Wealth Gap Between Whites and Blacks

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In the United States (US), the household wealth of a median white family in 2019 was $147,000, while the median black family owns $3,600 – just over 2% of what the median white family owns (Collins, Asante-Muhammad, Hoxie, & Terry, 2019). The wealth gap between whites and blacks not only suggests that there is an inequality of outcomes, but also an inequality of opportunities. The economic opportunities provided by wealth range from security against disruptions in income to the ability to make investments in businesses, human capital development and housing. Because wealth can be transmitted across generations, the racial wealth gap is continually perpetuated and widened. If the trends of the past 3 decades continue, the median black family will own just over 0.3% of what the median white family owns by 2050 (Collins et al., 2019). In this paper, I demonstrate that the main factors behind this yawning racial wealth gap are disparities in home equity and college education attainment as well as the persistent labor income gap between whites and blacks.

For most American families, home equity is the single largest contributor to household wealth (Taylor, Kochar, Fry, Velasco, & Motel, 2011). However, homeownership rates are heavily skewed towards whites. In 2019, 73.2% of whites own a home while the proportion of blacks who own a home is only 41.8% (U.S. Census Bureau, 2020). A reason for this disparity in homeownership rates is that blacks are less likely to afford homes as compared to whites due to the existing income and wealth gap. The median black family could afford only 55.3% of all homes listed for sale in the US in 2017 while the median white family could afford 77.6% of listed homes (Mikhitarian, 2018). Another reason for the disparity in homeownership rates is that blacks have lower access to credit due to discriminatory lending. Black borrowers pay an average of 29 basis points more on their mortgage interest rates than white borrowers with comparable credit risk (Cheng, Lin, & Liu, 2014). An analysis by Berkeley researchers Bartlett, Morse, Stanton and Wallace (2017) found that between 2008 and 2015, lenders rejected 1.3 million creditworthy black and Latino mortgage applicants between 2008 and 2015. When the researchers deleted the race identifiers of these rejected applications, the mortgage application was accepted. In addition to a disparity in homeownership rates, there is also a disparity in the home values of whites and blacks. In 2008, the home of a median white family is worth $85,800 while the home of a median black family is $50,000 (Traub, et al., 2016). Other than the fact that blacks have lower purchasing power, the disparity in home values is also due to neighborhood effects: neighborhoods consisting mostly of blacks are found to have low home values due to declining infrastructure and high poverty rates (Krysan, 2008). Since home equity makes up the largest part of American household wealth, disparities between homeownership rates and home values are significant contributors to the racial wealth gap.

A college degree is essential for individuals to succeed in the labor market and build wealth. However, there are disparities in educational attainment between whites and blacks. Despite rising college attendance rates among blacks, the college attainment gap between whites and blacks have been widening. In 2016, 35% of whites completed a four-year college degree, compared to just 21% of blacks (de Brey, et al., 2019). One cause of this disparity is residential segregation, which keeps black families in neighborhoods with low-quality schools. As a result, black students are less academically prepared for college and are more likely to drop out. In a report by the National Assessment of Educational Progress (2012), it was found that high schools with a predominantly black and Latino student population have less access to high-rigor courses. For instance, 3% of high schools with a large proportion of minorities offer calculus, compared with 48% of high schools nationwide and 56% of predominantly white high schools. Another barrier to degree completion for black students is financial hardship. Rapid growth in college costs over recent years have led many blacks to drop out of college for economic reasons (Traub et al., 2016). Urban Institute researchers Blom and Monarrez (2020) performed the Oaxaca decomposition to explain the graduation gap between white and black students at colleges and universities in Virginia and Connecticut. They found that 45% of the gap is due to the difference in student preparedness while 16% of the gap is due to financial circumstances. A large unexplained component of 39% hints at the possibility of institutional racism, although there may also be other unobservable characteristics not accounted for. In short, disparities in college graduation rates between whites and blacks which can be attributed to residential segregation, financial circumstance or institutional racism results in differences in labour income which feeds the racial wealth gap.

The labor income gap between whites and blacks has contributed to about 20% of the growth in the racial wealth gap over the past few decades (Shapiro, Meschede, & Osoro, 2013). Other than differences in college graduation rates, this income gap can be attributed to discrimination (or racial differences in unobserved worker characteristics) and growing income inequality in general (Wilson & Rodgers, 2016). While blacks have been occupying higher ranks in the income distribution, this progress had been offset by a shift in overall income distribution. Over the last few decades, the share of income going to those at the upper end of the distribution had been dramatically increasing while everyone else continued receiving the same share of income. This shift had harmed blacks disproportionately as they are overrepresented in the lower end of the income distribution. As a result, the racial income gap stagnated over the past 50 years despite efforts to close it (Manduca, 2018). In 1968, the median family income of blacks was 57% that of whites. Fast forward to 2016, the median family income of blacks was 56% that of whites. In a study that employed statistical adjustment to control for this shift in income distribution, it was estimated that without the rise in general income inequality, the racial income gap would have declined to a greater extent (Smith, 1993). While most researchers have asserted that the racial wealth gap was too large to be explained by the racial income gap, Aliprantis, Carrol and Young (2019) demonstrated through the dynamics of wealth accumulation over time that the racial income gap is the dominant force driving the racial wealth gap.

Other than the negative impacts on the economic security and mobility for the black population, the racial wealth gap also stifles the US economy as a whole due to its dampening effect on consumption and investment (Noel, Pinder, Stewart, & Wright, 2019). Simulations by Weller, Maxwell and Solomon (2019) have shown that providing American children with seed capital in the form of a national baby bonds program would have the single largest effect on the racial wealth gap. In this program, an initial sum of money would be deposited into savings account for each American newborn. Additional progressive contributions would be made each year based on parental wealth. Once 18, beneficiaries can use the funds for asset-building purposes such as buying a home or paying for college, thus increasing access to homeownership and college education. This program, however, is no panacea. More can be done to tackle issues associated with discrimination, residential and school segregation, and the general rising income inequality.

References

Bartlett, R. P., Morse, A., Stanton, R., & Wallace, N. (2017). Consumer Lending Discrimination in the FinTech Era. SSRN Electronic Journal. doi: 10.2139/ssrn.3063448.
Aliprantis, D., Carrol, D., & Young, E. R. (2019). The Dynamics of the Racial Wealth Gap. SSRN Electronic Journal. doi: 10.2139/ssrn.3467718
Blom, E., & Monarrez, T. (2020). Understanding Equity Gaps in College Graduation. Urban Institute.
Cheng, P., Lin, Z., & Liu, Y. (2014). Racial Discrepancy in Mortgage Interest Rates. The Journal of Real Estate Finance and Economics, 51(1), 101–120. doi: 10.1007/s11146-014-9473-0.
Collins, C., Asante-Muhammad, D., Hoxie, J., & Terry, S. (2019). Dreams Deferred: How Enriching the 1 Percent Widens the Racial Wealth Divide. Institute of Policy Studies.
de Brey, C., Musu, L., McFarland, J., Wilkinson-Flicker, S., Diliberti, M., Zhang, A., . . . Wang, X. (2019). Status and Trends in the Education of Racial and Ethnic Groups 2018. National Center for Education Statistics.
Krysan, M. (2008). Does race matter in the search for housing? An exploratory study of search strategies, experiences, and locations. Social Science Research, 37(2), 581–603. doi: 10.1016/j.ssresearch.2007.06.001.
Manduca, R. (2018). Income Inequality and the Persistence of Racial Economic Disparities. Sociological Science, 5, 182–205. doi: 10.15195/v5.a8.
Mikhitarian, S. (10 April, 2018). Why White and Asian Home Buyers Have an Advantage Over Black, Hispanic Buyers. Retrieved from Zillow: https://www.zillow.com/research/affordable-home-listings-by-race-19419/
National Assessment of Educational Progress. (2012). The Nation’s Report Card: Trends in Academic Progress. National Center for Education Statistics.
Noel, N., Pinder, D., Stewart, S., & Wright, J. (2019). The Economic Impact of Closing the Racial Wealth Gap. McKinsey & Company.
Shapiro, T., Meschede, T., & Osoro, S. (2013). The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide. Institute on Assets and Social Policy.
Smith, J. P. (1993). Affirmative Action and the Racial Wage Gap. The American Economic Review, 79-84.
Taylor, P., Kochar, R., Fry, R., Velasco, G., & Motel, S. (2011). Wealth Gaps Rise to Record Highs Between Whites, Blacks and Hispanics. Pew Research Center.
Traub, A., Ruetschlin, C., Sullivan, L., Meschede, T., Dietrich, L., & Shapiro, T. (2016). The Racial Wealth Gap: Why Policy Matters. Desmos.
U.S. Census Bureau . (2020). Quarterly Residential Vacancies and Homeownership, Forth Quarter 2019.
Weller, C. E., Maxwell, C., & Solomon, D. (2019). Simulating How Progressive Proposals Affect the Racial Wealth Gap. Center for American Progress.
Wilson, V., & Rodgers, W. M. (2016). Black-White Wage Gaps Expand with Rising Wage Inequality. Economic Policy Institute.
Peer Editors: Priyahdharshini Haritheertham and Pamela Ngui Shan May.

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Wealth Gap Between Whites and Blacks

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