Implications for inequality and poverty measures

The social indicators that are used to monitor social cohesion and inequality over time and across countries (such as quintile shares and at-risk-of-poverty rates) are routinely computed from data on household income. There is no such readily available data source in the case of wealth. However, there is little doubt that it is a relevant measure of living standards and one that can capture long-term economic resources better than monthly or annual income flows. The main reason for the imbalance between the use of income-based social indicators and wealth-based indicators up to now has been the lack of reliable data. Although many standard tools used in income analysis can also be used for wealth analysis, certain features of wealth distribution make the measurement of inequality rather more challenging. These include the presence of a substantial amount of negative net worth in most sample data on wealth, the strong skewness and the fat tails of the distributions, and the large proportion of the population with little or no wealth.

There is also no consensus as to how to define wealth poverty. In the USA, there have been some attempts to incorporate wealth into the income measure, either by annuitising it over the expected remaining years of life (Weisbrod and Hansen, 1968; Rendall and Speare Jr., 1993) and adding it to annual income, or by treating it as stock. Studies suggest that when this income-net worth measure is used to calculate poverty rates in the US, the rate is lower than the rate of income poverty, with substantial reductions in the poverty rates of older families (Haveman and Wolff, 2004).

One study (ibid.) attempted to define wealth poverty, specifying an asset-poor household to be one 'with insufficient assets to enable it to meet basic needs for a period of time (three months)'. To provide a joint measure of income and assets, the poor are defined as those who have both annual income below the poverty line and assets below 25% of the poverty line. Haveman and Wolff found that, while there was a reduction in income poverty, asset poverty increased slightly over the last two decades of the twentieth century, and that asset poverty tends to decline steadily with age and education and, not surprisingly, is more prevalent among those renting housing than among homeowners. 

More recently, there have been several studies that also apply the concept of asset poverty to cross-country comparisons, though with a slight modification. Here households are considered to be asset poor if their financial asset holdings are less than 25% of annual median income (Gornick et al., 2009a, b). The cross-country findings indicate that asset poverty is very prevalent in households of single elderly women (between 30% and 55% are asset poor) in European countries, and between 43% and 56% are either income or asset poor, or both. 

Relatively little is known about the relationship between income and wealth, especially outside the US (Kennickell, 2009). Initial work using the Luxembourg Wealth Study (Jäntti et al., 2008), however, indicates that net worth and disposable income are highly, but not perfectly, correlated within countries. Subsequent preliminary results of other countries tend to confirm this.