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Income Inequality Is Surging — Mostly Because of the Stock Market

The rich get richer, and they've got numbers to prove it!

By John Divine, InvestorPlace Assistant Editor

http://invstplc.com/1B1PYyC

Remember Occupy Wall Street? Regardless of how you feel about the controversial demonstrations, the protesters were right about one thing: The stock market is the biggest driver of wealth disparity.

occupy wall street 99 percent 630
Source: Flickr

Listen, I make stock picks every day and invest in the market myself — I’m not demonizing investors by any stretch of the imagination. All I’m saying is that in order to understand income inequality, we need to acknowledge the significant role the stock market plays in creating it.

Study after study backs this up, and the growing wealth distribution gap has gotten many Americans agitated. But these reports should really empower the average investor — not make them feel victimized. After all, it reiterates yet again that anyone who can be invested in the market, should be.

The stock market doesn’t care how much money you have. It’s the long-term investor’s friend, plain and simple, and it can help every American regardless of class or income level.

But in order for it to help you, you need to have some skin in the game. Stay out of the stock market and it will leave you behind.

Drivers of the Growing U.S. Income Gap

Stocks aren’t the only thing that can affect the distribution of wealth, of course. Taxes, wages, retirement income, social insurance, interest income — each of these can and do contribute to who’s holding what slice of the pie. But according to a 2013 study by Thomas Hungerford of the Economic Policy Institute, the most potent force driving the increase in income inequality between 1991 and 2006 was the stock market.

Hungerford notes that the Gini coefficient, the most widely used measure of income inequality, increased by  15% in that 15-year span. A Gini coefficient of zero indicates absolute wealth equality, while a Gini coefficient of 1 means that one person literally holds all the dough.

The United States has a far higher Gini coefficient than the most other countries, according to the Organisation for Economic Co-Operation and Development (OECD). Clicking the term “OECD” in the chart below will show the 34-country averages against the averages in the U.S.

In 2006, Hungerford’s research shows that “the contribution of capital gains and dividends to income inequality almost doubled” from 1991 levels. And we see from the interactive chart above that wealth inequality continued to grow in the years after 2006 as well.

Perhaps counterintuitively, the impact of wages on the Gini coefficient fell by 22.5% over that period, meaning wages, when isolated, actually helped to narrow the income gap.

And in case you were wondering, Hungerford isn’t just some rogue economist with a point to make: A 2012 research paper by Jack Favilukis of the London School of Economics also fingers the stock market as a definitive driver of income inequality, saying Wall Street played a “major role” in the surging income gap over the last 30 years. Through 2007, the top wealth decile (the wealthiest 10%) owned 72% of the market’s total equity.

Unless the other 90% decides to dramatically change their investing tendencies, that number is unlikely to decline anytime soon.

Considering a recent Bankrate.com study showing that just 26% of people younger than 30 are invested in the stock market — and that 53% of those who don’t invest don’t participate because they simply don’t have the money — color me skeptical that the wealthy will lose their high exposure to equities in the years ahead.

Different people will have different takeaways from these numbers, but one conclusion is unavoidable: The stock market is one helluva way to fatten your pockets.

Over the long run, stocks are still the best game in town. If your budget allows for it, try to buy yourself a slice of the pie.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at [email protected]

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/income-inequality-is-surging-mostly-because-of-the-stock-market/.

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