The Relationship between Income and Net Worth in the U.S.: A Virtuous Cycle for High but Not Low Income Households

Abstract

Is there a reciprocal relationship between household income and net worth and does that relationship depend on initial income? Using cross-lagged panel models of household income and net worth data from the Panel Study of Income Dynamics, we compare the income-wealth relationships of high and low income households from 1989 to 2011. Adjusting for demographic differences, we find a reciprocal relationship between income and wealth for high, but not low, income households. Results suggest intra-generational mobility works differently by initial income, which could partially explain the difficulty of escaping poverty and low U.S. support for liberal social welfare policy.