From Income to Wealth Inequality: Trickle-Down vs. Capital Gains (Banque de France)

Summary

• By 2020, general-equilibrium price changes caused by rising U.S. earnings inequality alone raised the average wealth of the top 0.1% by 25%.p.2
• The price changes resulting from higher earnings inequality raised average wealth for the top 1% by 18% and for all households by 8%.p.2
• Under perfect competition with no market power, the same price changes would have lowered wealth by 4–5% for households above the median and by 9% for the bottom half.p.2
• Price adjustments explain about a quarter of the observed rise in the share of wealth held by the top 1%.p.2
• Rising earnings inequality accounts for two fifths of the total rise in household wealth relative to national income and a quarter of the rise in stock-market values relative to physical capital.p.2

Key insights

1. In a U.S. model calibration, price effects raised the average wealth of the top 0.1% by 9% over 1970-2020, and overall average wealth by 0.2%.p.1
2. Under imperfect competition, extra saving by high earners bids up existing asset prices, generating capital gains that accrue primarily to the wealthiest households.p.2
3. Under perfect competition, increased saving finances new capital, causing interest rates to fall and wages to rise, which narrows wealth gaps.p.4
4. In a two-agent steady-state setup, general-equilibrium price changes dampen wealth inequality because the wealth of the rich is more sensitive to interest rate changes than the wealth of the poor.p.5
5. The general-equilibrium price channel accounts for about a quarter of the observed rise in the top 1% wealth share and a fifth of the rise in the top 0.1% wealth share.p.6
6. Following a one-time unexpected inequality shock, the general-equilibrium price effect on the top 0.1% wealth level remains positive for eight decades.p.30