Dynamic Racial Wealth Inequality Accounting, 1860-2020

• In Event: Do Policy Levers Close Racial Gaps? Evidence Across Wealth, Taxation, and Higher Education

Abstract

What economic channels account for Black–White wealth inequality dynamics since Emancipation? We calibrate a model with group-specific wealth accumulation and earnings frictions to match, from 1860 to 2020, U.S. wealth distributions by race. The model incorporates heterogeneity in income processes, exposure to downside risk, and differences in saving behavior across groups, allowing us to jointly rationalize observed disparities in both wealth levels and distributions over time. Black households earn less on average and also face larger wealth downside risks than White households, which significantly shapes their ability to accumulate and sustain wealth, both at the intensive margin (wealth-to-income ratio) and the extensive margin (share of households with zero or negative wealth).

A key contribution of the analysis is to highlight the role of wealth fragility. Wealth fragility is crucial for explaining the significant share of Black households with zero or negative wealth, as even modest negative shocks can lead to persistent wealth depletion. This mechanism generates a high prevalence of wealth inequality that cannot be fully accounted for by income differences alone. Moreover, the model captures important historical dynamics: Black–White racial gaps in wealth destruction risk widened sharply during periods of institutional and economic change. In particular, these gaps spiked around the Civil Rights era, despite concurrent progress in earnings convergence, suggesting that improvements in income alone were insufficient to close wealth disparities.

By 2020, the gap in wealth destruction risk remains substantial, standing at approximately 5 percentage points. Counterfactual decompositions indicate that differences in exposure to downside financial risks play a central role in shaping long-run wealth inequality between Black and White households. In fact, we find that downside risks explain approximately 90 percent of the extensive-margin racial wealth gap, while the earnings gap explains more than 80 percent of the intensive-margin racial gap before 1960, but less than 50 percent since 1960. Our results further suggest that these risks not only hinder wealth accumulation but also exacerbate vulnerability to negative shocks, offering a promising framework for understanding and addressing persistent racial wealth inequality.

Author

• Teega-Wende Zeida, Brock University
  Presenting Author