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Household Wealth and the Measurement of Economic Well-Being in the United States

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  • Edward N. Wolff
  • Ajit Zacharias

Abstract

The standard official measure of household economic well-being in the United States is gross money income. The general consensus is that such measures are limited because they ignore other crucial determinants of well-being. We modify the standard measure to account for one such determinant: household wealth. We then analyze the level and distribution of economic well-being in the United States during the 1980s and 1990s, using the standard measure and a measure that differs from the standard in that income from wealth is calculated as the sum of lifetime annuity from nonhome wealth and imputed rental-equivalent for owner-occupied homes. Our findings indicate that the level and distribution of economic well-being is substantially altered when money income is adjusted for wealth. Over the 1989Ð2000 period, median well-being appears to increase faster when these adjustments are made than when standard money income is used. This adjustment also widens the income gap between African Americans and whites, but increases the relative well-being of the elderly. Adding imputed rent and annuities from household wealth to household income considerably increases measured inequality and the share of income from wealth in inequality. However, both measures show about the same rise in inequality over the period. Our results contradict the assertion that the Òworking richÓ have replaced the rentiers at the top of the economic ladder.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_447.

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Date of creation: May 2006
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Handle: RePEc:lev:wrkpap:wp_447

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  1. Maury Gittleman & Edward N. Wolff, 2004. "Racial Differences in Patterns of Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
  2. Donald L. Lerman & James J. Mikesell, 1988. "Impacts of Adding Net Worth to the Poverty Definition," Eastern Economic Journal, Eastern Economic Association, vol. 14(4), pages 357-370, Oct-Dec.
  3. Osberg, Lars & Sharpe, Andrew, 2002. "An Index of Economic Well-Being for Selected OECD Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(3), pages 291-316, September.
  4. Wolff, Edward N., 2007. "The retirement wealth of the baby boom generation," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 1-40, January.
  5. Edward N. Wolff, 2003. "The Devolution of the American Pension System: Who Gained and Who Lost?," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 477-495, Fall.
  6. Francine D. Blau & John W. Graham, 1990. "Black-White Differences in Wealth and Asset Composition," NBER Working Papers 2898, National Bureau of Economic Research, Inc.
  7. Edward N. Wolff & Ajit Zacharias, 2003. "The Levy Institute Measure of Economic Well-Being," Economics Working Paper Archive wp_372, Levy Economics Institute, The.
  8. Wolff, Edward N, 1990. "Wealth Holdings and Poverty Status in the U.S," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 36(2), pages 143-65, June.
  9. Lerman, Robert I & Yitzhaki, Shlomo, 1985. "Income Inequality Effects by Income," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 151-56, February.
  10. Menchik, Paul L & Jianakoplos, Nancy Ammon, 1997. "Black-White Wealth Inequality: Is Inheritance the Reason?," Economic Inquiry, Western Economic Association International, vol. 35(2), pages 428-42, April.
  11. Lerman, Robert I. & Yitzhaki, Shlomo, 1995. "Changing Ranks and the Inequality Impacts of Taxes and Transfers," National Tax Journal, National Tax Association, vol. 48(1), pages 45-59, March Cit.
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