Wealth-income Ratio Research Articles

Globalization and Wage Polarization

In the 1980s and 1990s, the US labour market experiences a remarkable polarization along with fast technological catch-up, as Europe and Japan improve their global innovation performance. Is foreign technological convergence an important source of wage polarization? To answer this question, we build a multi-country Schumpeterian growth model with heterogeneous workers, endogenous skill formation and occupational choice. We show that convergence produces polarization through business stealing and increasing competition in global innovation races. Quantitative analysis shows that these channels can be important sources of US polarization. Moreover, the model delivers predictions on the US wealth-income ratio consistent with empirical evidence.

The National Wealth–Income Ratio in Greece, 1974–2013

Can the rise of wealth–income ratios observed in rich economies be found in the case of Greece as well? This paper uses a generalization of a two‐good wealth accumulation equation to estimate the evolution of the national wealth–income ratio, and finds that, similarly to the European evidence, the ratio rises from about 280 percent in the 1970s to about 500 percent on the eve of the current financial crisis. On average, during 1974–96, the saving‐induced wealth growth cancels out the capital losses, whereas in the subsequent decade, 1997–2007, the balance changes considerably when the saving effect vanishes and the prolonged capital gains result in a rising wealth–income ratio. During the recession, income falls faster than wealth. The results remain robust to several alterations of the benchmark framework.

Personal Savings from Top Incomes and Household Wealth Accumulation in the United States

:This article explores the determinants and distribution of household wealth. Looking at U.S. data since 1980, it finds convincing evidence that top incomes were saved at high rates and contributed to the steady increase in the household wealth–income ratio. First, I rule out counterclaims regarding the role of housing and real estate prices finding little evidence of their influence on the trends and magnitudes of household net worth relative to disposable income. With savings as the remaining explanation, I present an accounting decomposition formula that captures savings rates for any reference group using the dynamics of intergroup accumulation rates. This methodology is applied to data from national accounts, balance sheets, and income distribution statistics in order to compute saving rates for the top 1 percent of households in the U.S. income distribution. The estimates also support the idea that top income earners have outsaved other households, thereby capturing an increasing share of wealth.

The Consumption and Wealth Effects of an Unanticipated Change in Lifetime Resources

In 2000, Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of €20,000–30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees. This paper was accepted by Amit Seru, finance.

Capital stocks and capital services: Integrated and consistent estimates for the United Kingdom, 1950–2013

The evolution of capital services is crucial for understanding labour productivity growth. Capital stocks and the wealth–income ratio are important for understanding welfare and inequality. Accordingly, we present annual estimates of fixed capital services and capital stocks for the United Kingdom, 1950–2013, for the whole economy and for the market sector. Our estimates cover nine asset types including R&D. We compare estimates of capital services based on an endogenous (ex post) rate of return with ones based on a hybrid method which allows for ex ante risk: firms' expectations may not be satisfied. Contrary to expectation, we find that capital intensity (capital services per hour worked) rose during the Great Recession even though labour productivity fell. And the wealth–income ratio is now substantially lower than it was in the early 1980s unless dwellings are included in the total.

Inequality and Mobility using Income, Consumption, and Wealth for the Same Individuals.

Recent studies of economic inequality almost always separately examine income inequality, consumption inequality, and wealth inequality, and hence, these studies miss the important synergy between the three measures explicit in the life-cycle budget constraint. Using the Panel Study of Income Dynamics (PSID), we study inequality in three dimensions, focusing on the conjoint distributions of income, consumption, and wealth for the same individuals. We find that the trends in inequality in income, consumption, and wealth similarly increase between 1999 and 2013. We examine the pairwise distributions of our measures using the average propensity to consume and the wealth-income ratios. Using the longitudinal nature of the PSID, we follow people over this period and find mobility is similar using income, consumption and wealth. We conclude that while all three types of inequality are rising, wealth increasingly acts as a buffer to cushion income changes, which could reduce mobility - both intra- and inter-generational mobility.

Household finance over the life-cycle: What does education contribute?

This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life-cycle model is constructed to understand a rich set of facts about decisions of households with different levels of educational attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and the wealth–income ratio. Model parameters, including preferences, the costs of stock market participation and portfolio adjustment, are estimated to match financial decisions by different education groups. Based on the estimated model, education affects household finance mainly through increased average income. The estimation also finds evidence that higher educational attainment is associated with a lower stock market entry cost and a larger discount factor. Education specific differences in income risks, medical expenses, mortality risks and the life-cycle pattern of income explain relatively little of the observed differences in household financial choices.

The Consumption and Wealth Effects of an Unanticipated Change in Lifetime Resources

In 2000 Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of €20,000-30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees.

Wealth-Income Ratios in a Small, Late-Industrializing, Welfare-State Economy: Sweden, 1810-2014

This paper uses new data on Swedish wealth-income ratios over two hundred years in order to answer the question: Do the findings of Piketty and Zucman (2014) for very rich and large Western economies extend to small countries that were historically backward and that developed a different set of political and economic institutions during the twentieth century? The findings show on both similarities and differences. In the pre-industrial era up to the First World War, Sweden looks completely different than the rest of Europe, having wealth-income ratios that were about half of those in France and Britain. Over the twentieth century, aggregate trends and levels are much more similar, but the structure of national wealth differs. In Sweden, government wealth grew much faster and became more important than elsewhere and this also holds true for the public pension system, which suggests an explicit role of historical economic and political institutions for the long-run evolution of wealth-income ratios.

The Consumption and Wealth Effects of an Unanticipated Change in Lifetime Resources

In 2000 Italy replaced its traditional system of severance pay for public employees with a new system. Under the old regime, severance pay was proportional to the final salary before retirement; under the new regime it is proportional to lifetime earnings. This reform entails substantial losses for future generations of public employees, in the range of €20,000-30,000, depending on seniority. Using a difference-in-difference framework, we estimate the impact of this unanticipated change in lifetime resources, on the current consumption and wealth accumulation of employees affected by the reform. In line with theoretical simulations, we find that each euro reduction in severance pay reduces the average propensity to consume by 3 cents and increases the wealth-income ratio by 0.32. The response is stronger for younger workers and for households where both spouses are public sector employees.

Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010 *

AbstractHow do aggregate wealth-to-income ratios evolve in the long run and why? We address this question using 1970–2010 national balance sheets recently compiled in the top eight developed economies. For the United States, United Kingdom, Germany, and France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise` of wealth-income ratios in recent decades, from about 200–300% in 1970 to 400–600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries (600–700%). This can be explained by a long-run asset price recovery (itself driven by changes in capital policies since the world wars) and by the slowdown of productivity and population growth, in line with the β=sg Harrod-Domar-Solow formula. That is, for a given net saving rate s = 10%, the long-run wealth-income ratio β is about 300% if g = 3% and 600% if g = 1.5%. Our results have implications for capital taxation and regulation and shed new light on the changing nature of wealth, the shape of the production function, and the rise of capital shares.

Top Incomes and the Great Recession: Recent Evolutions and Policy Implications

This paper presents new findings from the World Top Incomes Database and discusses some of their policy implications. In particular, the paper provides updated top income series for the United States—including new estimates through 2010, showing a strong rebound of the top 1 percent income share, following the 2008–09 sharp fall. It also presents updated income series for other developed countries (including the United Kingdom, France, Germany, and Japan) and new series on wealth-income ratios. In light of this extended set of country series, the paper analyzes the relative importance of market and institutional forces in explaining observed cross-country trends, and the likely impact of the Great recession on these long-term evolutions. It discusses the policy implications of the findings, both in terms of optimal tax policy and regarding the interplay between inequality and macroeconomic fragility.

Labor income dynamics at business-cycle frequencies: Implications for portfolio choice

Young agents with low wealth-income ratios counter factually hold more stock than young, rich agents and old agents using the standard portfolio choice model with i.i.d. stock returns and labor income. This paper matches the countercyclical volatility and procyclical mean of U.S. labor income and finds that, consistent with U.S. data, young, poor agents now hold less stock than both young, rich agents and old agents, and no stock a large fraction of the time. Our results suggest that the predictability of labor income growth at a business-cycle frequency, particularly the countercyclical variation in volatility, plays an important role in a young agent's decision making about her portfolio's stock holding.

Retirement and Saving

The UK is regarded as having too low a level of savings, both to maintain the capital stock and to provide an adequate level of income in retirement without an increase in taxation. Pomerantz and Weale (2005) have a discussion of the savings shortfall that focuses on the maintenance of the wealth-income ratio, whilst Khoman and Weale (2006) and Turner (2006) investigate life cycle saving and the savings shortfall in relation to pensions. Economists are careful in the use of the term 'too little' in relation to the outcomes of the decisions of optimising agents, and if we think there is a market failure, we have to describe that failure. Agents who are saving for retirement have to make decisions on the date at which they retire, the level of savings during their working lives and the level of consumption they will undertake when retired as well as whilst working. They may save too little because of misperceptions about their life expectancy or about the provision of publicly funded goods or money, such as health services and retirement pensions.

Retirement and Saving

The UK is regarded as having too low a level of savings, both to maintain the capital stock and to provide an adequate level of income in retirement without an increase in taxation. Pomerantz and Weale (2005) have a discussion of the savings shortfall that focuses on the maintenance of the wealth-income ratio, whilst Khoman and Weale (2006) and Turner (2006) investigate life cycle saving and the savings shortfall in relation to pensions. Economists are careful in the use of the term 'too little' in relation to the outcomes of the decisions of optimising agents, and if we think there is a market failure, we have to describe that failure. Agents who are saving for retirement have to make decisions on the date at which they retire, the level of savings during their working lives and the level of consumption they will undertake when retired as well as whilst working. They may save too little because of misperceptions about their life expectancy or about the provision of publicly funded goods or money, such as health services and retirement pensions.

Labor Income Dynamics at Business-Cycle Frequencies: Implications for Portfolio Choice

A large recent literature has focused on multiperiod portfolio choice with labor income, and while the models are elaborate along several dimensions, they all assume that the joint distribution of shocks to labor income and asset returns is i.i.d.. Calibrating this joint distribution to U.S. data, these papers obtain three results not found empirically for U.S. households: young agents choose a higher stock allocation than old agents; young agents choose a higher stock allocation when poor than when rich; and, young agents always hold some stock. This paper asks whether allowing the conditional joint distribution to depend on the business cycle can allow the model to generate equity holdings that better match those of U.S. households, while keeping the unconditional distribution the same as in the data. Calibrating the business-cycle variation in the first two moments of labor income growth to U.S. data leads to large reductions in stock holdings by young agents with low wealth-income ratios. The reductions are so large that young, poor agents now hold less stock than both young, rich agents and old agents, and also hold no stock a large fraction of the time. Our results suggest that the predictability of labor-income growth at a business-cycle frequency plays an important role in a young agent s decision-making about her portfolio s stock holding.

Entrepreneurship and Household Saving

Abstract Using data from the 1983 and 1989 Federal Reserve Board Surveys of Consumer Finances, we quantify three findings about entrepreneurial saving decisions and their role in household wealth accumulation. First, entrepreneurial households own a substantial share of household wealth and income, and this share increases throughout the wealth distribution and the income distribution. Second, the portfolios of entrepreneurial households, even wealthy ones, are very undiversified, with the bulk of assets held within active businesses. Third, wealth-income ratios and saving rates are higher for entrepreneurial households even after controlling for age and other demographic variables. Taken together, these findings suggest that studies of household saving decisions in general and of the savings decisions of wealthy or high-income households in particular have paid insufficient attention to the role of entrepreneurial decisions and their role in wealth accumulation.

The Life Cycle in Economic History

The life cycles of income and wealth form important traces of the economic history of households. Comparisons of cross-sectional estimates of the age-wealth profiles from 1774 to 1962 reveal little change in the basic pattern although crosssectional age-income or earnings profiles peak later in modern periods because of the increased investment in human capital.The wealth-income ratio appears to be declining. Multivariate regressions for Utah households show wealth-income patterns consistent with a life cycle model based on smoothing of consumption with little interaction between age and other determinants of economic position. Foreign birth has a positive effect on income while reducing wealth.

A model of social security and retirement decisions

Abstract : The paper analyzes the potential inducement to retire earlier and the effects on lifetime savings in the presence of social security. The framework is a model of intertemporal utility maximization by individuals with endogenous retirement age. Aggregate behavior is examined against two alternative hypotheses. First, payments to and benefits from social security are equal for each generation. Second, a system based on a 'pay-as-you-go' principle which allows for intergenerational transfers. Among the issues analyzed: the possibility of multiple equilibria; the effects on the optimum retirement age and on the optimum wealth-income ratio at retirement of changes in the 'replacement ratio' and the effects of changes in the population long-run growth rate on implied tax-rates. (Author)

The effect of population growth on wealth and saving in the Modigliani-Brumberg life cycle model

The effect of a change in the rate of population growth on the aggregate savings-income ratio and on the aggregate wealth-income ratio is evaluated in a life cycle model of capital accumulation and growth. It is shown that the former will increase and the latter will decrease when the rate of population growth increases.