Imagine you are the owner of some considerable wealth, like a house or stock portfolio. It is natural and reassuring for most of us to regard such wealth as being self-made. But is this really true? This question gets at the heart of why intergenerational mobility and equality of opportunity are major topics of research and public debate.
Wealth plays a major role in intergenerational mobility and an even more important role than concepts like income. Wealth is fundamentally intergenerational. While income and education are highly persistent across generations in many countries, wealth is the only outcome that can be—and often is—directly and easily transferred from one generation to the next. Wealth is also highly important in shaping one's life by allowing one to achieve one's goals, such as buying a home or starting a business.
In our study, we examine the levels, trends, and drivers of inequality of opportunity in individual wealth in Germany, using data from the Socio-Economic Panel (SOEP) spanning 2002 to 2019. We measure how much of wealth inequality is attributable to circumstances beyond individual control, such as parental background, migration background, education, and geographic factors. We find that approximately 62% of total wealth inequality is due to these factors, a proportion that has remained remarkably stable over the period of our analysis. This is in sharp contrast to labor earnings, where inequality of opportunity is declining over time.
One of our central findings is that intergenerational transfers, like inheritances and gifts, play an increasingly prominent role in driving inequality of opportunity in wealth. Childhood circumstances, such as parental education and the occupational status of parents, also contribute significantly to inequality. Our findings highlight how structural factors, determined early in life, have a lasting impact on individuals' ability to accumulate wealth. The importance of geographic and demographic characteristics, such as migration background and region of birth, also remain relevant.
Over the same period, we find that inequality of opportunity in labor earnings has declined, driven in part by policy measures such as educational expansion and improvements in gender equality in the workforce. However, no such trend is observed for wealth. This suggests that labor market reforms alone are insufficient to address current wealth disparities.
The decomposition of wealth in real estate, business, and financial wealth adds another dimension to the analysis. We find that real estate constitutes the largest share of individual wealth in Germany and is the primary driver of overall inequality. We discover a more important role of gender for inequality of opportunity in financial and business wealth that would stay unnoticed in the analysis of net wealth, due to their limited presence in most individuals' portfolios.
Our study provides a fresh look at the roots of inequality and the challenges posed by wealth inequality, which call for carefully designed policy measures. Addressing intergenerational wealth transfers, for example through inheritance taxation, could reduce wealth inequality. Investments in equitable regional development might also help level the playing field. Further, supporting equal access to financial resources and business ownership opportunities could support more gender-inclusive wealth building.
This study is published as a SSRN working paper:
Hilbert, Viola and Koenig, Johannes and Graeber, Daniel, Inequality of Opportunity in Wealth: Levels, Trends, and Drivers (November 29, 2024). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5038580
Authors:
Daniel Graeber (SOEP/DIW Berlin, IZA Bonn, Center for Economic Policy Analysis (CEPA))
Viola Hilbert (SOEP/DIW Berlin, Berlin School of Economics, FU Berlin)
Johannes König (Bundesverwaltung, DIW, Berlin School of Economics)
