The Drivers Behind Increasing Wealth-to-Income Ratios in Selected OECD Countries

Wealth-to-income ratios in developed countries have been increasing in the past decades and are now reaching levels comparable to those before the two World Wars. Earlier literature has shown that high levels of the wealth-to-income ratio go together with high degrees of wealth inequality, financial instability and asset price bubbles. We use a bias-corrected least squared dummy variable (LSDVC) estimator to quantitatively examine the main drivers behind these increasing wealth-to-income ratios. Our contributions are fourfold: (i) we quantitatively test earlier predictions by Piketty, and find that the impact of saving behavior on the wealth-to-income ratio is smaller than he predicts; (ii) our results suggest that wealth-to-income ratios are mainly driven by a single component of capital: housing; (iii) we control for earlier saving assumption; and (iv) we use a different, more complete, definition of returns on capital than earlier similar literature by not only considering capital gains but also yields. In periods of low economic growth, such as the last decades, wealth-to-income ratios will continue to rise to even higher levels. Our results suggest that besides wealth and inheritance
taxation, governments should also consider mitigating the continuously increasing house prices when aiming at stabilizing wealth-to-income ratios.