Academic journal article Economic Perspectives

Black/white Differences in Wealth

Academic journal article Economic Perspectives

Black/white Differences in Wealth

Article excerpt

Introduction and summary

The gap in wealth holdings between African-Americans and white Americans is enormous--much larger than the gap in earnings. For example, Menchik and Jianakoplos (1997) find that the average wealth of black households is 20 percent of the average wealth of white households in the 1976 National Longitudinal Survey of mature men and 23 percent in the 1989 Survey of Consumer Finances, even though average black income is 60 percent and 50 percent of average white income, respectively, in the two samples. Blau and Graham (1990) use data from the 1976 and 1978 waves of the National Longitudinal Surveys of young men and women and find that, on average, young black families hold only 18 percent of the wealth of young white families, while the corresponding percentage for income is 64.9.

Wealth is important in any society. It influences access to capital for new businesses, is a source of political and social influence, and provides insurance against fluctuations in labor market income. It influences the quality of housing, neighborhoods, and schools a family has access to as well as the ability to finance higher education. The fact that friendships and family ties tend to be within racial groups serves to amplify the effect of the race gap in wealth on the financial, social, and political resources available to blacks relative to whites. [1]

What explains the huge wealth gap? In this article, we summarize some of the results of our ongoing research on this question, drawing heavily on the analysis in Altonji, Doraszelski, and Segal (1999). We focus much of our attention on the most obvious possibility, which is that the wealth gap may arise because whites have higher incomes than blacks and have marriage and fertility patterns that are more favorable to wealth accumulation. Indeed, the existence of a gap in wealth is not surprising in view of the well-established income disparity. [2] Both savings levels and savings rates are positively related to income. Since blacks on average have lower incomes than whites, we would expect blacks to have lower savings. A lower flow of savings translates into less wealth. Similarly, the fact that blacks are less likely to marry, have less stable marriages, and have more children implies that blacks will have less wealth per household than whites. The issue is whether differences in income and demographic patte rns can explain the large gap.

Several studies, including those mentioned above, have found large wealth differences even after controlling for differences between blacks and whites in average income and other factors. For example, Blau and Graham (1990) conclude that as little as one-quarter of the wealth gap can be attributed to racial differences in income and demographic variables. There are some limitations to previous studies that lead us to revisit the issue. For example, the wealth of a married couple is likely to depend not only on earnings last year but also on earnings in previous years. Earnings in any one year are influenced by transitory factors, such as whether an individual experiences a layoff or has opportunities to work overtime, and are a very rough indicator of the resources available to a household over the extended time frame in which wealth accumulation takes place. Smith (1995) and Avery and Rendall (1997) base their wealth models on current income alone, and this is not an adequate control for race-related differ ences in earnings streams. Consider a white family and a black family who have the same income in the previous year. In most cases, the white family will have enjoyed a higher income in other years than the black family, and thus will have higher wealth. Blau and Graham (1990) and Menchik and Jianakoplos (1997) decompose income into current income and the normal or usual flow of income to the household, which we refer to as permanent income. They measure the permanent component of income as the part of income that is predictable given race, sex, age, education, health status, number of children, and geographic location. …

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