Researchers from Imperial College London and the Paris School of Economics have looked across the pond at 50 years of data and found that America, rather than being the country of dreams, is a place where the rich get richer and the poor get poorer:
The researchers drew on new economic data from which they could build a database of the distribution of wealth for most European countries for the first time. This brought the data in line with the available US financial figures and allowed them to compare the change in both total household wealth and wealth inequality in Europe and the United States since the 1970s to the present day, as well as working out the reasons for those changes.
The researchers found that although both regions had a similar steady growth in total household wealth, the way the wealth had been distributed has been markedly different since the 1980s.
Dr Clara Martínez-Toledano, Assistant Professor in Finance at Imperial College Business School and one of the lead authors of the study said: “From the 1980s we see a wealth gap start to emerge, where there’s a more dramatic change in the United States. 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.”
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Another important factor that can explain the wealth gap between rich and poor in the US is inequality of labour income, with the US economy showing a much bigger contrast in pay between the lowest and highest paid workers than the European economies over the same time period.
To document these findings, the researchers ran simulations that substituted the labour income inequality and asset price trajectories from France into the US figures. They found the hypothetical 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. The results were similar when they substituted the same figures from other European countries into the US data.
The researchers say US policymakers should prioritise job market policies that are aimed at boosting wages at the lower end of the distribution to reduce wealth inequality. They also call on central banks to play a key role in stabilising house prices.
Dr Martínez-Toledano explained: “Less equal societies have less stable economies. High levels of economic inequality can lead to economic and political instability. This is why action needs to be taken before societies become polarised.”
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You can see the datasets at the Distribution Wealth Accounts for Europe database, and read the research here, in the Journal of Monetary Economics.