Sustained wage growth and broadening participation in financial markets could help reduce disparities.
Pay for lower-income workers grew modestly faster than for higher-income workers over 2019−2024, extending trends seen during the robust labor market just prior to the pandemic. Paired with higher investing rates, shown above, this trend could erode disparities if sustained over time.
Wealth disparities depend on when people purchase assets and the returns they generate.
Tracking household financial behavior at a micro level, we find mechanisms that may sustain wealth disparities in ways that previously have been difficult to discern using publicly available data.
For example, the return that people earn on wealth holdings depends on the timing of asset purchases. Due to inequality in the labor market, the slow recovery from the Great Recession meant that income gains—an important determinate of wealth building—came later for lower earners. Stock market valuations were largely rising over this period, meaning lower-income investors transferred money to investment accounts when valuations were about 5 percent higher than those with high earnings levels. This will likely weigh on their investment returns relative to those with higher incomes and wealth. The canonical lens on the distribution of household wealth in the U.S.—the Federal Reserve’s Survey of Consumer Finances—is based on snapshots taken every three years, making it challenging to detect this specific kind of mechanism.
Sizing up the challenge.
Greater market participation by lower-income households means that future rises in asset prices will benefit more people, but it does not per se substantially erode existing disparities in wealth levels. The scale of wealth matters, as does the degree of inequality. According to Federal Reserve data, the total amount of wealth held by U.S. households is over $150 trillion, which is over ten times larger than annual wages and salaries. The growth of savings in financial assets for lower-income individuals is a positive signal for their financial health, but these savings rates represent a fraction of income.
Relatedly, wealth inequality accumulates over generations and is much larger than income inequality. Increases in wealth driven by asset prices, like rising home values—up over 50 percent since 2019—and the doubling of the stock market since 2019, disproportionately benefit those who already have sizable holdings.
The large stock of accumulated wealth also means that differences in returns on wealth—which have been shown in Institute reports (in stocks and crypto-assets) and academic research (in multiple recent studies on housing) to favor the already wealthy—exert a powerful force sustaining high levels of inequality.
As the Institute reaches its tenth year, our work will continue to use proprietary data to highlight policy relevant mechanisms that operating between markets, wealth, and the overall economy. These insights can help policymakers better understand the changing forces that will drive inequality over the next ten years.
