‘The American Dream’ means different things to different people. Professor Raj Chetty, who heads up Stanford University’s Equality of Opportunity Project, distills it into a simple statistic: The probability that a child born to parents in the bottom-fifth of the income distribution will make the leap to the top fifth — the classic notion of ‘rags-to-riches’.
Today, according to Prof. Chetty, a child is more likely to attain the American Dream if she lives in Canada or Sweden. Based on the most recent data, in the U.S., a child has a 7.5% chance of moving from the bottom quintile to the top compared to 9% in the United Kingdom, 11.7% in Denmark, 12% in Sweden and 13.5% in Canada.
Prof. Chetty and his research team, led by Harvard Professor Nathaniel Hendren and Brown University Professor John Friedman, have found that rates of upward mobility vary even more within the U.S. Using tax records for 10 million kids born between 1980 and 1982 — basically, every American child born in the early 1980s — they calculated upward mobility for every metro and rural area in the country; then, they looked at the incomes for these same individuals in 2012 — when they were in their early 30s.
What they found was startling: In the centre of the country, rates of upward mobility exceed 16.8 per cent — higher than the rate for Canada, Denmark or Sweden; but, at the other end of the spectrum, in cities like Atlanta and Charlotte, North Carolina, the numbers were lower than for any country in the study. The patterns were dramatic: The south east had much lower rates of upward mobility than the centre of the country; and the west coast had higher numbers: San Jose came in at 12.9% and Salt Lake City at 10.8%; but the rate for Chicago was much lower, at 6.5%.
Prof. Chetty and his team were able to determine that the critical driver of these differences is childhood environment. The team came up with five characteristics of mobility differences between areas.
1. Segregation vs. Integration
Not surprisingly, places that are more segregated by income or race tend to have lower levels of upward mobility. Prof. Chetty refers to this as ‘residential segregation’. Regardless of how you measure it, Atlanta is an incredibly-segregated city, and as a result, Atlanta and places that look like it tend to have the lowest rates of upward mobility in the U.S. In contrast, if you look at Sacramento — which actually has the same share of Blacks and Hispanics as Atlanta — you find that there is much more residential integration — and consistent with that, Sacramento has much higher rates of upward mobility.
2. Income Inequality
The second pattern detected by the researchers was that places with more income inequality also tend to have lower levels of inter-generational mobility. That is, if you have a smaller middle class in a particular area, you also tend to have less mobility, and insofar as there is a causal link between those two things, that is potentially concerning: If inequality rises over time, we might see an erosion in the rates at which people move up across generations, as well.
3. Single-Parent Homes
The team found that areas with more single parents have lower rates of upward mobility, and communities with more two-parent households have higher upward mobility. As a result, you might conclude that ‘growing up in a two-parent household has beneficial effects relative to growing up in a one-parent household’. That is part of the story, says Prof. Chetty, but it’s not all of it: Even when the researchers looked at the subset of children whose own parents were married, if they were growing up in an area with lots of single parents, they were less likely to move up in the income distribution. In short, it’s not about whether your own parents are married or not: There is a community-level factor involved.
4. Social Capital
This brings to mind the old adage that, ‘It takes a village to raise a child’. Even if you’re not doing well, someone else in your community might be able to help you out. Salt Lake City, Utah — with its vast Mormon Church followership — is a classic example of a city with a lot of such ‘social capital’, and the researchers found that it also has very high rates of upward mobility.
5. Quality Public Schools
On this point, the researchers found clear evidence of causal effects. While the first four elements can be helpful in terms of where to focus policy interventions, in this case, Prof. Chetty et al. definitively say that improving the quality of public schools in specific ways can make a major difference. In particular, they found that pro-actively ensuring ‘teacher quality’ — measured by ongoing improvement in students’ grades, yearover year — is imperative to changing these patterns.
For more on this ongoing research, visit equality-of-opportunity.org
. Raj Chetty
is a Professor of Economics at Stanford University and Co-Director of the Public Economics group at the National Bureau of Economic Research. This article is based on his presentation at Stockholm University’s Institute for International Economic Studies.
This article originally appeared in The Inequality Issue (Fall 2017) of Rotman Management. The magazine offers the latest thinking on leadership and innovation and is published three times a year.
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