Prosperity & Upward Mobility: US and other Countries

by Ben Lorica (last updated Nov/2011)

Prosperity by Country

The Legatum Prosperity Index is an attempt to measure well-being by going beyond simple economic metrics, like average income or GDP per capita. Legatum's Prosperity Index takes economic metrics into account, but also factors entrepreneurial opportunities and a host of other factors around quality of life and well-being.

The purpose of the Prosperity Index is to encourage policymakers, scholars, the media, and the interested public to take a holistic view of prosperity and to understand how it is created. Prosperity extends beyond just material wealth. It includes factors such as social capital, effective governance, human rights and liberties, health, opportunity, security, and overall quality of life.

In the dot plots below, I compare countries on their overall rank based on their composite Legatum Prosperity score, as well as their rankings using Legatums metrics for the state of their Economies and Entrepreneurship opportunities. It might surprise Americans that Sweden, Denmark, and Finland outrank the US on dimensions (Economy and Entrepreneurship) that less dynamic social welfare states aren't supposed to be good at. But even within these dimensions, Legatum's models employ a variety of metrics, including those that measure satisfaction and expectation.

OVERALL Prosperity Index: Besides scores for their economies and entrepreneurship opportunities, countries are rated on factors pertaining to social capital, effective governance, human rights and liberties, health, and security. The U.S. ranks 10th, behind the Scandinavian countries, Austalia/NZ, and Canada.

ECONOMY: Rates countries across 17 factors including gross domestic savings, unemployment, inlfation, non-performing loans, and respondents satisfaction with standard of living and employment opporunities. The U.S. ranks 18th.

ENTREPRENEURSHIP Opportunities: Rates countries across 14 factors including business startup costs, R&D expenditure, and respondents perception that "Working Hard Gets You Ahead". The U.S. ranks 5th, behind Denmark, Sweden, Finland, and the U.K.

While Legatum ranks over a hundred countries, I only include countries who belong to a few regional and economic groupings: the APEC, the EU, and the G20.

Select Group:

Legatum Prosperity Index: 2011 Rankings
Countries sorted from Top to Lowest OVERALL Rank
[ Source: www.prosperity.com ]

Intergenerational Upward Mobility: U.S. and other countries

Governor Mitch Daniels of Indiana recently noted that "upward mobility from the bottom is the crux of the American promise." In early 2009, the Economist noted that "71% still agreed that hard work and personal skill are the main ingredients for success." Americans particularly care about intergenerational opportunities. They believe that their economic system allows hardworking children of working class citizens the chance to move up the income ladder. In fact many successful politicians frequently cite their working class upbringing as evidence that the US is "greatest" country in the world.

Optimism has declined since the financial crisis of 2008. News reports cite curveys that indicate Americans are much more pessimistic about their near and long-term economic futures. The notion that the next generation will be better off is no longer assumed.

When it comes to (intergenerational) upward mobility, how does the US stack up against other countries? Among conservatives the answer is clear: Scandinavian countries are less dynamic, and thus upward mobility pales in comparison to the US. But as we've seen above, when entrepreneurial opportunities are measured using a range of metrics, Denmark, Sweden, and Finland compare favorably with the US.

In a 2006 study, German researchers studied Intergenerational Earnings Mobility in several countries including the US. Since there aren't any long-term longitudinal survey data sets that cut across all the countries in their study, the researchers chose well-known survey data for each of the countries¹. Intergenerational mobility is measured by looking at the probability that offsprings move up to higher-income groups.

It turns out that compared to the equivalent set of parent-offspring pairs in Scandinavian countries, sons whose Fathers are in the bottom 20% are much less² upwardly mobile in the US. Throw in the fact that compared to the US, there is much less concentration of wealth and income in Sweden, Finland, and Denmark, you begin to wonder why other countries aren't emulating at least some features of these 3 economies. (A good place to start is for countries to consider Sweden's approach to financial sector regulation!)

Here are the results of the multi-nation study on Intergenerational Upward Mobility:

Estimated quintile group mobility: Assuming a Father is in the bottom 20% of all earners, what is the probability³ that his offspring will be in the same income group? Perfect Mobility implies that offsprings of a parent in the bottom (or top) 20% income group, are equally distributed across each of the five income quintiles.

Father is in the BOTTOM 20%: The upward mobility of sons is much less likely in the US. In the US, 42% of sons stay in the bottom 20%. Moreover 66% (or two-thirds) of all sons remain within the bottom 40% of all earners. Outside the US the comparable proportion who remain in the bottom 40% of all earners are: UK (53%), Sweden (50%), Norway (51%), Finland (51%), and Denmark (47%). Put another way, in the US a son whose father was in the bottom 20% of all earners has only a 1 in 3 chance of ending up in the top 60%. His odds of ending up in the top 60% would be much higher in Sweden (1 in 2).

On the other hand, intergenerational upward mobility for daughters whose Fathers were in the BOTTOM 20%, is only marginally worse in the US.

Select Offspring Group:

Offspring Position in Earnings Ladder:
Percentage Who End Up in Each Fifth
[ Source: American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility, Tables 12 & 13 ]

Related resources:

Income and Wealth Inequality in the U.S.

CEO Compensation: US and other countries

(1) For the US they relied on National Longitudinal Survey of Youth and the Panel Study of Income Dynamics.

(2) As the authors observe: "Indeed, it is very noticeable that while for all of the other countries persistence is particularly high in the upper tails of the distribution, in the U.S. this is reversed - with a particularly high likelihood that sons of the poorest fathers in the U.S. will remain in the lowest earnings quintile. We view this as a challenge to the popular notion of an American exceptionalism in economic mobility. Indeed, the combination of a high probability of American sons of the poorest fifth of fathers remaining in the lowest quintile group, the lower probability of rags-to-riches (poorest to richest) and slightly lower probability of riches-to-rags (richest to poorest), places the notion of American exceptionalism in a new light."

(3) For simplicity, I display percentages rather than (confidence intervals of) probabilities, in the bar graphs.

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