Wealth Inequality May Be a Bigger Problem in the U.S. Than Income Inequality

Tuesday, July 29, 2014

U.S. income inequality has been a focal point of public discussion and debate in recent years, with claims that it is severe and that the distribution is becoming increasingly unequal over time. However, wealth inequality is a much greater dilemma, according to a recent article from The Regional Economist, published by the Federal Reserve Bank of St. Louis.

Income Inequality

Research Director and Economist Christopher Waller and Senior Research Associate Lowell Ricketts, both with the St. Louis Fed, noted that, “Households in the top 10 percent of the income distribution have earnings so great that they raise mean income over the median for the entire population.” In 2010, the median household income was about $46,000, while the mean income was close to $78,500. They also noted that some inequality in the U.S. income distribution naturally develops between age groups and that a lot of it is determined by educational attainment.

Waller and Ricketts used a simple measure to see how income inequality in the U.S. compared to other countries around the world (which will be discussed on this blog Thursday) and how it compared to wealth inequality in the U.S. They used the ratio of the median income of the top 10 percent of the income distribution ($203,900) divided by the median income of the bottom 10 percent ($9,900). “The resulting ratio of 21 quantifies the substantial divide between the rich and the poor in the U.S.”

Wealth Inequality

Waller and Ricketts then examined U.S. wealth inequality in terms of net worth, defined as household assets less liabilities.1 In 2010, the median net worth of all households was $77,300. “Just as there was with the income statistics, there is a substantial divide between median and mean net worth. Mean net worth was $499,000, indicative of an even more top-heavy distribution than that of income.”

Using income distribution, Waller and Ricketts calculated the same ratio as used above. The median net worth of the top 10 percent of the income distribution ($1.194 million) divided by the median net worth of the bottom 10 percent ($3,100) yields a wealth inequality ratio of 385, notably higher than the ratio of 21 for income inequality.

Using net worth distribution to define the population groups changes the statistics even more dramatically, as the bottom 20 percent of the distribution has a negative median net worth. The ratio of the median for the top 10 percent ($1.9 million) divided by the median for the bottom 30 percent ($700) yields a ratio of 2,714.

Not All Wealth Inequality Is Bad

Waller and Ricketts explained that some wealth inequality is a function of age, allowing people to maintain a stable path of consumption over their life spans. Young people have little wealth and tend to be unskilled, so they borrow money for school and their first home. In middle age, they start paying down their debt and accumulating wealth while entering their peak earning years. As they get older, they start spending down the wealth they accumulated. Waller and Ricketts said, “This natural life cycle of wealth accumulation hasn't changed much, and most Americans will progress along a similar path. While the process is the same for most people, at any one point in time you're going to have relative inequality: poor, middle and rich based on age alone. While this natural inequality doesn't account for the entire wealth disparity across the population, it is important to understand that some inequality isn't inherently bad.”

Waller and Ricketts concluded, “The labor market has changed into a system that places a greater value on education than physical labor and rewards skilled workers with wage premiums. This system is characterized by substantial inequality, but it doesn’t inherently exclude anyone from climbing the income brackets. … Wealth inequality is a much greater dilemma, but it is often unaddressed in the public debate outside of tax proposals. … Financial education initiatives could use some of the energy devoted to the fierce debate surrounding income inequality in the U.S.”

Notes and References

1 Household assets include both financial (such as retirement accounts, stocks and bonds) and nonfinancial (such as cars, homes and small businesses).

Additional Resources

Posted In Financial  |  Tagged christopher wallerincome inequalitylowell rickettswealth inequality
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