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Wealth Gap Is Increasing, Study Shows

August 9, 2007
University of Michigan
The rich really are getting richer and the poor are getting poorer, a new University of Michigan study shows.

The rich really are getting richer and the poor are getting poorer, a new University of Michigan study shows.

The study---the most recent available analysis of long-term wealth trends among U.S. households---is based on data from the Panel Study of Income Dynamics, conducted by the U-M Institute for Social Research (ISR) since 1968.

Over the last 20 years, the net worth of the top two percentile of American families nearly doubled, from $1,071,000 in 1984 to $2,100,500 in 2005. But the poorest quarter of American families lost ground over the same period, with their 2005 net worth below their 1984 net worth, measured in constant 2005 dollars.

The poorest ten percent of families actually had a negative net worth---more liabilities than assets. The poorest 5 percent of American households had a negative net worth of a little more than $1,000 in 1984, compared to nearly $9,000 in 2005.

"These findings show that the wealth gap is increasing steadily," said Stafford, a senior research scientist at ISR and director of the Panel Study of Income Dynamics, which is funded primarily by the National Science Foundation and the National Institute on Aging.

The analysis of a nationally representative sample of approximately 8,000 families was conducted by Stafford and ISR economist Elena Gouskova.

From 2003 to 2005, the average net worth of American families increased 12 percent, Stafford and Gouskova found. In constant 2005 dollars, overall average net worth, including home equity, rose from $275,600 to $309,600.

But during that period, the average net worth of African American households fell slightly, from $59,900 to $59,500. And the median net worth of households headed by high school drop-outs and by younger people, from ages 20 to 39, also declined.

Both white and black families had lower rates of participation in the stock market, but the rate of decline was stronger among black families. Slightly over six percent of black families owned stocks in 2003, compared with 5.3 percent in 2005---an 18 percent decline. Among white families, the percent owning stocks fell from 32 percent to 28 percent during the same period---a 12 percent drop.

Overall, the rate of non-collateralized, short-term debt---unpaid credit card balances, student loans, and medical or legal bills---rose two percent during the period. But black families experienced a strong seven percent increase in the likelihood of having such debt, bringing the proportion carrying such debt to 49.7 percent. In comparison, slightly more than half of all white families (51.8 percent) had this kind of debt. The average amount of short-term debt black families carried was $12,900; for white families, the average amount of debt was $16,800.

"That's a lot of credit card debt to be carrying," Stafford said.

The researchers also examined net worth dynamics across different age groups and educational levels. They found that the median household net worth of people in their 20s declined by nearly 30 percent, while the net worth of households headed by people in their 30s also fell slightly. The findings provide support for the widespread sense that it is harder than it used to be for younger people to establish themselves financially.

Those with some college education realized the strongest growth in family wealth. Their average net worth rose 31 percent during the period studied, to $341,700. College graduates showed a 10 percent rise in net worth, to $563,100 on average. But high school graduates showed only a modest increase in wealth, while the median wealth of high school drop-outs declined during the two-year period.

Home ownership rates decreased slightly from 2003 to 2005, but the value of home equity grew strongly, from $82,900 to $100,300 on average. "We'll have to wait to see how this has changed with the recent slowdown in housing," Stafford said.

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The above post is reprinted from materials provided by University of Michigan. Note: Materials may be edited for content and length.

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