Income and wealth inequality

Question 1

Who are the three important groups when discussion both income and wealth inequality?

Answer 1

Different important groups in the income distribution:

Top 10% - the top 10 richest
50-90% - middle class
0-50% - the bottom 50

Question 2

How has income inequality developed over time?

Answer 2

The income of all 3 groups grew at the same rate from WW2 until 1971.

After 1971 they diverged and income inequality grew
- The bottom 50: Flat line. No income growth for half of the population.
- 50-90%: Little income grow (but not at the same rate as the economy grew in this period)
- Top 10%: Huge income grow

Question 3

Which is biggest: income or wealth inequality?

Answer 3

Wealth inequality

Question 4

How has wealth inequality developed over time?

Answer 4

The wealth of all 3 groups grew the same until 2007 → then big divergence

After 2007 the bottom 50% fell way behind the two other groups.
- Only 1-2% of the US’ total wealth is owned by this group.

Question: How can the bottom 50% experience growth in wealth until 2007 when the right graph shows that they have had no income growth since 1971?
–> Either the assets they had grew in value or they started saving more?

Question 5

What determines household wealth in a given year? (equation)

Answer 5

Wealth/assets next year=Todays net assets + the returns on existing assets + new savings/investments

Question 6

Why is there so much inequality in wealth?

Answer 6

Because there are systematic differences in the asset portfolios of different groups of people

Question 7

Which assets and debts do the different groups from the income distribution primarily have?

Answer 7

Rich people:
- Assets: Stocks, bonds, houses
- Debt: None

Middle class:
- Assets: Houses (the houses they live in), some money in the bank
- Debt: Yes, but less than the bottom 50. Mainly housing debt

Bottom 50:
- Assets: Some have houses, cars, deposits, money in the bank for emergencies
- Debt: A lot

Question 8

Why does it create inequality that people have different asset portfolios?

Answer 8

Because the return on these assets can systematically differ.

So returns of different types of assets will be a driver of wealth inequality:

Example:
- If the housing market is doing better than the stock market, then wealth inequality will fall (because that mainly helps the middle class in terms of relative wealth - because housing is often their main asset).
- But if the stock market is doing better than the housing market, then wealth inequality will rise, because the main asset of mainstream America won’t be helped by this whereas the top 10% will (the case in the US after 2008)

Question 9

What are the theoretical views behind why different groups have different asset portfolios?

Answer 9

View 1: Risk is a function of wealth: rich people take more risk, because they can afford to (therefore they have more stocks, bonds etc.)

View 2: Liquidity need is a function of wealth
–> poor people need more liquidity than rich. Why?
- It is harder to lend money for the poor
- You have a higher risk of losing your job as poor

• In this view poor people have lower returns on wealth, because they have to/it is rational –> they need to hold safe assets.