Wealth, Income Inequalities Pose Continual Challenge

MBA (8/1/2008 ) Palaparty, Vijay
Wealth inequalities among Americans poses a greater challenge looking ahead than income inequality, according to a report from the Center for American Progress.
The CAP report, Wealth Mobility and Volatility in Black and White, said a traditional measure of generational progress is income mobility—comparing the income of parents to their children. However, it said measuring wealth—what people own versus what they earn—could also be used as a metric to predict the future.

“Inequality in wealth is much greater than income inequality in the United States,” said Dalton Conley, professor at New York University and co-author of the report. “To fully understand a family’s economic well-being and the life chances of its children, we must not only consider income and education but also accumulated wealth. Compared to income, wealth may be more fundamental to upward economic mobility”

The report said wealth protects families and their children against economic vulnerability, temporal fluctuations and shocks to the labor market. “The loss of a job or a health care crisis may not translate into a family’s financial ruin if the family has some savings or a mortgage that it can refinance,” it said.

However, another report from CAP highlighted overall declining financial security among middle-class families. It said drops in personal wealth contributed to the decline.

“Because house prices started to fall and debt continued to rise in 2007, the share of families who could weather an unspecified emergency equal to three months of income decrease to 29.4 percent in 2007, from 30.5 percent in 2005 and 39.4 percent in 2000,” said Christian Weller, professor at the University of Massachusetts, Boston, and author of the report, America’s Middle Class Still Losing Ground.

Weller also said the share of families who had enough resources to cover a spell of unemployment declined since 2000. In 2007, 44.1 percent of families had enough wealth to cover a period unemployment, significantly down from 51.0 percent in 2000.

“Despite wealth being central to upward economic mobility and financial security, we know very little about the wealth transmission process,” said Rebecca Glauber, professor at the University of New Hampshire, Durham, N.H., and co-author of the first report.

The report found that between 1984 and 2003, though wealth volatility existed among households, Americans in the top and bottom quartiles tended to stay there over time—both in terms of their own relative position and their childrens’ position. It also said that a person’s family explains three-quarters of wealth distribution as adult. Among African Americans, however, the report said the impact of family background was only 37 percent.

“Individuals are more likely to maintain wealth than to attain wealth,” Conley said. “Low-wealth children are unlikely to become high-wealth adults, while high-wealth children are very likely to be high-wealth adults,” Conley said.

The report also said less than 10 percent of children who grew up in families in the bottom wealth quartile, which had a maximal cut off of about $8,000 in 1984, reached high wealth levels by adulthood between 1999 and 2003, when the top group’s minimal value was $82,501 and the median was more than $189,000. However, 55 percent of children who grew up in families in the top wealth quartile—with more than $155,000 of net worth in 1984—maintained high wealth levels by adulthood.

"The strongest predictor of an adult’s relative wealth status is his or her income, which in turn is highly predicated on his or her parents’ income and wealth,” Glauber said.

Glauber added that wealthy white children are much more likely to become wealthy adults than wealthy African-American children. More than 55 percent of white children raised by parents in the top wealth quartile held onto the top wealth position as adults. Only 37 percent of African American children raised by parents in the top wealth quartile were able to hold onto the top wealth position as adults.

“African Americans have more difficulty retaining their relative wealth status,” Conley said.

Over a 15-20-year period, 60 percent of whites who were in the top wealth quartile remained there, compared with only 22 percent of African Americans, a period in which Conley also said people were more likely to maintain wealth than to attain wealth. Less than 5 percent of those who were in the bottom wealth quartile, with less than $5,767 in 1984, moved to the top. Fifty-eight percent of those who were in the top wealth quartile, with at least $114,563 in 1984, did not change.

“When viewed through the lens of wealth—as opposed to just income—there is a high degree of wealth instability combined with a lack of mobility, particularly in terms of breaking out of the bottom quartile,” Glauber said. “Cross-sectional wealth inequality is enormous.”

“We see a country where many families may be struggling just to maintain a fairly consistent standard of living, leaving precious few resources to provide a stepping stone for their children or a nest egg for their own retirement,” Conley said. “When we separate analysis by race, the distinctions are even starker. African Americans not only enjoy one-tenth the wealth of white families at the median, but they also are more likely to be asset poor across their entire adulthoods and even inter-generationally.”