The only index that provides a quantitative measure of economic opportunity (rather than economic outcomes) for different demographic groups and states in America.
2. Why does the EOI matter?
To discuss economic opportunity, we need to measure it— "what gets measured, gets done." The Index is an evidence-based approach designed to show what personal, economic, and environmental factors are most likely to generate broad-based income growth in the future for specific demographic groups, states, and the population as a whole.
3. Why is the EOI ground-breaking?
Until the launch of the EOI, Americans were not able to quantify exactly how opportunity was growing or shrinking; nor could they compare economic opportunity across gender and racial groups.
By breaking down the drivers that have been shown to affect expected lifetime income, the EOI allows users to understand exactly what factors are leading which demographic groups to earn more or less than others during their lifetimes.
4. Why do traditional measures of wealth and economic opportunity fall short?
There are many measures of economic activity, such as unemployment, inflation, GDP growth, productivity, or retail spending. But there is no credible, authoritative measure of economic opportunity—the potential for people to improve their economic well-being based on their efforts.
GDP per capita (the country's total output (Gross Domestic Product or GDP) divided by the total number of people in the country), a popular measure used to rank how rich countries are compared to one another, does not show the great variance and concentration of income for people from different socio-economic backgrounds. As long as the nation’s total GDP grows at a higher rate than its population, we will see an increase in GDP per capita without really understanding what proportion of the population is actually earning the bulk of the income, or whether these gains are likely to be sustainable.
Other measures, such as the Gini coefficient (a measure of statistical dispersion most prominently used as a measure of inequality of income distribution or inequality of wealth distribution), provide a snapshot of income inequality, but they do not take into account interactions among income, race, and gender, providing little granular understanding of what is really taking place in society.
5. How did you define "economic opportunity", and why?
HOW: Hope Street Group has defined economic opportunity as expected lifetime real income:
Expected – reflects a probable outcome. Luck, individual circumstance, and societal change always play a role in economic outcomes. We endeavor to measure the part of economic outcomes that can be predicted by characteristics of the individual and the economy.
Lifetime - a single year might give us a misleading snapshot of one's overall circumstances, so Hope Street Group focuses on income over the entire lifespan.
Real – adjusted for inflation. Since purchasing power diminishes with the effects of inflation, Hope Street Group strips away inflation to reflect the actual amount of goods and services that can be purchased with lifetime income; this allows comparisons of relative income at different points in history.
Income – concerned with economic opportunity, rather than non-economic opportunities such as freedom of expression. Even though a variety of economic, societal, cultural and political factors impact opportunity, Hope Street Group decided to concentrate on economic opportunity because it is most amenable to quantitative metrics and comparisons.
WHY:
Since we are measuring economic opportunity (and not social goods, individual freedom, etc.), we use income/earnings as the base of our definition. In addition we focus on the resources available, rather than how they are spent (which would signify the outcome of economic opportunity rather than the availability of opportunity).
6. How did you develop the EOI?
How: Hope Street Group brought together peer-reviewed academic research on individual factors that are important for determining a person's income level or life expectancy into a meaningful whole, formulating a quantitative measure of what current conditions--the current values of these "drivers"-- say about future outcomes. It is important to emphasize that our study is based on a synthesis of a body of academic literature, rather than our own opinions or perceptions.
Hope Street Group developed an online environment for the economics and policy communities to critique, update, and continuously improve the Index over time, making it the living standard for "opportunity policy analysis."
Who: The EOI was developed by economists from the left and the right, researching more than 1,000 peer-reviewed articles.
When: Hope Street Group began its preliminary research on the EOI in 2006 with the help of volunteers and consultants, including PhD economists and doctorate students. We devoted a full-time staff member to the development of the EOI in mid 2007, and EOI 1.0 (national EOI by demographic groups) was launched online in April 2008. An updated version of EOI 1.0, integrating practitioners’ and academics’ feedback, was launched in January 2009.
7. How often is the EOI updated?
All of the indicators underlying the EOI are updated once a year with new data, usually in the spring.
8. How many variables are included in the EOI, and how did you categorize them?
The EOI contains 36 different variables, organized into 6 sub-indices.
Human capital development: share of population with high school diploma, share of population with college degree, math test score at age 9, reading test score at age 9, incarceration rate, divorce rate
Health and social safety nets: percent adults who smoke, diabetes prevalence, share of population with high school diploma, share of population with college degree, infant mortality rate, violent crime rate, disability rate, private health insurance coverage, share of children with health insurance, air quality, marriage rate,
Labor market dynamism: unemployment rate, percent unemployed 27 weeks and over, percent usually employed full-time, job opportunities in manufacturing sector, non-wage benefits as share of compensation, labor force participation rate.
Asset ownership: homeownership rate, share of population with access to bank account, net financial assets, homeowners’ equity, government debt per capita.
Policy and regulatory framework: effective individual income tax rate, marginal individual income tax rate, corporate tax rate, percent change of employment in regulatory agencies, all industries price-cost margin.
Macroeconomic growth and stability: investment as a percentage of GDP, R&D as a percentage of GDP, inflation rate, trade as a percentage of GDP, federal surplus/deficit as a percentage of GDP.
Note that two variables, including share of population with high school diploma and share of population with college degree, are included in the EOI twice, once in human capital development and again in health and social safety nets. Research suggests that education affects opportunity both directly (via increased and more remunerative job opportunities) and indirectly (via better health outcomes for educated persons, even after adjusting for other factors affecting health).
9. How did you determine the weight of each variable in the EOI?
Ideally, we would have liked to have used the economist’s traditional tool of regression analysis on historical data to isolate the impact of each indicator in the EOI on real income in later years. Unfortunately since many of the variables in the Index: 1) are correlated with one another (a simple example of this is that many increase over time) and 2) actually have effects on each other (for example, education is a major driver of economic opportunity, but education also impacts health outcomes, which in turn affect economic opportunity as well), it makes it harder from a statistical standpoint to tease apart the individual impact of each.
We therefore turned to an alternative approach – instead of applying regression analysis, we examined the impact of each variable individually on income and/or life expectancy through literature reviews. For example, consider the weighting of the college graduation rate. We found journal articles that measured the impact of college degrees on future income; e.g. Ashenfelter (1991) finds a 40-50% increase in earnings between 12 and 16 years of education. As the literature generally has shown an increasing premium to education in recent years, we took the top end of this range (50%). Therefore, for every 1 percentage point increase in the number of college graduates, expected lifetime earnings rises roughly 1% x 50% = 0.5%. Every variable is benchmarked to the Index in this same manner and ultimately all of the variables are adjusted in accordance to their relative weights with one another to arrive at the final weights.
10. What are some of the EOI’s most important findings?
To date, the EOI project has achieved two significant milestones: 1) it has refined and quantified existing hypotheses about economic opportunity and 2) it has introduced new dynamics and drivers that were rarely included in debates before. Among its findings:
Education is the most important driver in economic opportunity in the United States, making up one third of the total drivers that impact economic opportunity.
Health is the second most important drivers in economic opportunity, making up almost one-fourth of the total drivers that impact economic opportunity.
If the African American infant mortality rate were the same as that for Asian Americans, African Americans would improve their health outcomes by 13%.
1/3 of the net health improvement over the past 27 years has been due to lower smoking rates.
More educated individuals are healthier and live longer, and even after controlling for other factors, educational attainment drives almost one-third of the health outcomes of Americans.
There is a significant racial gap in expected lifetime earnings, with the widest gap – about 27% -- between typical Asian and Hispanic males.
Health is not only important in prolonging lifespan, it is even more important in increasing the productivity of an individual’s income-generating years.
11a. What does the EOI say about economic opportunity over the past few decades?
Economic opportunity has generally been increasing over the past 27 years, with periods of declining economic opportunity correlated to economic downturns and recessions. The most recent declines occurred in 2007 and 2008.
11b. How are the EOI results different from outcome measures which also vary over the business cycle?
Since the business cycle is closely linked to Americans’ earnings, the EOI results will not differ greatly from business cycle fluctuations/outcomes; however, the EOI allows people to examine exactly what factors are leading to the changes in expected lifetime earnings.
12. How do you plan to develop the EOI?
In July 2008 Hope Street Group will launch the customized EOI, a set of questions which will allow visitors to the Hope Street Group website to obtain their own personal EOI outcome and compare it to their peers. In [September 2009], Hope Street Group will launch a state-level EOI that measures how and why economic opportunity varies across the country, and what states can learn from each other.
13. What other Indices could be considered comparable to the EOI?
The Human Development Index & the American Human Development Project: In 1990 the United Nations Development Programme’s Human Development Report presented a "new way of measuring development by combining indicators of life expectancy, educational attainment, and income into a composite Human Development Index, the HDI". The novelty of the HDI was inherent in the way that it allowed one distinct statistic to serve as a benchmark for both social and economic development factors. The American Human Development project applies the HDI’s theoretical framework to the United States.
The objective of Hope Street Group’s Index as a tool that allows for the investigation of economic opportunity by subgroups, including race and gender, is strongly influenced by HDI’s disaggregated approach to intra-country analysis. However, whereas the HDI focuses on comparing countries across broader development measures, Hope Street Group’s EOI addresses economic opportunity for individuals. In addition, while the HDI integrates income in its composite, the EOI explains income discrepancies by disaggregating its drivers by race and gender.
Index of Economic Freedom: For over a decade the Heritage Foundation and the Wall Street Journal have been documenting the link between economic opportunity and prosperity around 162 countries worldwide across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights. While the Index of Economic Freedom focuses on the basic institutions that protect the right of individuals to work toward their own economic interests on a global scale, Hope Street Group’s Index examines a broad range of factors, including economic institutions, which affect economic opportunity on an individual level.
The Assets and Opportunity Scorecard: The Corporation for Enterprise Development (CFED) created this Scorecard to "measure how easy or hard it is for families across the United States to achieve the American Dream." Recognizing the depth and breadth of the debate surrounding the role of assets in ensuring economic security, CFED developed a six-index framework, including financial security, business development, homeownership, health care, education, and tax policy and accountability. Hope Street Group also recognizes the importance of assets in driving economic opportunity and has included asset ownership as a sub-index in the EOI, emphasizing the impact of this element on the individual rather than on the state-level.
Economic Mobility Project: The Pew Charitable Trusts launched its Economic Mobility Project with the release of analytic pieces on opportunity in the United States by examining gender, race, immigration, and families. The emphasis of this analysis is on economic mobility, adopting the perspective that economic inequality is inevitable and, in fact, not disconcerting if there is constant movement out of the bottom and a reasonable chance to make it to the top. Overall, the project concluded that "the American Dream is alive if somewhat frayed." Hope Street Group's EOI attempts to drill down to the underlying drivers of economic opportunity in the United States, which ultimately helps determine the degree of economic mobility. By quantifying these drivers and their relative importance, Hope Street Group intends to create a gauge of the extent and equality of opportunity in order to be able to pinpoint relevant, specific and quantifiable policy implications that can improve opportunity.
14. How is the EOI relevant to policymakers?
Policymakers from both sides of the aisle acknowledge that there is no silver bullet solution in bridging our current economic opportunity gap, and the EOI provides them a framework in which they can quantify, measure, and benchmark economic opportunity to better target policies and gauge their effectiveness by race and gender and by state.
15. Give me an example of how a policymaker would use the EOI.
For example, if a change in diet and lifestyle choices resulted in a decline of the prevalence of diabetes in the United States, the EOI would be able to capture the impact of this trend on the expected lifetime income of Americans by race and gender. As a result, policymakers can begin to benchmark and measure the potential impact of their desired policy outcomes on specific demographic groups in order to allocate limited resources where they are needed the most.
16. How is the EOI relevant to me personally?
The EOI is a resource that is helping individuals understand what is likely to affect their economic opportunity, empowering them to make educated decisions - both personal (like stopping smoking) and public (like for whom to vote) – about crucial factors that have empirically been shown to effect economic opportunity. It is clear that policymakers, regulators, and the financial markets are not the only actors to have perpetuated the economic difficulties we face today as a nation. The public at large continued to consume when doing so meant accumulating backbreaking debt. Lack of information and education are partly to blame, but it should be recognized that in many cases a lack of responsibility and planning also perpetuated the economic down spiral. In that respect, parents, guardians, and community leaders can use the EOI to educate themselves and the next generation of Americans on how to most effectively improve their prospects for greater economic opportunity.
17. How is Hope Street Group using the EOI?
The EOI informs the work of Hope Street Group’s forums and policy teams, framing its work around education and health care - the key drivers of economic opportunity as identified by the EOI.
18. How can the EOI best be used by the media/press?
The media can use the EOI as a transparent tool to better understand and analyze the significance of economic announcements/new policies for different groups in the United States – encouraging the press to ask the tough questions that lie at the root of the economic opportunity gap in our country.
19. Are you considering any partnerships or collaborations to advance the EOI?
We are in the process of exploring with Gallup, Inc. ways in which we can enhance the dynamism and applicability of the EOI to specific policy areas.
