European and American households have seen their wealth grow by roughly similar degrees over the last 50 years, but in the US, the gap between the rich and the poor has become much more pronounced
Wealth inequality is a hugely important issue for governments and policymakers, but the current evidence makes long-term country comparisons difficult, and doesn’t help us to clearly understand the reasons behind differences in wealth inequality trajectories.
To address this lack of knowledge, and together with Thomas Blanchet from the Paris School of Economics, we have gathered all the necessary data to build the first Distributional Wealth Accounts for Europe. This enables a comparison of wealth inequality between Europe and the United States over the last five decades. Our project forms part of a bigger international drive by the World Inequality Lab to provide more comprehensive public information about wealth and income inequality across the world.
Having built the database, we started our research analysing the evolution of aggregate wealth by calculating the ratio of each country’s household net wealth (assets minus liabilities) to national income. This ratio indicates whether individual countries in Europe and the US are becoming richer or poorer.
We then drilled down to the individual level and measured how wealth among the richest one per cent of the population changed in each of these countries over the same period.
Finally, we explored the differences in wealth inequality trajectories between Europe and the US by focusing on three key drivers of wealth accumulation: differences in savings, wages, and capital gains (of which the profit from property sales forms a key part).
Europe has experienced (slightly) faster growth in aggregate wealth than the US
We found the evolution of aggregate household wealth (relative to income) was similar in Europe and the US, steadily increasing from three times national income in 1970 to five times national income in the US and six times national income in Europe in 2018. The wealth to income ratio was slightly higher in Europe than in the US in recent years, mainly due to a bigger decline in house prices in the US during the global financial crisis. Individual European countries wealth inequality trajectories had hugely varied.
The evolution of wealth among the wealthiest one percent of the population tells a different story
However, when we analysed the evolution of the top one percent wealth share in each of these regions, we found that, while Europe experienced moderate growth, the growth in the US was significantly higher. In other words, the gap between rich and poor in the US became much more pronounced. This was true whether compared to the European average or any single European country.
How can we explain these differences? To answer this question, we broke wealth down into three key drivers: differences in saving rates (i.e. the ability of individuals to save some of their income), wages, and capital gains rates (i.e. the changes in the value of assets) across wealth groups.
Do these drivers account for the difference in wealth inequality between Europe and the US?
To examine the drivers, we ran simulations that substituted the labour income inequality and asset price trajectories from France into the US figures. When we did this, we found the US wealth concentration levels were lower as a result of the smaller rise in labour income inequality and the larger rise in house prices relative to financial assets in Europe – this benefits middle income individuals more as they have a larger share of housing in their portfolio. The results were similar when we substituted the same figures from other European countries into the US data.
Our research leads us to make two key calls to action for policymakers:
1. Job market policies are crucial to reducing wealth inequality
We have shown labour income inequality has been a huge factor in the growing gap between rich and poor in the US. Controlling unemployment and designing policies aimed at boosting wages at the lower end of the market must be a priority if wealth inequality is to be reduced.
2. Central banks must play a key role in stabilising house prices
Since housing is an asset that has a disproportionate impact on middle income individuals, it is important prices are stabilised to prevent financial crises.
We hope the new Distribution Wealth Accounts for Europe database will be used by other researchers to build on this work and that it will be also helpful to inform the public debate, providing data that hasn’t previously been available. We plan to regularly update the database, so that we retain the most up-to-date information about the state of wealth inequality in Europe and the US.
This article draws on findings from "Wealth Inequality Dynamics in Europe and the United States: Understanding the Determinants" by Thomas Blanchet (Paris School of Economics) and Clara Martínez-Toledano (Imperial College London).