Wealth and Its Distribution: Tomorrow is Yesterday

Wealth and income inequality is a big issue and I thought some historical perspective on wealth inequality might be interesting given that my research to date has led me to conclude that little has changed for the bottom of the wealth distribution at least in terms of relative wealth shares.  While there has been the growth of a middle wealth holding class over the last one hundred years in Canada, the wealth share of the bottom half of the wealth distribution is remarkably unchanged. 

In my wealth work on Wentworth County, Ontario (the Hamilton area), I had the opportunity to construct wealth shares by decile using probate wealth records.  This data was quite detailed with real estate, financial assets, livestock and other personal estate documented (sixteen asset categories all together).  Of course, not everyone probated wealth and therefore I needed to adjust for the possibility of people with wealth who did not go through probate.  There are other issues with probate records in terms of their representativeness but I’m going to set those aside as they are discussed in the published wealth work. (See Di Matteo & George, “Canadian Wealth Inequality” Canadian Historical Review, 1992, 73,4, 453-483.)

The approach used to adjust the data was what is known as the estate multiplier technique – a method by which the estates of those dying in a particular year can be used as a sample of the population still alive at that time.  If it can be assumed that the age and sex of those dying in a given year are representative of the living population, you can then “blow up” the estate data by a mortality multiplier equal to the reciprocal of the mortality rate.  The alternative is of course to assume that those who did not probate resembled those who did in which case the distribution of probate type individuals alone is the proxy for everyone.   The latter approach will tend to result in a slightly more equitable picture of wealth distribution as the results below show. 

I have both the estate multiplier estimates as well as the raw probate estimates for Wentworth County in 1892.  Based on the estate multiplier estimates, in 1892, the top half of the population owned 100% of wealth, while if just the probated estates are considered, the top half owned 92 percent of the wealth. While it is debatable just how representative Wentworth County is of late 19th century Canada, these historical results mirror other research. For example, in late 19th century Nova Scotia, the top 10% reported owning 66% of wealth, while results for Massachusetts in the late 1880s put the share of the top 10% at 74%.

I compare these with estimates done in a 2006 paper titled “Revisiting Wealth Inequality” by Rene Morisette and Xuelin Zhang in 2006 in Statistics Canada’s Perspectives on Labour and Income (See Table below).  They use the Assets and Debt Survey for 1984 and the Survey of Financial Security for 1999 and 2005 to construct estimates for the distribution of wealth for families in Canada.  While survey data and probate wealth data are two very different sources and the sample sizes are vastly different (there are only 154 individuals, with three quarters of them male, in the 1892 Wentworth County data) the comparison is interesting.

 

 

Wealth in the 19^th century was very unequal – according to the estate multiplier estimates, the top 10 percent held 83 percent of all wealth.  One of the changes in wealth distribution moving from the nineteenth to the twentieth century was the growth of a middle wealth holding class.  The share of the top 10 percent declines while that of deciles 2-6 goes up.  However, in 2005, the top 10 percent still holds almost 60 percent of the wealth.  The next five deciles hold the remaining forty percent while the bottom forty percent of the distribution has almost nothing. 

 

After a century, the bottom half's share of the wealth distribution in Canada has not changed very much. While the inequality of the 19th century can perhaps be attributed to an unmitigated capitalist market economy, what explains the present? After all,  during the twentieth century Canada adopted a comprehensive welfare state system with income security programs, subsidized university education, public health care and other assorted public goods and infrastructure. One would think that, over time, human capital would be built up, earnings enhanced and wealth would then trickle down to those at the lower end of the wealth distribution.

What about the effects of our redistributive tax system? In the 1890s, tax revenues came primarily from tariffs and excise duties. There was no general sales tax or income tax. We now have a mildly redistributive tax system, and still no major improvement has occurred in the share of wealth held by the bottom half of the population. The only redistribution appears to have occurred away from the top 10%, and towards the remainder of the top half. Have the welfare state and the progressive income tax system primarily benefited the middle class? Should we take this as proof that poverty is inevitable?   Or is it the existence of a middle wealth holding class that is the anomaly with most of history being divided simply into rich and poor?

 

 

Comments

[Nick Rowe]

Good post Livio.

Help me understand one thing. What exactly is "probate"? Is there separate data on probates and estates? I got confused by your paragraph beginning:

"The approach used to adjust the data was what is known as the estate multiplier technique ....."

If you have wealth data on everyone who dies, and assume that death, conditional on age and sex, is independent of wealth, I can see how you can estimate the wealth distribution from that plus demographic data on age and sex. But I got lost on the probate stuff.

BTW, do you also have data on number of surviving children, by wealth? Thinking of the Alms economist, whose name escapes me.

[Determinant]

Probate is the process of registering and administering an estate according to a will. A probated will is one that has been fulfilled and all claims against the estate resolved.

Probate also means proving a will is valid and dealing with any objections. Surrogate Courts were created for this purpose though they have now been subsumed into the Superior Court of Justice.

At the time Livio is studying I imagine farms and their associated assets and liabilities (buildings, livestock, loans outstanding) were by far the largest category.

A further point of interest is that Livio very likely included members of my family in his study.

[Livio Di Matteo]

Nick:
Determinant is on the mark re probate but for the record:

The primary data source is the probate records of the Ontario surrogate courts. Under the Surrogate Courts Act, 1858 (Statutes of Canada, 22 Vict., Cap. 93, 1858) a surrogate court with the power to issue grants of probate and administration valid throughout the province was established in each Ontario county, replacing the centralized Court of Probate established in 1793. Probate was an institutional arrangement, which transferred property from the dead to the living and one applied for probate in the county or district where most of one's property was located. The process of probate served to grant administration over the estate of the deceased, authenticate the will and provide evidence as to the character of the executor. In intestate cases (without a will) the application to the court for administration was made by an interested party (usually the widow or next of kin but sometimes a creditor) and once granted, distribution of the estate was made according to law.

I do have data on number of children.

Determinant:
Real estate, livestock, etc... were very large and important asset categories given the agricultural nature of the economy. However, there was also a surprisingly large amount of financial asset holding - bank accounts, mortgages, bonds, life insurance, etc...May do another post later on composition. I've taken down quite a few Ontario wills even outside Wentworth Co. so I may have a fair number of people's ancestors.

Cheers.

[DF Sayers]

"Should we take this as proof that poverty is inevitable?"

The above data do not apparently reflect poverty (at least not in the sense I think of it). Rather, it reflects wealth inequality. I would say that a well-functioning capitalist economy always begets inequality, which rises exponentially between realignments. I am not as familiar with Canada's (and Wentworth's) economic histories, but I would point to the radically different tax rate, growth, employment and government expenditures in 1930s-50s US vs. today as an example. Taxes on the very rich have dropped, entitlements reduced, and often under the administrations of Democrats who claim to oppose such measures. I think this points to a specific clique managing government, but the inequality is unsustainable per the loss of demand that it incurs.

[Pdt]

Interesting. I take it that Canadian probate law is much the same as Australia's or Britain's? IE that only estates above a certain size required probate? If so, the probated only figures for 1892 are probably more reflective of the actual distribution of wealth. Poorer people - and this would include many small farmers and similar - probably did not bother (I know my small-holder ancestors did not).

This is one perspective. Another would be the social one - that many of the welfare state initiatives mentioned did not so much redistribute wealth as redistribute the power associated with it. The citizen who can rely on a pension, knows that unemployment assistance is available, is a member of a union, and need not fear that sickness will leave him or her destitute is in a very different position vis-a-vis the wealthy than one without these protections. This is reflected in the economy in confidence, in types of manufacture and consumption and in policy.

One might also note that markets do tend - unless continually corrected - to concentrate wealth (see, eg, that astonishing concentration of land ownership in the UK in the heyday of the UK upper classes around 1850). What would the figures look like without government intervention? Pakistan perhaps?

[Min]

DF Sayers: "the inequality is unsustainable per the loss of demand that it incurs."

Hmmm. I would have thought that the loss of demand would tend to perpetuate inequality, through the loss of opportunity.

[Wonks Anonymous]

Possibly related, Greg Clark on upward mobility in England over time and the possible emergence of a permanent underclass:
http://www.econ.ucdavis.edu/faculty/gclark/papers/Ruling%20Class%20-%20EJS%20version.pdf

[Saj Karsan]

I agree with DF Sayers in that these figures do not demonstrate poverty, just inequality. Did the bottom decile 100 years ago have low infant mortality rates, ready access to clean water, reliable electricity, and easy and cheap access to entertainment (through e-books, phones, tv and internet)? Today's bottom decile have a higher standard of living than the bottom decile of a century ago, and yet it is offered that "poverty is inevitable" because there is inequality?

[JL]

http://robertreich.org/post/6595110483
Comments on this? I like these vulgarisations but they are hard to criticize without the proper training and especially data. The sociological and political aspects are obviously simplistic, but I was wondering about the economic aspects.