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Why is Wealth Inequality Rising?

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  • James P. Smith

    (RAND Corporation)

Abstract

This paper summarizes the principal facts about wealth inequality and how it has been changing during the last fifteen years. A very sharp rise in the inequality in household wealth has taken place at least since the mid-1980s. I first examine the relation between wealth and income by illustrating how wealth is distributed within and across income groups and then attempt to uncover some reasons why wealth inequality has been expanding so rapidly. The reasons examined include the receipt of inheritances, rising income inequality, and capital gains, particularly those due to appreciation in equity markets. The subsequent impact of these capital gains on financial savings in other forms is also investigated. Two of the possible explanations--the receipt of inheritances and the uneven savings generated by the simultaneous rise in income inequality--were rejected as likely to be quantitatively unimportant. The principal culprit lies instead in the third reason: the uneven receipt both within and across income classes of capital gains, particularly those due to sharp price appreciation in equity markets. Capital gains in stocks then induced households to reduce their financial savings in other assets and therefore may have contributed to the recent secular decline in household savings. Throughout, this research relies on two longitudinal surveys that have pioneered the incorporation of household wealth modules into multipurpose social science surveys: the Panel Study of Income Dyunamics (PSID) and the Health and Retirement Survey (HRS).

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File URL: http://128.118.178.162/eps/mac/papers/0402/0402012.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0402012.

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Length: 41 pages
Date of creation: 04 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0402012

Note: Type of Document - pdf; prepared on Win98; to print on Xwrox DocuPrint N2125 PS; pages: 41; figures: Figures contained within the document
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Web page: http://128.118.178.162

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Keywords: wealth inequality;

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References

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  1. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  2. F. Thomas Juster & James P. Smith & Frank Stafford, 2004. "The Measurement and Structure of Household Wealth," Labor and Demography 0402009, EconWPA.
  3. Joseph Lupton & James P. Smith, 1999. "Marriage, Assets, and Savings," Working Papers 99-12, RAND Corporation Publications Department.
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Cited by:
  1. Ann Huff Stevens, 2008. "Retirement Wealth Across Cohorts: The Role of Earnings Inequality and Pension Changes," Working Papers wp186, University of Michigan, Michigan Retirement Research Center.
  2. Banks, J & Blundell, R & Smith, JP, 2000. "Wealth inequality in the United Statesand Great Britain," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  3. Anna Fräßdorf & Markus Grabka & Johannes Schwarze, 2011. "The impact of household capital income on income inequality—a factor decomposition analysis for the UK, Germany and the USA," Journal of Economic Inequality, Springer, vol. 9(1), pages 35-56, March.
  4. James P. Smith, 2004. "Unravelling the SES health connection," IFS Working Papers W04/02, Institute for Fiscal Studies.
  5. Michael D. Hurd & James P. Smith, 1999. "Anticipated and Actual Bequests," NBER Working Papers 7380, National Bureau of Economic Research, Inc.
  6. James P. Smith, 2003. "Consequences and Predictors of New Health Events," NBER Working Papers 10063, National Bureau of Economic Research, Inc.
  7. Michael Hurd & James P. Smith, 2003. "Expected Bequests and Their Distribution," Working Papers 03-10, RAND Corporation Publications Department.

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