The economics of inequality

Recent research on wealth inequality

Dr. Matthias Schnetzer

November 11, 2022

Recap

• Which trend can you identify for the wage share in most European countries and why is that?
• What are Kuznets Waves?
• What does the elephant curve by Branko Milanovic show?
• What are malign and benign factors that might lead to a decrease in global inequality?

What is wealth and how do we measure it?

Definition of private wealth

Non-financial assets

• Dwellings (owner-occupied residence, other real estate)
• Consumer durables (vehicles, etc.)
• Valuables
• Intellectual property

Financial assets

• Currency and deposits
• Net equity in own unincorporated business
• Mututal funds and investment funds
• (Private) Pensions funds
• Bonds and other debt securities
• Shares and other equity
• Life insurance funds -Other financial assets

Liabilities

• Owner-occupied residence loans
• Consumer durable loans (e.g. for vehicles)
• Other investment loans (collateralized)
• Other loans (e.g. education loans)

No human, social and cultural capital; No public social security pensions (marketable vs. augmented wealth)

Source: OECD (2013)

HFCS versus National Accounts

Underreporting in HFCS in % of NA	Tangible assets	Financial wealth	Liabilities	Net wealth
Austria	-8	62	59	12
Germany	15	58	29	30
France	17	61	33	32
Spain	16	63	39	24
Italy	-5	80	60	23
Belgium	-21	42	24	6
Finland	-1	63	12	22
Netherlands	13	86	16	47

Source: Vermeulen (2016)

Why is there underreporting in HFCS?

• Target population in Austria: 3.9 million households
• Gross sample in HFCS 2017: 6,280 households
• Realized interviews: 3,072 households
• Response rate in HFCS 2017: approx. 50%
• Residual: refused interviews, invalid addresses, households not available, etc.

• Response refusal correlates with wealth and is highest at the top (Vermeulen, 2016)
• Wealthy households own a greater number of assets and miss some components more easily (Kennickell/Woodburn, 1999)

Press R

How to deal with the missing top in wealth surveys?

Upstream strategy: Oversampling

• Undercoverage and Underreporting
• Oversampling is crucial for wealth surveys
• Oversampling in HFCS 2017: 🇧🇪 🇨🇾 🇩🇪 🇪🇪 🇪🇸 🇫🇮 🇫🇷 🇬🇷 🇭🇷 🇭🇺 🇮🇪 🇱🇻 🇱🇹 🇱🇺 🇵🇱 🇵🇹 🇸🇰
• No oversampling: 🇦🇹 🇮🇹 🇲🇹 🇳🇱 🇸🇮
• How does oversampling work?
  • External personal wealth data (🇫🇷 🇪🇸)
  • List of streets with high-income people (🇩🇪 🇸🇰)
  • Income tax data (🇱🇺 20% of the sample from top 10% earners)
  • Regions with higher average income (🇵🇱)

Downstream strategy: Pareto estimation

• Pareto-Distribution is a sensible approximation to the distribution of large wealth
• Two parameters:
  • Threshold for “large” wealth \(m\)
  • Pareto-Index \(\alpha\)

\[P_i(x_i) = Pr(X_i \leqslant x_i) = 1 - \left(\frac{m_i}{x_i}\right)^{\alpha_i}\] \[\forall ~\text{implicates} ~i = 1...5 \wedge x_i \geqslant m_i\]

A smaller \(\alpha\) means greater inequality. Empirically, \(\alpha\) often is around 1.5 for wealth.

Reading recommendation: Gabaix (2016)

European Rich List Database (ERLDB) and HFCS

Cumulative density function of wealth in Germany

Adjustment of top 1% shares

Convergence of adjusted survey data and national accounts

Wealth distribution in Austria

Self-positioning in the wealth distribution

• Correct positioning of households in the richest decile: 0
• Average estimated decile in the richest decile: 6
• Average estimated decile in the poorest decile: 3

For animated version, see here

Net wealth distribution in Austria

Median: 83,000€

Average net wealth
of total population:
318,000€

Average net wealth
of top 1%:
12,500,000€

Source: Heck et al. (2020)

Alternative figure for wealth distribution

Participation in wealth components

Participation in %	Bottom half (0-50%)	Upper middle (51-80%)	Affluent (91-95%)	Top 5% (96-100%)
Vehicles	65.5	87.4	93.2	97.4
Owner-occupied residence	6.2	80.3	94.1	93.2
Other real estate	2.8	14.7	27.9	60.8
Business wealth	2.1	4.8	13.3	50.2
Deposits	99.4	99.6	99.3	100.0
Saving accounts	80.1	91.1	95.5	97.7
Mutual and investment funds	3.6	8.1	19.6	26.9
Bonds	1.2	2.8	5.0	9.7
Shares	1.9	5.8	10.1	15.0

Gender net wealth gap in Austria

	Mean wealth	Mean GWG (in €)	Mean GWG (in %)	Median Wealth	Median GWG (in €)	Median GWG (in %)
All respondents
Couples	356,553			173,683
Male	207,485	58,417	28	82,285	13,862	17
Female	149,068			68,422
Male respondent
Male	270,307	110,995	41.1	99,347	27,085	27.3
Female	159,312			72,262
Female respondent
Male	138,830	957	0.7	63,825	−1,395	-2.2
Female	137,873			65,220

Note: The respondent in HFCS is the financially most knowledgeable person who is best informed about the household’s finances.
Source: Rehm et al. (2022)

Migrant net wealth gap in Austria

	Mean wealth	Mean MWG (in €)	Mean MWG (in %)	Median Wealth	Median MWG (in €)	Median MWG (in %)
Natives	165,730			59,001
Migrants
Total	98,007	67,723	41	15,931	43,070	73
1st generation	63,001	102,729	62	9,917	49,084	83
2nd generation	139,775	25,955	16	32,763	26,238	44
1st generation migrants only
Short stay	39,598	126,132	76	4,935	54,066	92
Long stay	86,317	79,413	48	20,196	38,805	66

Note: First-generation migrants are distinguished into short (⩽20 years) and long (>20 years) time since arrival in Austria.
Source: Muckenhuber et al. (2022)

Global wealth distribution

Global income and wealth inequality

Source: Chancel et al. (2022)

Income and wealth inequality across Europe

Extreme global wealth inequality

Source: Chancel et al. (2022)

Private and public wealth

Source: Chancel et al. (2022)

Bibliography

Chancel, Lucas/Piketty, Thomas/Saez, Emmanuel/Zucman, Gabriel (2022). World inequality report 2022. World Inequality Lab.

Gabaix, Xavier (2016). Power laws in economics: An introduction. Journal of Economic Perspectives, 30(1), 185–206. DOI: 10.1257/jep.30.1.185

Heck, Ines/Kapeller, Jakob/Wildauer, Rafael (2020). Vermögenskonzentration in Österreich – ein update auf basis des HFCS 2017 (AK Working Paper No. 206). AK Wien.

Kennickell, Arthur B./Woodburn, R. Louise (1999). Consistent weight design for the 1989, 1992 and 1995 SCFs, and the distribution of wealth. Review of Income and Wealth, 45(2), 193–215. DOI: 10.1111/j.1475-4991.1999.tb00328.x

Muckenhuber, Mattias/Rehm, Miriam/Schnetzer, Matthias (2022). A tale of integration? The migrant wealth gap in austria. European Journal of Population, 38(2), 163–190. DOI: 10.1007/s10680-021-09604-1

OECD (2013). OECD guidelines for micro statistics on household wealth. OECD. DOI: 10.1787/9789264194878-en

Rehm, Miriam/Schneebaum, Alyssa/Schuster, Barbara (2022). Intra-couple wealth inequality: What’s socio-demographics got to do with it? European Journal of Population, 38(4), 681–720. DOI: 10.1007/s10680-022-09633-4

Vermeulen, Philip (2016). Estimating the top tail of the wealth distribution. The American Economic Review, 106(5), 646–650. DOI: 10.1257/aer.p20161021