New Data On Wealth Mobility And Their Impact On Models Of Inequality

from the Cleveland Fed

— this post authored by Daniel R. Carroll and Nick Hoffman

Using data on families’ wealth over time, we calculate changes in relative wealth mobility; that is, how likely families are to move up or down the wealth distribution, relative to one another. We find families have become less likely to change their position in the wealth distribution over time, and those that do move are less likely to go very far. We also look at the savings behaviors that are associated with more mobile families and find that families that make large movements through the wealth distribution appear to be more likely to own some form of a risky asset.

Wealth inequality, the unequal distribution of assets across households, has been rising for decades. However, this statistic alone gives an incomplete picture of the inequality of households’ economic experiences and opportunities. A fuller understanding comes from also knowing how much movement within the distribution households experience over time. For instance, is it likely that someone with low wealth today will be a wealthy person at some point in the future, or are they rigidly stuck at the bottom? In other words, a fuller understanding of households’ economic opportunity comes from a combination of data on both wealth inequality and wealth mobility.

This Commentary explores the topic of wealth mobility in the United States during the past three decades (see Carroll and Chen 2016 for similar work on income inequality and mobility). Examining supplemental data from the Panel Study of Income Dynamics (PSID), which track families’ wealth over time, we calculate changes in relative wealth mobility; that is, how likely families are to move up or down the wealth distribution, relative to one another. We find that wealth mobility has declined since the 1980s, a trend that is robust to a wide range of measures. Finally, we identify savings behaviors that are associated with more mobile families. Such behaviors may explain the disparity between observed levels of mobility and the levels predicted by the standard model used to study inequality.

Determinants of Wealth Mobility

Households move up and down the wealth distribution for many reasons. Households’ savings behavior is one factor that affects their mobility. For example, those who hold portfolios composed primarily of riskier, but higher-expected-return assets (such as stocks) are more likely to move up or down in their wealth position than those who hold less risky assets (such as savings bonds). Marriage and divorce, which may lead to assets being combined or separated, can cause large movements upward and downward, respectively.

Other factors may be driven greatly by luck. Did a risky asset return a high payoff, or did it fail? Was the household subject to expensive medical bills due to an unforeseen illness? Did the household receive a large bequest from a parent? In some cases, it may be a mix of both luck and choice, as in the case of a bankruptcy.

Age can also affect mobility. Household savings behavior follows a “life cycle.” Young households are generally more wealth-poor because they have had little time to save. They often borrow (in anticipation of future labor income) to make large purchases such as a car, a house, or an education. As a result, they tend to start out low in the wealth distribution. As households age, they typically save more, paying down debt and building up a retirement fund, so they rise in the distribution. Finally, when households enter the retirement phase, they dissave, dipping into their accumulated wealth to fund consumption. This drawing down of savings moves households back down the wealth distribution over time.

Measuring Wealth Mobility

Since 1984, the PSID has included a wealth module that attempts to measure the evolution of household wealth. In order to get a comprehensive estimate of wealth, interviewers ask participants a series of questions that separate total net worth into nine subcomponents. These include equity in the main family home and a wide variety of investments, ownership equity in a farm or business, and all outstanding debt outside of a mortgage or auto loan. The PSID then calculates two values for family net worth: one which includes all nine components, and another which excludes equity in the main home. Because homes are a major savings vehicle, and thus one of the primary means by which households can change their wealth, we choose the measure that includes home equity. In order to compare wealth across time, we use the consumer price index (CPI) to convert all values to constant 2016 dollars.