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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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Keywords: wealth inequality;

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References

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  1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
  2. Juster, F. Thomas & Smith, James P. & Stafford, Frank, 1999. "The measurement and structure of household wealth," Labour Economics, Elsevier, vol. 6(2), pages 253-275, June.
  3. Lupton, J. & Smith, J.P., 1999. "Marriage, Assets, and Savings," Papers 99-12, RAND - Labor and Population Program.
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Cited by:
  1. James P. Smith, 2005. "Unraveling the SES-Health Connection," Labor and Demography 0505018, EconWPA.
  2. Michael D. Hurd & James P. Smith, 1999. "Anticipated and Actual Bequests," NBER Working Papers 7380, National Bureau of Economic Research, Inc.
  3. James P. Smith, 2003. "Consequences and Predictors of New Health Events," NBER Working Papers 10063, National Bureau of Economic Research, Inc.
  4. Fräßdorf, Anna & Grabka, Markus M. & Schwarze, Johannes, 2011. "The Impact of Household Capital Income on Income Inequality - A Factor Decomposition Analysis for the UK, Germany and the USA," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 35-56.
  5. Michael Hurd & James P. Smith, 2003. "Expected Bequests and Their Distribution," Working Papers 03-10, RAND Corporation Publications Department.
  6. James Banks & Richard Blundell & James P. Smith, 2000. "Wealth inequality in the United States and Great Britain," IFS Working Papers W00/20, Institute for Fiscal Studies.
  7. 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.

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