Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic

Wealth inequality in the U.S., measured by the top 1% wealth share, experienced dramatic changes in the first year of the COVID-19 pandemic. Economic theory suggests that the key to understanding wealth inequality is heterogeneity in the return to net worth across households. To understand the dynamics of wealth inequality during the COVID-19 pandemic, we develop a novel methodology that allows us to estimate the returns to net worth for different groups of households at relatively high frequency. We show that portfolio heterogeneity and asset price movements are the main determinants of wealth returns and inequality, whereas saving-rate heterogeneity and within-class return differences played a minor role. As the stock market continued to outperform the housing market, the return of the wealthy has risen faster than that of other households, reinforcing the wealth concentration at the top. We also document a widening racial return gap between white and black households later in the pandemic. Nearly all of the racial differences in the wealth return, however, are explained by the differences in wealth, not by race itself. Whereas the previous literature has evaluated return heterogeneity and its implications for long-run wealth inequality in low-frequency data, our analysis suggests that return heterogeneity together with large asset price movements is also key to understanding short-run dynamics in wealth inequality.