By Sam van de Schootbrugge 13-01-2021

What Determines How Wealthy You Become?

(5 min read)
Resize text:


Income and wealth inequality have become political flashpoints in recent years. Yet the exact origin of wealth inequality remains murky. Do people get rich based largely on income earned in the labour market? Do large capital gains on real and financial assets matter more? And to whom? Or is wealth inherited, as French economist Thomas Piketty argues?

A new NBER working paper uses a unique Norwegian dataset that studies individuals’ wealth over 20 years. They look at segments of the population, including the super-rich. They find:

Current wealth proxies potential wealth well, particularly for those at the top. That is, the wealthier an individual is today, the more likely they are to be wealthy in the future.
Labour income is the most important determinant of wealth, except among the top 1%. Meanwhile, inheritances and gifts do not drive wealth outcomes, even among the top 1%.
Equalising wages and increasing government transfers to poorer cohorts compresses the wealth distribution, while higher returns on real estate and risky financial assets widen it.
Parental wealth significantly influences child wealth. Children of the top 1% receive greater inheritances and invest these resources to receive a disproportional amount of their wealth from capital income.

TO READ THIS DEEP DIVE
SUBSCRIBE TO MACRO HIVE PRIME

£39/month thereafter

For access to our Slack Chat Room, where we discuss all things markets with our researchers and subscribers

START YOUR FREE TRIAL


MOST READ

FOMC Preview: The Market Is Short Growth and Short FAIT (3 min read)

By Jon Turek | Jul 26, 2021
Following the recent bond market rally, there is an interesting disconnect between market pricing and market narrative. The market...

ECB: New Language, Same Policy Stance (2 min read)

By Caroline Grady | Jul 22, 2021
The ECB’s first meeting post strategy review produced no policy surprises. The central bank adjusted forward guidance on interest rates...

Six Myths About Brazil and the Market Implications (1 min read)

By John Welch | Jul 19, 2021
Local and international press paint Brazil in the throes of never-ending crises, between COVID-19, spiralling fiscal deficits and debt...

US