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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).

Suggested Citation

  • James P. Smith, 2004. "Why is Wealth Inequality Rising?," Macroeconomics 0402012, EconWPA.
  • 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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    File URL: http://econwpa.repec.org/eps/mac/papers/0402/0402012.pdf
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    References listed on IDEAS

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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. Lupton, J. & Smith, J.P., 1999. "Marriage, Assets, and Savings," Papers 99-12, RAND - Labor and Population Program.
    3. 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.
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    Citations

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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. 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.
    3. Michael D. Hurd & James P. Smith, 2001. "Anticipated and Actual Bequests," NBER Chapters,in: Themes in the Economics of Aging, pages 357-392 National Bureau of Economic Research, Inc.
    4. 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.
    5. Michael Hurd & James P. Smith, 2002. "Expected Bequests and Their Distribution," NBER Working Papers 9142, National Bureau of Economic Research, Inc.
    6. James Smith, 2005. "Consequences and Predictors of New Health Events," NBER Chapters,in: Analyses in the Economics of Aging, pages 213-240 National Bureau of Economic Research, Inc.
    7. James Smith, 2004. "Unravelling the SES health connection," IFS Working Papers W04/02, Institute for Fiscal Studies.
    8. Michael Hurd & James P. Smith, 2002. "Expected Bequests and Their Distribution," NBER Working Papers 9142, National Bureau of Economic Research, Inc.
    9. Amaral, Pedro S., 2017. "Monetary Policy and Inequality," Economic Commentary, Federal Reserve Bank of Cleveland, issue January.

    More about this item

    Keywords

    wealth inequality;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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