Meldung vom 02.10.2017
- Austrian wealth is among the most unequally distributed in the whole Euro Area
- Home ownership is a main contributor
- Financial assets play a surprisingly limited role
Even though inequality has gained importance in the public discourse, reaching UN sustainability development goal status in 2015, it has not been the major topic in recent elections in France and Germany neither being so in the upcoming election in Austria.  Should inequality be back on the agenda, especially from an economic policy perspective?
A rising tide lifts all boats. On the one hand, the argument can be made that a certain degree of inequality is necessary to promote economic growth. And so long as economic growth shifts the whole income distribution upwards, a certain degree of inequality is preferable over inequality-reducing policies which can potentially harm economic growth. On the other hand, lower degrees of inequality can be beneficial for economic growth. Similar to the argument that there are no incentives to work harder in a perfectly equal society, high degrees of inequality can disincentivize those at the top of the wealth distribution due to gains from inheritance as well as those at the bottom of the wealth distribution due to limited social mobility. Hence, the relationship between inequality and economic growth depends on the degree of inequality.
Inequality and economic growth has traditionally been perceived to follow an inverted U-shaped relationship. Based on the seminal contribution by Kuznets (1955), the Kuznets curve describes rising inequality during 19th century industrialisation and a decrease in inequality during the Golden Era of European economic growth post WWII.  With inequality rising again since the late 1970s, the predictive power of the traditional Kuznets curve has weakened and Piketty’s (2014) seminal contribution to the debate can be read as adding the finishing stroke.  Piketty’s (2014) sees rising inequality inherently connected to modern capitalism only weakened by large exogenous shocks, with the return of capital being greater than economic growth (r > g). However, Milanovic (2016), former lead economist in the World Bank’s research department, interprets the recent rise in inequality as the start of a second Kuznets curve driven by technological change and labor allocation into skill-heterogenous services.  He predicts inequality to rise further as the peak of the second Kuznets curve has not yet been reached.
Inspired by the debate about the relationship between economic growth and inequality, we take a closer look at the state of wealth inequality within the Euro Area focusing particularly on Austria.  Measures of wealth inequality list Austria among the Euro Area member states with the highest degree of wealth inequality. Based on data from the ECB’s 2016 Household Finance and Consumption Survey (HFCS), Austria has the fourth highest Gini coefficient, 1 indicating the maximum level of inequality, the second largest quantile ratio (90th percentile over 50th percentile of the net wealth distribution) and even the highest Theil index. Figure 1 shows two of these measures across the whole Euro Area. In Austria, the poorest household within the top 10 % of the wealth distribution is 6 times more wealthy than the median household. Only Germany with a ratio of 7.7 shows a higher value. The Euro Area shows a net wealth quantile ratio of 4.8.
Looking at levels of nominal net wealth at different quantiles (not adjusted for cross country differences in the price level) shows that the median Austrian household has a lower net wealth than the median household in the Euro Area. The top quantiles of the Austrian net wealth distribution are above the Euro Area average but still similar to a lot of other Euro Area member states. Hence, compared to the indicators of inequality in figure 1, in which Austria and Germany performed so poorly, figure 2 shows that German and Austrian wealth inequality is based on comparably low levels of net wealth.
This result is rather surprising. One reason for why median net wealth is lower than in the Euro Area despite of having higher GDP per capita, is household size. Austrian households are smaller than their Euro Area countrerparts. Except for single households, median net wealth in Austria within the same household size are higher than the Euro Area average. A second reasons is homeownership. Only 48 % of Austrian households own their main residence, which is the second lowest share after Germany (44 %) and 13 %-points below the Euro Area average. Among those households who own their main residence, the median net wealth is the third highest after Luxemburg and Belgium and 42 % above the Euro Area. The net wealth of the median household with home ownership is 3.8 times the net wealth of the median Austrian household. This ratio is 4.3 in Germany, 2.4 in the Netherlands and 2.2 in the total Euro Area. The unequal distribution of net wealth in Austria is, therefore, driven by the unequal distribution of home ownership.
Surprisingly, financial assets play a rather limited role in explaining the unequal distribution of net wealth. The median household in the top 10 % of the net wealth distribution holds less financial assets in Austria than in the Euro Area. Moreover, the distribution of financial assets is among the least unequal in the whole Euro Area. Financial assets play a proportionately larger role in the wealth portfolios of poorer households, which further highlights the importance of real assets. Financial assets comprise 10 % of the total assets of the 10 % wealthiest households, while financial assets are 60 % of households’ total assets between the 20th and 40th percentile of the net wealth distribution. The composition of financial assets, however, is not constant. At the top of the wealth distribution 17 % of households hold publicly traded shares while it is only 0.7 % at the bottom of the distribution. However, Austrian households are more risk-averse than the representative Euro Area household across the whole wealth distribution. That this has contributed to comparably low capital gains during recent years when stock markets rallied, has also been pointed out in the Allianz Global Wealth Report 2016.
This short analysis has argued that Austrian net wealth shows one of the most unequal distributions in the whole Euro Area. This is mainly driven by the importance of real assets in net wealth and the low homeownership rate in Austria. A recent examination of the ECB’s Household Finance and Consumption Survey, which is the underlying dataset of this analysis, suggests that wealth is distributed even more unequally in Austria as the wealthiest households are underrepresented or understate their wealth.  Moreover, looking at the changes since 2010, when the first ECB Household Finance and Consumption Survey (HFCS) was conducted, a dispersion in the mid-range of the distribution is revealed. Median net wealth has increased by 2.4 % (inflation adjusted). Each percentile below the median, however, experienced a decline in net wealth at constant prices while all percentiles up from the median, except for the 90th percentile, experienced an increase in net wealth.
So how easy is it to climb up the wealth distribution? A recent study by Fessler and Schürz (2015) show that inheritance is crucial and plays a more important role than climbing up the income distribution.  Among Euro Area member states, the relative importance of inheritance compared to the income position is highest in Austria. An intergenerational transfer is equivalent to an income increase which leads to a 52 percentile higher rank in the income distribution, compared to 35 percentiles in the Euro Area. This implies that, with no inheritance tax in place, social mobility along the income distribution should be a top political priority in order to ensure a society of equal opportunities.
 In his 2012 State of the Union address, the US President Barack Obama, termed inequality as ‘the defining issue of our time’. Moreover, Christine Lagarde, the Managing Director of the IMF, identified ‘addressing inequality and building inclusive growth’ as one of three milestones of the future global economy in her October 2012 Annual Meetings Speech in Tokyo.
 Kuznets, S., (1995), Economic growth and income inequality, American Economic Review, 45:1, 1-28.
 Piketty, T., (2014), Capital in the twenty-first century, Harvard University Press.
 Milanovic, B., (2016), Global inequality: A new approach for the age of globalization, Harvard University Press.
 It is important to shift the focus from income to wealth inequality, which is much less present in the public debate but might be more severe and persistent.
 Eckerstorfer, P., Halak, J., Kapeller, J., Schütz, B., Springholz, F., and Wildauer, R., (2016), Correcting for the missing rich. An application to wealth survey data, Review of Income and Wealth, 62:4, 605-626.
 Fessler, P., and Schürz, M., (2015), Private wealth across European countries. The role of income, inheritance and the welfare state, ECB working paper series, No. 1847.