We live in unequal times. The causes and consequences of widening disparities in income and wealth have become a defining debate of our age. Researchers have made major inroads into documenting trends in either income or wealth inequality in the United States, but we still know little about how the two evolve together — an important question to understand the causes of wealth inequality.
Research: How the Financial Crisis Drastically Increased Wealth Inequality in the U.S.
Wealth inequality depends on a race between stocks and housing.
September 13, 2018
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Summary.
Although income inequality has been on the rise for decades, wealth inequality hadn’t changed much until more recently. Why not? Our research demonstrates that wealthier and less-wealthy people own different types of assets: the middle class has a higher share of its wealth in housing, whereas the rich own more stock. An important consequence of this finding is that housing booms lead to wealth gains for leveraged middle-class households and tend to decrease wealth inequality. Stock market booms primarily boost the wealth at the top of the wealth distribution where portfolios are dominated by listed and unlisted business equity, thereby, increasing wealth inequality. Before the financial crisis, housing prices were increasing enough that wealth inequality in America didn’t increase. When house prices collapsed in 2008, the value of middle-class households’ portfolios dropped substantially, while the quick rebound in stock markets boosted wealth at the top. Due to their heavy investment in equities, the top 10% wealthiest households were the main beneficiary from the stock market boom while being at the same time relatively less affected by the drop in residential real estate prices. The consequence of substantial wealth losses at the bottom and in the middle of the distribution coupled with wealth gains at the top produced the largest spike in wealth inequality in postwar American history.