Untangling the sources of racial wealth inequality in the United States

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Academic research on the reasons for rising wealth inequality in the United States is not as robust as research on growing income inequality, though there is little question that both types of inequality are on the rise. According to research by University of California-Berkeley economists Emmanuel Saez and Gabriel Zucman, the top 0.1 percent of families tripled their share of U.S. wealth since the late 1970s, from 7 percent to 22 percent, in 2012, the last year for which complete data are available. These 160,000 families each had a net wealth of at least $20 million.

But this is just one way of looking at how wealth is unequally distributed across society. Wealth in the United States is also highly unequally distributed by race and ethnicity. And it looks as though this inequality has increased since the Great Recession. Researchers, however, aren’t exactly sure of the sources of these wealth gaps. A new paper by economists at the Federal Reserve tries to sort out the role of various sources.

The paper, by economists Jeffery Thompson and Gustavo Suarez, tries to figure out how much of the wealth gap between white Americans and black and Hispanic Americans can be attributed to a number of “observable” characteristics. These characteristics include education level, income, homeownership and inheritances received from parents. The two authors use data from the Survey of Consumer Finances, a data set on family wealth holdings run by the Federal Reserve that covers from 1989 to 2013, to catalogue these observations.

They find that the amount of wealth inequality by race and ethnicity is quite large. The average wealth of white families was, on average, five to six times larger than that of black families, and between four to five times larger than those for Hispanic families. In sorting out the source of these gaps, Thompson and Suarez find that a large share of the gap can be explained by these “observable” factors. The largest factors appear to be the levels of income and homeownership. In other words, the fact that white Americans have higher income levels and rates of homeownership explain a large chunk of the gap. The results, however, show that inheritances don’t play that big of a role in the gap, though the authors offer no explanation of why this might be the case.

In total, the two authors believe these observable factors explain a large chunk of the racial and ethnic wealth gap. At the median, the exact middle of the distribution of wealth, they explain almost the entirety of the gap between white and Hispanic wealth and 80 percent of the gap between white and black Americans. Yet the role of unobserved factors rises the further they research those at the top of the wealth ladder. For the top 10 percent of families, the observable factors explain only 70 percent of the gap between black and white Americans and only 80 percent of gap with Hispanic families.

In other words, the gap between families at the top of the white wealth ladder and families at the top of the black and Hispanic ladders can’t be fully explained by differences in education, income levels, homeownership, and inheritances. Some other factors, then, must explain the rest of this gap.

Discrimination, in its many forms including redlining in the housing market (with probable corresponding affects on inheritances) could play a major role in this unexplained gap. But Thompson and Suarez note that these unobserved factors aren’t necessarily just discrimination. They note that the universe of things that aren’t observed is quite high, so a number of factors could be at play here. At the same time, many of the observable factors they find that explain wealth inequality can be very strongly influenced by discrimination. Disparities in income, education, homeownership, and inheritances in the United States were and are influenced by racial and ethnic discrimination.

Clearly this accounting of the wealth gap is incomplete. Teasing out what those remaining unobserved factors are and why they play a larger role at the top the of wealth ladder would give economists and policymakers alike a sense of the connections between the sources of income and wealth inequality in the United States.