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How Can We Measure and Evaluate the Racial Wealth Gap?

June 15, 2016

The current political cycle has prompted renewed interest in the nation’s distribution of wealth—highlighting a disparity that is often called the nation’s “wealth gap.” The gap has been described as a chasm between the riches of the few set against the struggles of the poor and middle class. Yet a deeper social disparity has challenged public policy since the Civil Rights movement: even today, the fortunes of people of color remain radically different from those of white people.  

A recent analysis suggests that the average white family holds 13 times more wealth than the average black family and 10 times more wealth than the average Hispanic family. In fact, if we follow the same white and African-American families over the course of their lives, those same families have seen the wealth gap nearly triple since the 1980s. We call this difference “the racial wealth gap.”

Drivers of the Racial Wealth Gap

The story of race and class in the United States has been well documented, highlighting the confluence of racism and public policy that has extended the racial wealth gap (e.g., through real estate red-lining practices and discrimination among employers). A recent body of research published in a special issue of the Journal of Race and Social Policy (co-edited by myself and Tom Shapiro) focuses on a variety of other factors:  disparities in incarceration rates; differential rates of homeownership; different neighborhood wealth trajectories; different employment prospects; limited access to inter-generational wealth; and greater credit/debt burden. During a family’s lifetime, these factors can greatly enhance or dampen the financial assets they accumulate and thus impact a household’s potential for wealth.

These factors often interact, reinforcing faster growth of household assets among white families but slower growth among non-white households. For example, head start assets—or those assets parents provide to their children to help them access opportunities, such as a loan or gift to buy a house—enable white families to purchase a home early in their lives and begin building equity. Black families are much less likely to receive such financial transfers, and when they do, the median amount is substantially less than that of a white household.  Similarly, because black families often lack assets to help pay for college, many of them are forced into larger student debt.

Measuring the Racial Wealth Gap

The racial wealth gap is difficult to measure. Currently, only a few national surveys measure wealth and debt, most prominently the Survey of Consumer Finances (cross sectional) and the Panel Study on Income Dynamics (longitudinal). Furthermore, although most national surveys provide separate and valid measures for African-American and white households, the data needed to completely understand trends among many non-white populations—such as sub-groups for Hispanic, Latino and Asian-American households—are unavailable. Measuring wealth gaps among these other non-white households is more complicated because many are recent immigrants from differing countries with varied income, wealth statuses, and financial behaviors when they arrive. 

A new pilot survey is attempting to over-sample households of different racial and ethnic backgrounds at the city-level to understand how racial wealth gaps vary across minority households. Analyses of these data in Boston demonstrate that Dominican families hold the least wealth of all races across the city. This survey offers some promise in creating a more granular understanding of the racial wealth gap at different geographic levels.

Policy and the Racial Wealth Gap

It is hard to know which public policies will negatively or positively impact the racial wealth gap.  Part of the challenge is simply understanding how families accumulate financial assets, and then identifying appropriate policy levers that can augment their wealth accumulation. In general, we know that families grow their financial assets when there is more income coming into the household than going out of the household. This suggests that culturally appropriate, financial-education policies may help. But we also know that people acquire wealth through assets that are accumulated through workplace compensation, as well as those gained through kinship networks. This suggests a more complicated interaction between federal, state, and local laws that may constrain the impact of public policy.

Tools such as the racial wealth auditTM can help. Using the most conservative assumptions possible, the tool starts from a baseline of existing racial wealth disparities, and predicts changes in household wealth for families who are impacted by a proposed or existing policy. The tool then describes the resulting racial wealth gap, allowing policymakers to observe whether the proposed or existing policy will increase or decrease the gap. 

But to make real progress, researchers that support the development of evidence-based practices need to focus on how programs impact both race and the racial wealth gap.  With rigorous evidence in hand, public policymakers can help non-white households accelerate wealth accumulation, which will close the wealth gap and more importantly offer greater opportunities to all Americans.

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