Wealth inequality was recently identified as a major risk facing the world in 2023 by the World Economic Forum. Research from Imperial College London suggests that wealth inequality has increased faster in the United States than it has in Europe.
The researchers believe this is primarily an impact of the significant rise in stock market prices, but they nonetheless believe that addressing the gap will require policy interventions to increase wages at the lower end.
Measuring inequality
The researchers built a database of wealth distribution for most European countries using new economic data. This allowed them to compare changes in total household wealth and wealth inequality in Europe and the United States from the 1970s to the present day, and identify the reasons behind these changes.
They found that while both regions experienced similar growth in overall household wealth, the distribution of wealth has diverged since the 1980s.
“From the 1980s we see a wealth gap start to emerge, where there’s a more dramatic change in the United States,” they explain. “The wealth that the top one percent richest people own in the States has undergone a significantly larger increase than the top one percent richest in Europe – in other words, the gap between rich and poor in the US became much more pronounced as wealthy Americans became even richer.”
Stock market growth
The researchers sought to understand the cause of the wealth gap by analyzing three factors: saving rates, wages, and capital gains rates. They found that while both regions saw significant increases in house and financial asset prices, stock market growth in the US was much greater than in Europe.
“Differences in the composition of these assets across wealth groups is key. The richest people tend to own financial assets such as stocks and bonds, while the middle wealth groups tend to have a house as their major asset,” the researchers explain. “But even with a big growth in house prices in both regions, stock market prices were the standout distinguishing factor, with a huge jump in value of US stocks during those decades.“
The wealth gap between the rich and poor in the US can also be attributed to income inequality among workers, with a greater contrast in pay between the lowest and highest paid in the US compared to European countries.
The researchers found that substituting labor income inequality and asset price data from France into US figures resulted in lower wealth concentration levels due to smaller rises in labor income inequality and larger rises in house prices compared to financial assets in Europe.
Closing the gap
They suggest that US policymakers should focus on job market policies to increase wages for low-income workers and for central banks to play a role in stabilizing house prices to reduce wealth inequality.
“Less equal societies have less stable economies. High levels of economic inequality can lead to economic and political instability,” they explain. “This is why action needs to be taken before societies become polarised.”
The Distribution Wealth Accounts for Europe database is now available on wid.world for other researchers to access and use. The researchers plan to regularly update the database to stay informed about wealth inequality in Europe and the US.
This project is part of a larger effort by the World Inequality Lab to increase access to information about wealth and income inequality worldwide.
