The Relative Role of Socio-Economic Factors in Explaining the Change Distribution of Wealth in the US and the UK

The US and the UK experienced substantial increases in net wealth over the period 1994/95-2005/06, largely driven by house price booms in each country. The distribution of these gains across households led to a slight increase in wealth inequality in the US but a substantial fall in inequality in the UK. We use a decomposition technique to examine the extent to which changes in households’ socio-economic characteristics explain changes in wealth holdings and wealth inequality. We find that changes in households’ socioeconomic characteristics explain a considerable share of the observed changes in wealth, especially changes in the lower tail of the distributions. In the upper tail of the US distribution characteristics explained a greater share of observed changes in financial wealth holdings after 2000 as financial asset prices fell. Characteristics played a more moderate role in explaining changes in housing equity being effectively overshadowed by the substantial growth in house prices. In the UK changes in characteristics were more important in explaining increases in net worth in the lower part of the distribution but changes in house prices dominated after 2000. In both countries we find that changes in household characteristics had an equalising effect on wealth inequality; moderating the increase in the US and accounting for over one-third of the fall in inequality in the UK. In this paper we have shown that while both the US and the UK enjoyed substantial increases in net wealth over this decade, which were largely driven by house price booms in both countries, the distribution of these gains across households led to a slight increase in wealth inequality in the US but a substantial fall in inequality in the UK. The financial crisis occurring shortly after the period of analysis was largely driven by irresponsible lending by financial institutions in the sub-prime market of the US. In future research it will be interesting to see how the impact of the crisis affected wealth inequality among UK and US households.