The Great Divergence: Intergenerational Wealth Inequality in the U.S. and France

Abstract

This paper studies the evolution of intergenerational wealth inequality in the U.S. and France since 1950 and 1970, respectively. We provide a set of new stylized facts on the distribution of wealth across age groups that shows a stark divergence between old and young adults since the 1980s, most strongly in the U.S. This divergence is observed when using both absolute and relative inequality measures. Using microdata for the U.S., we explore the reasons for this divergence by decomposing wealth accumulation into three components: saving, capital gains, and inheritances. While saving was the single most important component of wealth accumulation for cohorts born at the beginning of the 20th century, capital gains have started to play a much more prominent role for more recent generations. Our findings indicate that capital gains are the main driver of the rise in absolute wealth differences, but saving is the primary driver of relative inequality. The fact that capital gains do not play a significant role in explaining relative wealth differences is because `young adults’ have increased their leverage dramatically over the last decades, making them more exposed to rising housing and equity prices, two assets that have accumulated substantial positive gains since the early 1980s. Moreover, we find that inheritances have played a relatively minor role in the wealth accumulation of different cohorts, but their importance has increased over time.