Roosevelt Institute | Cornell University

Wealth Inequality Surpasses Income Equality Considerably

By Abigail HillerPublished November 9, 2014

Inequality is a hot-topic of today, and is only going to become hotter if continues to increase dramatically. Inequality persists in both income and wealth. Income is the flow that accrues to the stock of wealth. Recent research has explored just how greaty wealth inequality exceeds income inequality.
By Abby Hiller, 11/9/14

What are the different kinds of inequality?

"It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."

These are the words of Federal Reserve Chair Janet Yellen at a speech last week on inequality. They speak to the popularity and pervasiveness of inequality today in America. Income inequality measures the disparity in earnings between all Americans, while wealth inequality measures differences in assets, such as homes, investments, and automobiles. While the two are similar in implication, wealth inequality is in fact much greater in severity than income inequality.

How do they differ?

Research Director and Economist Christopher Waller and Senior Research Associate Lowell Ricketts calculated the ratio of the median income of the top ten percent to that the bottom ten percent, yielding a ratio of 21. When the same operation was performed on wealth inequality, dividing the median net worth of the top ten percent by that of the bottom ten yields a ratio of 385.

In looking at wealth inequality, it is useful to not only use the income distribution but also the net worth distribution. When this is done, the difference between income inequality and wealth inequality was even more dramatic. In this measure, the bottom 30 percent of the wealth distribution was used, since the median net worth of the bottom 20 percent is negative, due to their debt. The ratio of the median net worth of the top ten percent to the median net worth of the bottom 20 percent is 2,714.

This extreme wealth inequality is the greatest it has been since 1929, when the country faced the Great Depression. Many economist accredit the return of wealth inequality exclusively to gains to the top 0.1 percent. This group is made up of about 160,000 individuals, with net assets exceeding $20 million in 2012. Total household wealth possessed by this group has increased from 7 percent in 1979 to 22 percent in 2012.

Why do they differ?

This discrepancy is largely due to the compounding-nature of wealth. Even when one starts out with a minimal wealth advantage, due to compounding it will build on itself and grow to exceed that of individuals with less by relatively more and more. This is cited as a reason for why the "super-rich" are getting ahead by bounds and leaps, and the "rich" are not.

Job positions such as lawyers and doctors have to spend relatively more of their income to sustain their lifestyle than a position such as hedge fund manager or Fortune 500 CEO. These more middle-class individuals are shown to spend a higher percentage of their income on things such as transportation, utilities, healthcare, and food. This is likely due to the fact that their actual spending in these departments is similar to upper-class members, but since their income is lower, it makes up a higher proportion of their income.

In their work on wealth inequality, Emmanuel Saez and Gabriel Zucman of the National Bureau of Economic Research discuss how middle and low income workers do not bring in enough money to live, let alone save. Thus, they are burdened by debt. The opposite is true for the rich, who bring in more than enough to live, and thus have extra money to save.This creates what they call a "self-perpetuating cycle of wealth on the top and debt on the bottom."

This vicious cycle needs to be interfered with and stopped through the use of policy. Acknowledging the broad difference between wealth inequality and income inequality is important, as policies aimed at lessening inequality must take this discrepancy into consideration.