Wealth inequality of private households differs widely across European countries, with Germany being one of the most unequal regardless of the measure used. The reasons for this have long been the subject of numerous discussions. In a recent research paper with Thomas Jansson and Yigitcan Karabulut, we have uncovered a surprising relationship: in more unequal countries, such as Germany, larger shares of the population declare that there is equality of opportunity and that people get what they deserve. However, the positive relation comes solely from those with at least a university degree, while the less educated exhibit no significant pattern. Could it be that greater wealth inequality makes educated people believe that the system is fair and motivates them to build up wealth, while it fails to move the less educated, leaving them behind and propagating wealth inequality and social tensions? Are there any implications for policy or is this a fact of life that we must accept? Or is it not a fact at all, but another meaningless correlation of which there are many examples?

Plotting the share of total household wealth belonging to the wealthiest 10% of households against the shares of people agreeing with statements on equality of opportunities and on fairness (see graphs) does not prove that wealth inequality causes these views. Maybe there are unobserved country factors that make people happy with the system and also generate inequality. Maybe the educated have created the institutional and policy structures that generate greater wealth inequality, and they are eager to defend the system. Maybe the wealthy have much greater opportunities to get educated in highly unequal countries, and they convince themselves that opportunities are equal, and the system is fair. Maybe the more educated can sort themselves into regions with greater wealth inequality and opportunities for them and they declare their satisfaction. The possibilities for a spurious correlation seem to be limited only by our imagination and inventiveness.

How could we design a field experiment that controls for all confounding factors and can isolate the role of exposure to wealth inequality in shaping household risk taking and wealth outcomes in the medium and longer runs? The answer sounds scary. We would like to take people that are as similar to each other as possible, except for their education level, and randomly parachute them into areas that are identical in every respect except for the degree of wealth inequality they exhibit. We would then return ten to twenty years later to see whether the educated people we allocated to the most unequal areas turned out to be the ones more likely to have taken risks in their occupation, portfolio, and housing, and to have attained higher wealth levels and positions in the wealth distribution. Who would propose, authorize, let alone fund, such an experiment in a democratic country, where people are free to locate wherever they want and where people and regions differ in a multitude of ways?

Luckily, we can get close to such a setup by utilizing a policy implemented for very different reasons, combined with econometric methods that control for the role of other relevant differences among environments or people. In our paper, we employ a refugee allocation program implemented by Sweden, mainly in the years 1987-1991, to avoid congestion of refugees in big cities with limited employment opportunities. The program administrators were allocating refugees to apartments in different municipalities across Sweden as these were becoming randomly available. They were paying attention to the refugees’ family situation, education level, and language, but this and all other refugee data at their disposal are also available to us as researchers, and no interviews were conducted. The refugees were, by definition, at the start of their economic life in Sweden. The data allow us to focus on refugees who were destitute and happy to accept the allocated apartment and to take advantage of the integration opportunities offered by the government. In fact, they stayed in those municipalities for more than 8 years on average, and they were tracked by the statisticians even if they moved. For all these refugees, we can observe their level and composition of wealth ten to twenty years after their initial allocation. We also know their country of origin, a long list of household characteristics relevant for wealth and portfolio behavior. Further, we know the municipality of initial allocation and some key characteristics, such as the municipality’s average household income, household wealth, and income inequality at the time of allocation. Such a rich dataset allows us to overcome the issue that refugees, though all initially destitute, differed in several other characteristics; and that municipalities of initial location did not just differ in terms of wealth inequality but also in other, potentially relevant, respects.

We find that educated people who were exposed to greater wealth inequality in their initial location were more likely to be successful ten to twenty years later in terms of greater wealth, higher position in the wealth distribution among people in their age cohort, and higher ratio of wealth to income. They were also more likely to take risks, in the form of self-employment, stockholding, and homeownership. Importantly, these effects were significant in the top 50% of municipalities in terms of wealth mobility, and not among the rest.

How do the educated end up being wealthier when they are exposed to greater wealth inequality at the start of their economic life? We dig deeper into the mechanism, beyond their greater risk taking. Somewhat surprisingly, exposure to greater wealth inequality does not appear to trigger labor market responses of educated people: those exposed to higher wealth inequality do not end up with higher labor income or lower risk of being unemployed ten to fifteen years later. Such exposure also does not seem to inspire the refugees in their choice of whether and how much additional education to acquire after they witness wealth inequality. Do the educated simply imitate the risky choices of wealthier people in the municipality? We don’t find evidence of such imitation, let alone evidence of learning from those at the top: portfolio diversification and rebalancing do not appear to respond to exposure to inequality. We don’t even find evidence of the educated refugees being influenced by the educated wealthy people as role models. The thrust of the evidence points to the interpretation that educated people perceive higher wealth inequality as an opportunity in environments that allow mobility, and that they are more likely to be successful in their self-employment and risky financial and housing investments, ending up with higher wealth levels.

The picture is grim when it comes to the less educated people. These appear to be largely uninfluenced by the degree of wealth inequality to which they were exposed, not only in areas of low wealth mobility, but also in areas of high wealth mobility. Could it be that they do not accurately perceive wealth inequality and mobility? Could it be that, even when they perceive inequality and mobility reasonably well, they still cannot take advantage of risky opportunities to reach higher levels of wealth?

It is not guaranteed that people accurately perceive inequality around them. Recent research on perception, cognition, and developmental and social psychology, focusing mostly on income (rather than wealth) inequality, finds that people receive and process inequality cues from their environment. These can be social class cues from their peers, information from newspapers, and observation of the built environment around them. In a previous paper, we have found evidence consistent with financial information flowing through social interactions with peers. Moreover, Sweden is a very transparent society, in which local newspapers often report on the wealth of the richest locals. The less educated people, however, may have greater difficulty receiving both types of cues, as their peers are likely to be less informed and as they are less likely to have direct access to the Swedish language press. They are left with observing and interpreting the built environment around them.

Perhaps more fundamental than perceiving wealth inequality, though, may be the question of whether less educated people can make effective use of risky occupational and portfolio choices to improve their position in the wealth distribution. For one thing, recent research has found that people of low socioeconomic status (i.e., low education and low income) tend to be more pessimistic about asset returns. It has also found that lower education is associated with lower achieved asset returns.

So, when it comes to policy implications, is it all about education? Can we avoid the pitfalls of growing wealth inequality and social tensions simply by raising the minimum number of required school years? Although some research would seem to support such a mechanism, there is considerable current research suggesting that educational attainment and returns on wealth and on its components are joint outcomes of a more fundamental factor, namely of innate abilities to process information and to run finances. If we are going to empower the less educated to respond to greater wealth inequality by successfully exploiting opportunities for generating wealth, we need to adopt a multi-pronged approach that informs the less educated about such opportunities, advises them on how to use them without being destroyed by the risks, and provides them with simpler financial products and options that get automatically activated if individuals don’t actively choose them. If growing wealth inequality threatens social cohesion by leaving the less educated people behind while propelling others to the top, such empowerment can be an alternative, or at least a complement, to proposed redistributive schemes that entail wealth taxes. Wealth taxation generates not only political opposition but also disincentives for successful risk taking. Empowerment and support of the less educated in their financial decisions provide incentives for them to improve their financial well-being, and for the financial sector to grow its business through a democratization of finance.