Wednesday, March 8, 2017

Is the American Dream Just a Pipe Dream?

By Stephanie Allen, Project Assistant

In 1970, the percentage of American 30-year-olds who were earning more than their parents did at 30 was 92%. The percentage now is around 50%. That statistic hit me hard when I heard it on the Freakanomics podcast from January 18th (I got a bit behind in my podcast listening at the start of the year. I’ve been catching up during the last couple of weeks.).

In economic development, I think a lot about upward mobility and improving opportunities for prosperity. I wasn’t very surprised by that 50% number. What surprised me was the 92%. I was in college when the dot-com bubble burst and the job market wasn’t great when I graduated. When I was back on the job market again after my master’s degree in 2008, it was worse. I’ve been listening to people talk about the decline of the American dream my entire adult life. So, I didn’t find 50% surprising. What I found so surprising was that America actually used to be really good at this. Really, really good. Less than half a century ago 92% of 30-year-olds made more than their parents had! My jaw was on the floor. How did we lose so much ground so fast? And, more importantly, do we have any chance of regaining it?

Source: The Equality of Opportunity Project

The Equality of Opportunity Project addresses the first question in a paper from December of last year. They identify two important economic trends affecting incomes of people born in the 1980s relative to those of people born in the 1940s: lower growth rates in Gross Domestic Product and greater inequality in growth distribution. The paper concludes that while lower growth rates in the GDP play some role, it is the inequality in growth distribution that accounts for most of the drop. A smaller cohort of people benefit from growth today than benefited in the 1970s.

This suggests that in order to improve opportunities for prosperity we should focus not just on economic growth, but even more so on spreading the benefits of what growth there is around. 

The Equal Opportunity Project recently published work on the role of colleges in intergenerational mobility. There are some really interesting findings in this work, including their list of the top colleges by mobility rate—those who have large numbers of students who come from poor families and end up with high incomes. Topping the list is Cal State University – LA. Nine of the top ten are not-for-profit schools and of those only one is private (Pace University in New York). Four of the top ten are in the NYC metro; three are in southern California; three are in southern Texas. 

There is also a list of the top ten elite colleges that enroll the highest percentage of low- and middle-income students. UCLA tops that list, but is the only public school on the list. The data examined in this study confirm what most of us already presume, namely, that low- and middle-income students who attend top colleges end up earning almost as much rich students who attend the same college. Attending a top college seems to really boost an individuals’ chance at mobility. (For more on colleges and mobility, here are a couple articles from The New York Times: “Some Colleges Have More Students From the Top 1 Percent Than the Bottom 60,” “America’s Great Working-Class Colleges,” “Dreams Stall as CUNY, New York City’s Engine of Mobility, Sputters.”)

All this college data is interesting, but Raj Chetty, who is one of the principle investigators at The Equal Opportunity Project and who was interviewed on the aforementioned Freakanomics podcast, maintains that the biggest drivers of upward mobility have less to do with where we go to college and more to do with where we grow up. Chetty and his colleagues found that where you grow up plays a big role in your chances of upward mobility. They identified five significant factors that play a role in determining rates of upward mobility:

1) residential segregation – the more segregated a city, by income and by race, the lower the rates of upward mobility

2) income inequality – higher levels of inequality predict lower rates of upward mobility

3) family structure – growing up in a neighborhood with a lot of single parents is associated with lower rates of upward mobility (even for kids who grow up in two-parent households)

4) social capital – places with higher social capital have higher rates of upward mobility

5) school quality – places with better public schools have higher rates of upward mobility

Chetty is quick to point out that while there are significant correlations between the first four factors and rates of upward mobility, we’re still unsure about the causal mechanisms in those cases. But, that doesn’t mean that we can’t use this information to help us create policy that will lead to higher rates of upward mobility—that will help us recapture some of the American dream. And, we don’t need to create policy on the national level to do it. Many of these things can be addressed at the city, county, and state level. 

If you want to learn more about the findings, I suggest listening to the Freakanomics episode from January 18th “Is The American Dream Really Dead?” (or you can read the transcript of the podcast on the website). You can also check out these Equal Opportunity Project papers: 
And here are some articles from the New York Times based on the data from some of these papers: 

You can also check out one of our past posts: “The Growing Threat of Economic Immobility.”