Hope Street Group’s Economic Opportunity Index

Why an EOI?

The Economic Opportunity Index (EOI) is Hope Street Group’s unique approach to
quantifying and benchmarking economic opportunity in the United States in an
effort to build an Opportunity Economy. We started working on this because we
wanted to know what changes we can make today that will provide more
opportunity for all of us tomorrow.

There is a real need for measures we can rely on to evaluate whether America’s
vision of providing opportunity for all its citizens is growing or shrinking. With this
knowledge, we can figure out how to tackle the obstacles that are precluding our
society from reaching its fullest potential.

The factors that drive economic opportunity are shaped and chosen in the present;
yet outcomes are only realized in the future. Education today translates into more
opportunities tomorrow -- a healthier life now allows for longer and more productive
lives in the future. But we cannot wait until tomorrow to measure the results of our
decisions. We need to change our policies/habits now in anticipation of the
outcomes we seek in the future.

It’s time to stop arguing over the tired paradigm of “grow the pie” versus
“redistribute the pie.” In our view, both are possible and essential.

What is economic opportunity?

We define economic opportunity as expected lifetime real income:

• Expected - luck, individual circumstance, and societal change always play a

role in economic outcomes.

• Lifetime - a single year might give us a misleading snapshot of one's overall

circumstances.

• Real - adjusted for inflation.

• Income - concerned with economic opportunity, rather than non-economic

opportunities such as freedom of expression.

How was the Index developed?

Hope Street Group used peer-reviewed economic research to identify factors that
contribute to individual income and asset growth over a person’s lifetime. These
factors (or indicators) were measured using high-quality sources such as
government agencies, non-profit organizations, and the private sector – not surveys
or subjective assessments by Hope Street Group – and weighted according to their
relative importance in driving individual opportunity. The Economic Opportunity
Index is calculated for the United States as a whole and for different demographic
groups.
We invite the economics and policy communities to critique, update, and help us
continuously improve the Index so that it can become the living standard for
opportunity debate and policy in our country. Hope Street will also be improving the
index in 2009 by adding the ability to measure economic opportunity on the state
level and by customizing the weights of the sub-indexes for different demographic
groups. (For example, increasing high school graduation rates will impact the future
earning capacity of different demographic groups differently.)

What the EOI can tell us:

The EOI identifies the main drivers of economic opportunity and demonstrates how
they have been evolving to shape economic opportunity over time across different
demographic groups in the United States. It can help guide us in determining
which changes in policy have what kind of impact on the future earning capacity of
Americans. For example, if we raise high school graduation rates among Hispanic
men from x% to y%, how does that affect this demographic group’s future income?
What if we increase access to health care from x% t o y%? How would that change
what white women could earn?

The indexes and the weight they carry in the overall EOI:

1. 32 % Human Capital Development: Since income is highly correlated

with educational attainment, Hope Street Group has identified a number of
variables that correlate with education and skills attainment, and therefore
the degree to which a worker is valued in the labor force. (Examples:
graduation rates and standardized test scores.)

2. 22% Health Care and Social Safety Net: Better health, which is highly
impacted by the following variables, implies more capacity for work and
more productive working years. (Examples: infant mortality and smoking
rates.)

3. 22% Labor Market Dynamism: Wages are the primary source of

income for most households; the variables that reflect the health of the labor
market and the experience individual households have in the labor force are
critical to economic opportunity. (Examples: unemployment and labor force
participation rates.)

4. 12% Policy and regulatory framework: As opposed to the previous

sub-index, which focused mostly on the current health of the macro-economy
and the degree of resources allocated to future production, this set of
indicators reflects how government policy and regulation might affect future
growth and opportunity. What unites the three major components of this sub-
index, namely taxation, regulation, and antitrust enforcement, is that they all
produce distortions, which economists measure in terms of “excess burden”
or “deadweight loss” (DWL) to the economy. (Examples: individual and
corporate tax rates.)
5. 7% Asset ownership: Possession of assets provides a stream of income
(via dividends, interest, or rent), a cushion for unexpected financial needs,
and is an efficient savings vehicle. At the national level, a stronger asset
base implies a greater stream of economic “dividends” for citizens. We
include two main types of assets in this category: first, personal assets such
as homes or financial assets, which give an individual greater security and
earning power in the future; and second, societal wealth in the form of the
nation’s capital stock or debt. We convert these values to constant dollar
terms to remove the effect of inflation. (Examples – home ownership and
access to a bank account.)

6. Macroeconomic growth and stability: These variables reflect the

prospects of future stability and economic growth, an environment in which
individual incomes can grow and opportunity can be realized. Early models of
economic growth featured technological change as an exogenous variable,
one that all participants in the economy shared in equally, irrespective of
their investment decisions. Reacting to the failed predictions of the Solow
model, new models were developed which made technological change an
endogenous variable. In this endogenous growth literature, technical change
results from conscious decisions by economic agents to invest in physical
capital and – especially important – human capital. In models of endogenous
growth, policy change can impact the long-term growth rate of an economy –
for better and for worse. (Examples: investment and R&D as percentage of
GDP)

Updated 11.08