By Sam van de Schootbrugge 13-01-2021

What Determines How Wealthy You Become?

(5 min read)
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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.

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