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Wealth mobility in the US and Germany

Completed Project

Project Management

Dr. Markus M. Grabka, DIW Berlin

Project Period

October 1, 2015 - January 31, 2017

Funded by

Deutsche Forschungsgemeinschaft (DFG)

In Cooperation With

Assistant Professor Fabian Pfeffer, PSID, University of Michigan

The recent rise in inequality in many societies is an important topic in current social science and is of increasing concern in public policy-making (OECD 2011, Stiglitz 2012, Ostry et al. 2014). High inequality may harm the economy because credit rationing prevents the poor from investing in education and weakens innovations . Most recent findings of the OECD (2014) also point to a negative impact of high inequality on economic growth. High inequality may reduce social cohesion because people are less likely to trust each other and therefore reduce their community involvement. High inequality may also lead to the emergence of economic elites who may use their power to (re)shape the political system and gain special benefits.

Above and beyond these general points, a major concern from the viewpoint of public policy making is that of the stability of these inequalities since they may undercut the premises of an open society mobility. A high degree of inequality in a given society may be of less relevance if all members in that society had a similar chance to climb up the hierarchy at some point – both from an intergenerational and an intra-generational point of view. Mobility can therefore also be interpreted as an indicator of fairness and equity in a society.

Empirical evidence on the chances to move up or down the socio-economic hierarchy is limited and chiefly focused on the occupational and income hierarchy. When it comes to wealth mobility there is even less or, in the case of Germany, no empirical evidence available. This is mostly the result of a lack of adequate micro-data that contains longitudinal assessments of wealth (most wealth surveys are cross-sectional in nature, e.g. the U.S. Survey of Consumer Finances).

The aim of this project is to analyze two well-known household panel surveys to study cross-country differences in wealth mobility.

Our first aim is an in-depth analysis of wealth mobility and its determinants in Germany and the US. We make use of the Socio-economic Panel (SOEP) and the Panel Study of Income Dynamics (PSID). The SOEP is a representative panel survey of households in Germany started in 1984. Most important for our purpose, it collects wealth information in a five-year rotating extra survey module (2002, 2007, 2012). First results suggest that mean and median net worth (excluding social security wealth) is markedly lower than in the US (see Smeeding et al., 2006).  For the US we make use of the PSID. The PSID is the world’s longest-running, nationally representative household panel and was one of the models for the SOEP. The PSID began in 1968 and has collected detailed wealth information every five years since 1984 and every other year since 1999. For the US-German comparison, this project draws on wealth data from 2001, 2007, and 2013 to closely match the years available in the SOEP. The validity of the PSID wealth data has been shown to be high (Pfeffer et al. 2014). It has also been used to study shifts in the wealth distribution across the last three decades (Pfeffer et al. 2013).

In a second step we apply a decomposition technique to study to which extent country specific features explain mobility patterns by means of a counterfactual approach. In a first step, it can be assumed that the generosity of different welfare regimes (the pension system in particular) play an important role in explaining wealth levels, wealth inequality, and wealth mobility. Second, wealth portfolios differ between the two countries. Both financial assets and housing wealth have a higher relevance in the US compared to Germany (Smeeding et al. 2006). However, the respective volatility appear to be more pronounced in the US than in Germany and developed – at least for housing wealth  –in opposite directions in recent years. For more than a decade, the German housing market was marked by decreasing house prices until recently while the US experienced strong increases leading up to the Great Recession (2008) and even stronger decreases during and following the recession. The differential impact of the Great Recession – with large macro-economic shocks in the U.S. and very few in Germany – should also have affected wealth mobility in these two countries in different ways.

see also: Fabian Pfeffer and Markus M. Grabka (2014): Wealth Distribution and Wealth Mobility in U.S.-German Comparison. Paper prepared for the IARIW 33rd General Conference, Rotterdam, the Netherlands, August 24-30, 2014

DIW Team