"We live in unequal times. The causes and consequences of widening disparities in income and wealth are a defining debate of our age. Recent research by Thomas Piketty and his co-authors has made major inroads into documenting trends in either income or wealth inequality. But we still know little about how the two evolve together, and why wealth inequality is so much higher than income inequality.
In a paper with my co-authors, “Income and Wealth Inequality in America” (Kuhn, Schularick and Steins 2018), we exploit a unique new dataset that allows us to track the joint distributions of income and wealth in the U.S. since 1949. The dataset builds on historical waves of the Survey of Consumer Finances (SCF), conducted by the Survey Research Center at the University of Michigan from 1948 to 1977. We linked the historical survey data to the modern SCFs that the Federal Reserve redesigned in 1983.
What do we find? Most importantly, we show that rich and poor households have very different assets. Middle-class households prominently own houses, while the top-10% predominantly own shares and business equity. This gives rise to a race between the housing market and the stock market in shaping the wealth distribution. Housing booms lead to wealth gains for leveraged middle-class households and tend to decrease wealth inequality. Stock market booms primarily boost the wealth at the top of the wealth distribution. Asset price changes can therefore lead to major changes in the wealth distribution. Over extended periods in postwar American history, such portfolio valuation effects have been key drivers of shifts in the U.S. distribution of wealth.
Moreover, asset price changes can decouple trends in income and wealth inequality for long time periods. This was predominantly the case in the four decades before the financial crisis when the middle class rapidly lost ground to the top 10% with respect to income but, by and large, maintained its wealth position thanks to substantial gains in housing wealth. Incomes of the top 10% more than doubled since 1971, while the incomes of middle-class households (50th to 90th percentile) increased by less than 40%, and those of households in the bottom 50% stagnated in real terms. Our data confirm a strong trend toward growing income concentration at the top..."
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