by Megan Tan

Wealth inequality is a disturbing concern in today’s economy, since a small percent of the population owns so much of the wealth. Several explanations and solutions have been proposed to see if there is a way to evenly distribute the wealth. However, all of these have faults that do not fully solve the problem at hand. Professor Yonatan Berman, from The Raymond and Beverly Sackler Faculty of Exact Sciences at Tel-Aviv University, and her team of researchers looked to understand wealth inequality by using a theoretical approach to model such differences in affluence.

Using historical values of the growth rate, the savings fraction, and the fraction of capital income from national income in the United States from 1930 to 2010, the researchers created a numerical simulation. In this simulation, initial wealth and annual income were assigned to individuals. This initial value was distributed according to the known distributions in the US, and it was an important factor in the dynamics of wealth inequality. The wealth and labor income was then updated each year for each individual.

According to Professor Berman’s findings, the decrease in private savings during the 1980s caused a surge of wealth inequality. However, the recent financial crisis led to an increase in private savings. If this trend continues, financial crisis can serve as an opportunity to reduce inequality. The researchers also found that taxes reduce private savings, which, as a result, are expected to increase wealth inequality. However, the implications of reducing taxes or making income tax inequality should be considered when trying to prevent or reverse the inequality surge.

References

1. Y. Berman, Y. Shapira, E. Ben-Jacob, Modeling the Origin and Possible Control of the Wealth Inequality Surge. Public Library of Science, (2015). doi: 10.1371/journal.pone.0130181
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