Chair Yellen Discusses Inequality and Opportunity

Growing economic inequality inside the United States has emerged as a leading area of concern and debate among policymakers. Federal Reserve Chair Janet Yellen's recent speechOff-site link outlined the basics of widening inequality and some of her concerns regarding that trend. Yellen relied upon data from the Federal Reserve's triennial Survey of Consumer Finances (SCF). The 2013 SCF report is consistent with much existing data about the trend of growing inequality over the past several decades, and it shows that this widening inequality is hinged off of three primary sources: income, home values, and financial assets. According to the findings of the SCF, there are significant differences in the holdings and growth of real income, home values, and financial assets between the top 5 percent of households and the other 95 percent.

All told, much of the conversation surrounding economic equality centers on social and intergenerational mobility. Fundamental to the American dream is the ability to do better than the generation before you. Currently, research indicates that inequality can persist from one generation to the next. A study from the Pew Charitable Trust showed that approximately four in 10 children in the bottom fifth of households remained in that quintile as adults. Despite this, Yellen outlined four building blocks of opportunity to spur on intergenerational mobility. The first building block is making resources available to children during their formative years. This includes things like safe neighborhoods, access to quality schools, and better nutrition and health care. Research has shown that children with these resources have enhanced future earnings and outcomes.

Yellen pointed to a second building block: access to affordable higher education. Workers with a bachelor's degree earn 79 percent more money, on average, than those with just a high school education. However, the cost of college has been increasing significantly since 2001. This year student loan debt topped $1.1 trillion. Access to an affordable college education remains a key factor for higher earnings later in life.

The third building block Yellen cited is for households to have the opportunity to build a business, an important part of the American dream and a way to build wealth. While starting a company is risky, Yellen noted that business ownership is associated with higher levels of economic mobility and wealth generation. For example, she pointed out that for households in the bottom 50 percent that own a business, that business represents 60 percent of their overall wealth. Thus, enabling households to create businesses is vital to wealth generation. The last building block she described is that of receiving an inheritance. Inheritances are generally received at 40 years old, a pivotal time in an individual's life when parents are trying to save for college, make a career change, or launch a business. Inheritances give households, especially those with minimal financial resources, a sizable economic opportunity to improve their condition.

The four building blocks of opportunity Yellen outlined represent some of the major cornerstones of economic mobility in the United States. While inequality has been growing, the direct effect of that inequality has yet to be determined. More research needs to be conducted to determine the causes of inequality and what implications this inequality has on the larger economy.