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  5. Causes and Consequences of Economic Inequality
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Causes and Consequences of Economic Inequality

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

Hilton Riverside, Eglington Winton
Hosted By: Econometric Society
  • Chair: John N. Friedman, Brown University

New Estimates of Wealth Inequality in America and the Importance of Wealth for Entrepreneurship

Matthew Smith
,
U.S. Department of the Treasury
Owen Michael Zidar
,
Princeton University
Eric Zwick
,
University of Chicago

Abstract

We present new estimates of the concentration and composition of top wealth in the United States through 2016. Our wealth estimates are based on new data that links people to their sources of capital income and new methods to estimate the degree of return heterogeneity within asset classes. Relative to an equal returns approach, we find a larger role for private business wealth and a smaller role for fixed income wealth. Given the importance of business ownership for top income and wealth inequality, we turn to explore the determinants of entrepreneurship across the American population since the late 1990s. Our longitudinal data permit an analysis of which new firms end up being highly successful, allowing us to distinguish startups that are destined to remain as small businesses from star job creators. We also develop a novel measure of the returns to founding owners using a high-dimensional matching strategy, which tracks total income and wealth in the decade following entrepreneurial entry relative to that for a similar matched worker. We first document new facts on the lifecycle of star entrepreneurs, including their family backgrounds, where they grew up, and their labor market trajectories prior to entry. We then develop multiple research designs to evaluate the role of alternative mechanisms that might account for different entry rates and returns across groups. Our results support the class of explanations that highlight “pipeline” factors as the key supply-side constraints on the number of entrepreneurs from underrepresented groups, such as women or low income kids. Such factors limit the number of potential entrepreneurs who might be responsive to later-stage interventions. For example, policies that target the point of entry, such as liquidity support or tax incentives, are unlikely to close entry gaps and narrow return differences.

Assortative Mating and Wealth Inequality

Andreas Fagereng
,
BI Norwegian Business School
Luigi Guiso
,
Einaudi Institute for Economics and Finance
Luigi Pistaferri
,
Stanford University

Abstract

We use population data on capital income and wealth holdings for Norway to measure asset positions and wealth returns before individuals marry and after the household is formed. These data allow us to establish a number of novel facts. First, individuals sort on personal wealth rather than parents' wealth. Assortative mating on own wealth dominates, and in fact renders assortative mating on parental wealth statistically insignificant. Second, people match also on their personal returns to wealth and assortative mating on returns is as strong as that on wealth. Third, post-marriage returns on family wealth are largely explained by the return of the spouse with the highest pre-marriage return. This suggests that family wealth is largely managed by the spouse with the highest potential to grow it. This is particularly true for households at the top of the wealth distribution at marriage. We use a simple analytical example to illustrate how assortative mating on wealth and returns and wealth management task allocation between spouses affect wealth inequality.

The Historical Distribution of Black and White Wealth

Ellora Derenoncourt
,
Princeton University
Chi Hyun Kim
,
University of Bonn
Moritz Kuhn
,
University of Bonn
Moritz Schularick
,
University of Bonn

Abstract

The racial wealth gap is the largest of the economic disparities between Black and white Americans, with a white-to-Black per capita wealth ratio of 6 to 1. It is also among the most persistent. In this paper, we combine data and theory to illustrate the role of historical institutions, capital returns, income trends, and savings behavior in the level and persistence of the gap. We introduce a new time series of white-to-Black per capita wealth ratios covering 1860 to 2020 that draw on census data, historical state tax records, and a newly harmonized version of the Survey of Consumer Finances (1949-2019), among other sources. Combining these data with a parsimonious framework of wealth accumulation by each racial group, we show that given vastly unequal starting conditions under slavery, racial wealth convergence is an extremely distant scenario even if wealth-accumulating conditions were equal for the two groups post-Emancipation. We nd that observed convergence has followed a slower path relative to this equal conditions benchmark, and today's wealth gap is on track to diverge, rather than converge, due to overall rising wealth inequality. Our framework sheds light on the implications of policies like reparations, which address the historical origins of today's gap, versus less targeted policies for the future evolution of the wealth gap.

The Geography of Child Penalties and Gender Norms: Evidence from the United States

Henrik Kleven
,
Princeton University and NBER

Abstract

This paper develops a new approach to estimating child penalties based on cross-sectional data and pseudo-event studies around child birth. Data from the US show that child penalties can be accurately estimated using cross-sectional data, which are widely available and give more statistical power than typical panel datasets. Five main empirical findings are presented. First, US child penalties have declined significantly over the last five decades, but almost all of this decline occurred during the earlier part of the period, explaining the slowdown of gender convergence during this period. Second, child penalties vary enormously over space, e.g. from 12% in the Dakotas to 38% in Utah. Third, child penalties correlate strongly with measures of gender norms, both across space and over time. Fourth, an epidemiological study of gender norms using US-born movers and foreign-born immigrants shows that the child penalty for US movers is strongly related to the child penalty in their state of birth, adjusting for selection in their state of residence. Parents born in high-penalty states (such as Utah or Idaho) have much larger child penalties than those born in low-penalty states (such as the Dakotas or Rhode Island), conditional
on where they live. Finally, immigrants assimilate to US culture over time such that differences by country of origin eventually disappear.
JEL Classifications
  • D31 - Personal Income, Wealth, and Their Distributions
  • J31 - Wage Level and Structure; Wage Differentials