Working Paper: NBER ID: w28239
Authors: Sandra E. Black; Paul J. Devereux; Fanny Landaud; Kjell G. Salvanes
Abstract: Much attention has been given to rising wealth inequality in recent decades. However, understanding inequality requires an understanding of how wealth relates to the potential wealth an individual could accumulate and where this wealth comes from. Using administrative data from Norway, we create measures of potential wealth that abstract from differential consumption and spending behavior. We then examine how these measures relate to observed net wealth of individuals at a point in time and the role played by different sources of wealth in the distribution of potential wealth. We find that net wealth is a reasonable proxy for potential wealth, particularly in the tails of the distribution. Importantly, people in different parts of the potential wealth (or actual net wealth) distribution get their wealth from very different sources. Labor income is the most important determinant of wealth, except among the top 1%, where capital income and capital gains on financial assets become important. Inheritances and gifts are not an important determinant of wealth, even at the top of the wealth distribution. Finally, although inheritances are not important, parental wealth does influence child’s wealth; children of wealthy parents accumulate wealth from very different sources than children of less wealthy parents.
Keywords: wealth inequality; labor income; inheritance; capital gains
JEL Codes: G51; J01; J1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor income (J39) | Wealth accumulation (E21) |
| Labor earnings (J39) | Potential wealth distribution (D39) |
| Capital income and capital gains (E25) | Wealth accumulation (E21) |
| Parental wealth (G51) | Children's wealth accumulation (G51) |
| Inheritances and gifts (H24) | Wealth accumulation (E21) |