United States: How Inequality Affects Saving Behavior


By Oya Celasun

(Version in Español)

The incomes of U.S. households have become more unevenly distributed over the past three decades. For example, the Congressional Budget Office estimates that after-tax income almost tripled for the top 1 percent of households between 1980 and 2007, but grew only 22 percent for the bottom 20 percent.

Recent research has focused on the link between income inequality and growth, but less attention has been paid to the link between inequality and savings. So together with a few colleagues we have looked at how income distribution is linked to saving behavior.

Saving rates matter because they are an important factor for the U.S. economic outlook. The decline in the saving rate in the years leading up to the crisis (from 10 percent of after-tax income in 1980 to 1.5 percent in 2005) is the mirror image of the unsustainable boom in consumer spending during the bubble years.

Following the crisis, sharp losses in the values of houses and financial assets, as well as difficulties in obtaining new credit, forced American families to save more and rebuild their wealth. The ensuing rise in the saving rate, which stood at 4 percent in the second quarter of 2012, has been an important reason why the recovery from the 2008–09 recession has been sluggish.

Therefore, our study looked at which types of households drove the aggregate saving rate down before the crisis and those that drove it up afterwards, so as to improve our ability to assess the potential for future U.S. growth.

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Can Policymakers Stem Rising Income Inequality?


By David Coady and Sanjeev Gupta

The issue of rising income inequality is now at the forefront of public debate. There is growing concern as to the economic and social consequences of the steady, and often sharp, increase in the share of income captured by higher income groups.

While much of the discussion focuses on the factors driving the rise in inequality—including globalization, labor market reforms, and technological changes that favor higher-skilled workers—a more pressing issue is what can be done about it.

In our recent study we find that public spending and taxation policies have had, and are likely to continue to have, a crucial impact on income inequality in both advanced and developing economies.

In advanced economies, this is especially important given that the ongoing fiscal adjustment needs to be continued for many years to reduce public debt to sustainable levels. But it is equally important in developing economies where inequality is relatively high.

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