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Wealth inequality in the United States and Great Britain

Author

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  • James Banks

    () (Institute for Fiscal Studies and University of Manchester)

  • Richard Blundell

    () (Institute for Fiscal Studies and IFS and UCL)

  • James Smith

    () (Institute for Fiscal Studies and RAND)

Abstract

In this paper we describe the household wealth distribution in the US and UK, and compare both wealth inequality and the form in which wealth is held. Unconditionally, there are large differences in financial wealth between the two countries at the top fifth of the wealth distribution. And even after controlling for age and income differences between the two countries, we show that the median US household accumulates more financial wealth than their UK counterpart. We explore a number of alternative reasons for these differences and reject some explanations as implausible. These include differential receipt of financial inheritances or desired bequests, and differential average rates of return to corporate equity or housing. While less certain, we also argue that the differences that are concentrated among the older well-to-do are not likely due to differences in income or employment risks, savings for college expenses, or changes in permanent income. Some of the observed differences are due to what we refer to as "initial conditions", in particular previously high rates of corporate equity ownership in the US and housing ownership among young British households. But since these differences existed even in the early 1980s, initial conditions only provide a partial explanation. One further possibility may be that due to forced and voluntary annuitization of retirement incomes, older British households face considerably less longevity risk. Looking more widely, however, we find wealth held in different forms across the two countries, in particular in housing, which to some extent offsets the differences we observe in financial wealth patterns. We therefore point out that it is important that comparative studies compare genuine economic phenomena (such as the ability to smooth consumption) rather than particular economic measurements (such as the level of wealth in any one particular form). We also argue that it is crucial that comparative exercises of this form acknowledge the importance of institutional differences across countries, and in this particular comparison the role of housing markets, annuity markets and stock markets appear crucial and all merit further more detailed research. On balance, we are encouraged by the degree to which a detailed investigation can point to potential explanations of observed wealth differences between the two countries, and such an investigation will also lead to a deeper understanding of the household wealth accumulation process more generally.

Suggested Citation

  • James Banks & Richard Blundell & James Smith, 2000. "Wealth inequality in the United States and Great Britain," IFS Working Papers W00/20, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:00/20
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    File URL: http://www.ifs.org.uk/wps/wp0020.pdf
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    References listed on IDEAS

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    1. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain the Rising Return to College for Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 705-746.
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    Cited by:

    1. James Banks & Richard Blundell & James P. Smith, 2002. "Wealth Portfolios in the UK and the US," NBER Working Papers 9128, National Bureau of Economic Research, Inc.
    2. Orazio Attanasio & Carl Emmerson, 2001. "Differential mortality in the UK," IFS Working Papers W01/16, Institute for Fiscal Studies.
    3. James Banks & Richard Blundell & Zoë Oldfield & James P. Smith, 2010. "Housing Price Volatility and Downsizing in Later Life," NBER Chapters,in: Research Findings in the Economics of Aging, pages 337-379 National Bureau of Economic Research, Inc.
    4. Cagetti, Marco & De Nardi, Mariacristina, 2008. "Wealth Inequality: Data And Models," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 285-313, September.
    5. Jappelli Tullio & Pagano Marco & Di Maggio Marco, 2013. "Households' indebtedness and financial fragility," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 23-46, January.
    6. Francis, Johanna L., 2009. "Wealth and the capitalist spirit," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 394-408, September.
    7. Frank A Cowell & Eleni Karagiannaki & Abigail McKnight, 2012. "Mapping and measuring the distribution of household wealth: A cross-country analysis," CASE Papers case165, Centre for Analysis of Social Exclusion, LSE.
    8. Cho, Sang-Wook (Stanley) & Francis, Johanna L., 2011. "Tax treatment of owner occupied housing and wealth inequality," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 42-60, March.
    9. Jerry Green & Laurence J. Kotlikoff, 2006. "On the General Relativity of Fiscal Language," Boston University - Department of Economics - Working Papers Series WP2006-036, Boston University - Department of Economics.

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