $20,000 below. Therefore, 25 percent (or $5,000 divided by $20,000) of the individual’s deviation from the average income is explained by his parents’ deviation.
However, in country B, the individual is $15,000 below the average, while his parents were $30,000 below. Now, 50 percent of the individual’s deviation from the average is explained by his parents’ deviation. Again, absolute mobility is identical in both countries, but country A appears much more meritocratic than country B by virtue of its lower average income.
According to my analysis of OECD data, the disposable income boost required to move from the 10th percentile to the 50th percentile in the United States is $19,187, more than any other country in the OECD. By contrast, the “egalitarian” nations of Europe require much smaller boosts--$12,613 for Sweden, $11,627 for France, and $10,384 for Britain. (All these figures are in 2013 U.S. dollars adjusted for purchasing power.)
This phenomenon is partially thanks to the United States’ higher median disposable income: $30,473, compared to $24,547 in France and $20,768 in Britain. This highlights the shortcomings of using a relative metric to measure mobility—America gets penalized because it is richer.
Of course, none of this is to suggest that the United States has sufficient economic mobility, or that we should not strive to increase upward mobility. But whether robust economic mobility is a more American or European trait depends quite a bit on how you look at the data.
Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.
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