In this interview, University of Michigan sociologist Fabian Pfeffer, who is a Stone Center Affiliated Scholar, discusses his recent paper, coauthored with Nora Waitkus of the London School of Economics and Tilburg University, on cross-national patterns of wealth inequality.

Your latest paper, “The Wealth Inequality of Nations,” examines the components of wealth in 15 rich countries using the Luxembourg Wealth Study (LWS) Database. What led you to undertake that study, and what did you find?

Pfeffer: There are decades of research that compares countries’ level of inequality. Based on that research, we know that some countries are more unequal, such as the United States, and some countries are considerably less unequal, such as Sweden. Most of that research, however, measures inequality as inequality in household income. In our paper, instead of looking at income as an indicator of economic inequality, we look at wealth. And investigating wealth inequality, rather than income inequality, gives a fundamentally different answer in regard to which countries are more or less unequal.

In other words, a country’s level of income inequality is really not related to its level of wealth inequality. There is one country in the set that we analyzed that combines both high income inequality and high wealth inequality, and that is the United States. But outside of that, knowing how unequal a country is in terms of income doesn’t tell you a whole lot about how unequal it is in terms of wealth. Some countries that we have henceforth thought of as relatively egalitarian, such as some Nordic countries, actually have very high levels of wealth inequality. We are not the first ones to find that, but it’s a very striking and stable result in our study.

Empirically, the lack of correlation between wealth and income inequality is important, first, because wealth inequality is not just a different dimension of economic well-being; it’s also a much more unequal component. In all countries, wealth inequality is much larger than income inequality. Second, in the social sciences, we have not just contented ourselves with describing which countries are more unequal than others. We’ve also sought to understand why some are more unequal than others. There’s sort of an industry of social scientific work that tries to relate certain features of national welfare states to a nation’s income distribution. It’s a very active and fruitful area of research. But if income inequality is not really related to wealth inequality at the national level, then that means that a lot of prior research on income isn’t going to help us explain why some countries are more unequal in terms of wealth than others. There’s a need for more theoretical work on why, exactly, wealth inequality is higher in some places than in others.

Why are we now starting to see more studies of wealth inequality?

Pfeffer: Wealth has been under-studied in relationship to income because we didn’t have the data to study wealth in the same way. However, we increasingly do, including through efforts like the Luxembourg Wealth Study (LWS) Database. Most of my research beyond this paper also tries to fill some of these often very basic empirical gaps that arose from the fact that we just didn’t have that kind of access to wealth measures. For instance, documenting how large wealth inequality is — again, it’s much larger than income inequality. How it has changed over time — it’s been increasing very rapidly, especially during and since the Great Recession. And how the wealth of one generation translates into inequality of opportunity in the next generation. That’s another thread in my work: wealth inequality has independent associations with the outcomes of the next generation. For all of these reasons, we should continue to gather more data on wealth.

The data so far have enabled us to get a clear sense of wealth inequality being this different kind of beast. And I think what that brings up is a call for more explanation, such as institutional explanations that identify which features of a nation’s welfare state and markets, such as housing markets and mortgage markets, might be driving wealth inequality. And, again, the institutional features will likely be distinct from those that we’re used to studying in the long history of welfare state studies.

Is that what you’d like to see as the next step — research into what is driving these cross-national differences in wealth inequality?

Pfeffer: Absolutely. As a second contribution of our paper, we are trying to lay the foundation for some of these explanatory efforts in the following way: Wealth is composed of different asset components. Our claim is that if you want to make any inroads into understanding a nation’s level of wealth inequality, you first want to know which kind of wealth component and what aspect of that component is really driving that nation’s level of wealth inequality. It would be a very different story if wealth inequality, for example, was perfectly determined by how much financial assets are concentrated at the very top of the wealth distribution. Or if it was all about home ownership rates. In the paper, we begin to decompose the contribution of these different aspects of national wealth portfolios to try to identify the main active ingredients that account for a nation’s overall level of wealth inequality.

And here, too, we have a quite stark and, I would say, clear finding. It’s not so much about what we would call differences in wealth portfolios — e.g., how much of wealth is stored in housing and real estate versus how much wealth is in financial assets. Sure, there are large differences in national wealth portfolios, but that’s not really what’s driving cross-national differences in wealth inequality. What’s driving the cross-national differences most is the distribution of housing equity among homeowners.

Housing equity is the combination of two parts: the market value of the house, that is, what you would get for your home if you sold it today, minus the remaining mortgage principle, that is, what you still owe on the house. These two components are theoretically meaningful: on one side, house values are determined by housing markets, and the structure and dynamics of housing markets differ across nations. And on the other side, there are mortgages, which are determined by the regulation of financial markets and mortgage products. The two interact in interesting ways. We all became painfully aware of this during the financial crisis that was caused by mortgage-driven bubbles in housing values. There’s an expanding literature in the social sciences on the financialization of society — on how a lot of the economic activity of countries and of companies, and even families, is moving from the productive sector into financial markets. In the case of the U.S., more and more households are exposed to financial markets, not just because they have mortgages, but because they’re also tapping into home mortgage-based lending, such as secondary mortgages, and using that as investment to improve their homes or to invest in the education of their children.

There’s a broad literature on financialization that shows how, over the last decades, the U.S. and other countries have become more reliant at both the national level and the household level on financial products and debt, in short, on financial markets. These two things — cross-country differences in housing markets and financialization — are what we think will provide promising avenues for explaining why some countries are so much more unequal in terms of wealth than others.

So, the distribution of housing equity turns out to account for the United States’ high level of wealth inequality and for the lower inequality in some other countries, such as some former socialist countries in which a lot of housing equity is distributed much more equally. Why? During the transition to capitalism, a lot of housing was directly distributed to private households. It went from the public hand into private hands and made for a much more egalitarian distribution of wealth.

What challenges did you face in measuring wealth for this study?

Pfeffer: One feasible reaction to our finding of a lack of association between wealth inequality and income inequality is the following: we know that wealth is much more top-heavy. If it’s so concentrated at the very top of wealth distribution, perhaps the measures we’re looking at are not really well-suited to engage in a direct income versus wealth comparison? We respond to that in the paper by not just analyzing measures of income and wealth inequality that span the full distribution, but also by looking at some measures that focus much more on the top.

These measures capture how much wealth the top 5 percent of the wealth distribution owns. Or, for income, how much income the top 5 percent of the income distribution receives. These more top-heavy measures give us the same results, namely that countries that have more wealth concentration are not the same countries as those that have more income concentration. Again, with one notable exception, the U.S., which has high concentration in both wealth and in income.

Two more comments on the issue of wealth concentration at the top. One rejoinder, I guess, to this entire conversation is the following: yes, we’re looking at wealth across the population as well as wealth at the top. But, in the end, most of the data that we use come from nationally representative surveys, which tend not to cover the very, very top of the wealth distribution. For example, we have some millionaires in our samples, but we’re missing the billionaires. This is a classical problem for most surveys — even those that try really hard to capture the very top — that you don’t get the very top. And it turns out that that’s where a lot of wealth is concentrated. So, the kind of wealth inequality that we’re studying in our paper is not inequality between the billionaires or top 0.1 percent and everyone else. That’s a great question to study and an important field of research, but it’s not what we’re doing in this particular paper, partly because billionaires are not in our data.

Instead, we’re in many ways capturing wealth inequality among the 99 percent. And that wealth is still very unequally distributed. I think that’s important to keep in mind, and certainly it also relates to the centrality of housing equity we found. For the ultra-wealthy, housing equity is not really the central story. Billionaires tend to invest in financial assets. Financial assets and the regulation of financial markets are probably more important to study if you’re interested in the very, very top and the concentration among economic elites.

You’ve mentioned that the U.S. is an exception. Do you have any theories that might explain why the U.S. has the highest levels of wealth inequality?

Pfeffer: I do think there is a good argument to be made that the exceptional degree of wealth inequality and concentration in the U.S. may be related to the degree to which the U.S. economy and U.S. households have come to rely on financial markets, and, in particular, on mortgage markets. Another important aspect of the U.S. case is that wealth is a particularly important dimensions of racial inequality. For example, in the U.S., the Black-white wealth gap is tremendously large. The average African-American family has just about 12 cents on the dollar.

This racial gap in wealth, of course, reflects how wealth was built in this country for some groups and how it has been kept down for other groups. The U.S. started from a point where wealth was built on dispossessed land and on the backs of enslaved people. And, over centuries, white wealth continued to be built in exploitative processes that kept the wealth attainment of disadvantaged groups, and especially Black families, down. This is an important aspect reflected in today’s wealth distribution. At the same time, however, this doesn’t mean that all of the wealth inequality in the U.S. that I’ve been describing earlier is purely a reflection of racial wealth inequality. For example, if you looked at wealth inequality just among white households, you’d find the level is still exceptionally high, actually quite similar to the national level. So, it’s not as easy as saying that the exceptional degree of wealth inequality in the U.S. is a reflection only of racial wealth inequality.

You’re a sociologist. How does your approach to this topic differ from that of economists?

Pfeffer: Sociologists and economists have studied these types of topics for a long time, and there’s wonderful research on inequality in both fields. I consider a unique difference between the approaches typically applied by economists and those typically applied by sociologists to be that economists look at inequality through a gradational lens. For example, in terms of income or wealth, someone has $10,000 more than the next person, and the next person may have $10,000 more than that person: there are gradations of economic resources, some have more and some have less.

Many sociologists, in contrast, tend to think of inequality in a given dimension of socio-economic well-being as categorical. That is, inequality as being organized along group boundaries. Once you think of inequality as categorical, then you can also think of inequality as relational, so that these categories, these groups in a socio-economic hierarchy, stand in a certain relation to each other. And, finally, you can think about what that relation is. Depending on what theoretical tradition you come from, it could be that it’s exploitation. So, now, it’s not just the case that some people have more and other people have less, but it’s the case that some people have more because other people have less. And I think that’s a fundamentally different way to look at the world. Of course, it’s much easier to think about power differentials in a categorical world, and to study some of these exploitative processes. I mentioned one dimension of categorical inequality, related to race. But there are certainly many other processes by which wealth gets accumulated on one side on the backs of groups on the other side.

Fabian Pfeffer is an associate professor in the Department of Sociology and research associate professor in the Institute for Social Research at the University of Michigan. He is also the director of the Center for Inequality Dynamics at the University of Michigan.

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