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02.28.19

Policies designed to speed the closing of the racial wealth gap would do well to focus on closing the racial income gap, say Cleveland Fed researchers

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The average wealth of black households in the United States in 2016 was $140,000, while the average wealth of white households was $901,000, nearly 6.5 times greater. And the gap has changed little over the past half century.

What’s behind the persistence of the racial wealth gap? Federal Reserve Bank of Cleveland economists Dionissi Aliprantis and Daniel Carroll present new research that finds that the racial wealth gap is primarily the result of a sizeable and persistent racial income gap.

The researchers say that changing the income gap in their model changes the wealth gap dramatically. “For example, when we remove the labor income gap in our model, meaning black and white households earn the same income from their labor from 1962 onward, the black-to-white wealth ratio reaches 90 percent by 2007,” say Aliprantis and Carroll.

According to the researchers, other studies of the persistent gap in wealth between whites and blacks have concluded that the wealth gap was too big to be explained by differences in income. But using a different approach – one that captures the dynamics of wealth accumulation over time – Aliprantis and Carroll find that the income gap is the primary driver behind the wealth gap and that it is large enough to explain the persistent difference in wealth accumulation.

“The fact that black households have considerably less wealth than white households is troubling, not just because it is an inequality of outcomes, but also because it strongly suggests inequality of opportunity,” say Aliprantis and Carroll. “The economic opportunities provided by wealth range from protecting against unexpected disruptions to a household’s disposable income to enabling access to housing, good public schools, and postsecondary education.”

The researchers say that policies that successfully address the racial income and wealth gaps will have to address a broad set of issues. “For example, what is the relative importance of factors such as skills, racial discrimination in the labor market, and incarceration policies in maintaining the racial income gap?” say Aliprantis and Carroll. “Even more broadly, what is the role of factors such as deindustrialization, neighborhoods, and schools?”

Read more about the researchers’ findings in What Is Behind the Persistence of the Racial Wealth Gap?

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