On average, White households in the United States possess about ten times more wealth than their Black counterparts and eight times more wealth than Latino households. And the wealth inequality gap between White and Latino/Black Americans is growing.
The racial wealth gap is the differences in wealth between White households and their Black and Latino counterpart households. It measures the median differences in the wealth of Whites vs. that of Black Americans or Latinos.
Over the last four decades, the racial wealth gap has grown. Between 1983 and 2016, the median income for Black households halved while that for White households rose by a third.
What is wealth and how do you build it? What is the history of the racial wealth gap? How do households build wealth? What contributes to the wealth gap and what can be done to close the gap?
Table of Contents
What Is Wealth and How Do You Build It?
Wealth is the measure of assets a family or individual possesses or owns, minus any debts owed. Resources or assets may include retirement accounts, a home, and money saved. Debts or liabilities include student loans, credit cards, and mortgages. Wealth equals assets minus liabilities.
The income of a household or individual influences its wealth. If individuals can get jobs with reasonable wages, that will allow them to set money aside. These funds can be placed into savings, retirement funds, and educational costs.
Households can also build wealth through owning homes that appreciate in value. Money saved from wages can be used for investments or for starting a profitable business.
Parents can also offer a financial cushion that will protect adult children by helping with down payments for homes and paying for education. Wealth is also passed down from one generation to the next through inheritance which can then be used to grow more wealth.
Yet high-income and middle-income White households have more accumulated wealth than their Black and Latino counterparts earning similar incomes.
What are the causes of this wealth disparity?
the History of the Racial Wealth Gap
in the United States
Customs and laws that existed even before the United States was founded favored Whites at the expense of Blacks in building wealth. Slavery prevented Blacks from earning wages in exchange for their labor for about 246 years. Post slavery, the effect of racism, including economic and racial segregation further affected households and communities nationwide.
After WW1 the G.I. Bill, for instance, helped White veterans access government-sponsored homeownership and education, key factors to wealth-building. However, Black veterans were excluded from enjoying the same benefits systemically and statutorily.
“Explained: The Racial Wealth Gap”
Slavery was replaced with sharecropping, convict leasing, Jim Crow, disenfranchisement, and legal discrimination. Jim Crow reemerged in social policies and federal housing to further prevent Blacks from building wealth.
In 1863 Black Americans had a 1% share of the national wealth. Today this figure is only 1.5%. Despite moving from the south for green pastures in urban industries, Blacks continued to experience further worsening of the wealth gap.
How Does Inheritance Affect Wealth?
It was forecasted that Americans would inherit almost $765 billion in gifts and bequests alone in 2020, excluding wealth transfers to spouses and for child support. Inheritances make up about 4% of the total household income on a yearly basis. Most of this wealth goes untaxed.
Black Americans do not transfer as much wealth to the next generation as Whites do. Smaller incomes, lower rates of savings, and fewer opportunities to build wealth through real estate and other investments leave little for Blacks to pass along to the next generation.
Costs of caring for senior family members may leave Black and Latino families with a “negative inheritance.” About 75% of African American households have retirement savings amounting to less than $10,000 while a fifth of these families have $0 net worth or even less.
With the looming retirement of the baby boomers, trillions of inheritance dollars are in the forecast.
Most Americans do not inherit money, and if they do, it’s a very small amount. Still, Whites are five times more likely to receive an inheritance than Black Americans, respectively, 36 percent to 7 percent. And Whites received nearly ten times more wealth than Blacks.
Inheritances for White families convert more readily than for Black families. Each $1 of inherited money yields 91 cents for Whites and just 20 cents for Black Americans.
HOW WEALTH IS ACCUMULATED - THE ROOTS OF THE WIDENING RACIAL WEALTH GAP: EXPLAINING THE BLACK-WHITE ECONOMIC DIVIDE
While inheritance adds to the more substantial portfolio that Whites start with, Blacks typically set aside their inherited money for emergency savings.
How Does Homeownership Contribute to the Racial Wealth Gap?
The lingering effects of policies such as redlining and subprime loans have lessened the ability of Black families to accumulate wealth through homeownership. Since the greatest wealth of most families comes from home values, this has caused the wealth of many Blacks to lag behind.
For instance, the 1934 National Housing Act redlined neighborhoods where Black families lived, tagging them as areas with bad credit risks. This discouraged banks from lending money to Blacks wanting to purchase real estate in Black neighborhoods, and it excluded them from buying homes in White neighborhoods. Giving Whites access to valuable real estate markets while Blacks were relegated to poor neighborhoods.
REDLINING MAP: GREEN ZONE=A, FIRST GRADE | BLUE ZONE =B, SECOND GRADE | YELLOW ZONE=C, THIRD GRAD | RED ZONE=D, FOURTH GRADE.
The Federal Housing Administration (FHA) of the 1930s created loan programs so more Americans would have access to homeownership. However, the process of color-coding neighborhoods into red zones for “bad areas” and green zones for “good areas” prevented Blacks from accessing loans for homes in neighborhoods that were designed green zones.
Instead, Blacks were relegated to living in red zones where homes and businesses had lower value. Developers also discriminated against the red neighborhoods. Residents in red zones were systematically denied bank loans and government resources.
They were forced to get subprime loans which carried a higher interest rate than traditional loans. The higher payments increased the chance that the homeowners would default on the loans and lose their homes.
Green neighborhoods, on the contrary, attracted real estate developers who built homes and properties that helped these neighborhoods increase in value. Only Whites could live in these areas where estates grew in worth.
The 1968 Fair Housing Act outlawed redlining officially, but its patterns of residential segregation continued to impact Black families. The Black neighborhoods were nothing like those where Whites resided. The red zoned neighborhoods had lower home values, higher rates of poverty, and declining infrastructure.
More recently, the Great Recession of 2007 to 2009, resulted in a global financial crisis. This economic collapse was the most severe recession since the 1930s Great Depression.
The financial downturn caused high rates of unemployment. And with the discriminatory lending practices that targeted Blacks and other minorities with high-interest housing loans, the result was huge rates of foreclosure in those communities.
Blacks lost 53% of their wealth during the recession. Latinos lost 66%. Whites only lost 16%.
OVERCOMING THE HOMEOWNERSHIP WEALTH GAP
Many past policies that controlled homeownership have harmed the wealth-building of Black families. Changing those policies may help expand opportunities and make them more available to everyone. Here are some suggestions:
Create mortgage policies to favor struggling homeowners
Enforce stricter anti-discrimination housing regulations
Lower mortgage interest tax deduction cap policies
Build policy solutions at local government levels
Design outreach and counseling programs for renters and mortgage-ready millennials
Increase the number of homes available to first-time homebuyers since a greater number of people in the minority population are first-time homebuyers
Strengthen FHA’s loan program for first-time homebuyers who qualify for FHA mortgages
Use federal dollars to strengthen the FHA program and lower mortgage insurance premiums and monthly mortgage payments
Improve access to down payment assistance programs. For example, providing assistance to those living in formerly redlined or segregated areas.
Expand the credit score models. Including rent and utility payments would help boost credit scores
Finally, build more homes in Opportunity Zones. These are economically-distressed communities where private investors may be eligible for tax incentives. Developers who build homes and help revitalize these neighborhoods may receive tax breaks.
Using Median to measure the racial wealth gap
Why using the median is important.
According to the Federal Reserve's Survey of Consumer Finances, the average net worth of a U.S. household is $692,100. That’s because the 20 wealthiest people in the United States own more wealth than the bottom half combined, about 152 million people in 57 million households.
MEDIAN: The median is the number in the middle of a sorted list. Sort the list from highest to lowest value or lowest to highest, then find the number in the middle. That’s your median if the total amount of numbers in the list is odd. If you have an even number of values, add the two middle numbers together and divide by two.
So using the median is important because those at the top inflate the average. The median net worth for Whites as of 2019 was $189,000. Meaning that half of White households have a net worth of more than $189,000 and half own less than $189,000. Following suit, half of Black households make more than $24,000 and half make less than $24,000.
education and the racial wealth gap
Huge wealth disparities exist between families with identical education levels. Even in cases where Hispanic and Black household heads have a bachelor’s degree, their families’ median wealth of $78,000 and $68,000 respectively is still less than the $98,000 median wealth for White families with a head of household with no bachelor’s degree.
After accounting for demographic factors of the median net worth by education level of head of household, researchers still found there were considerable inequities:
The Black unemployment rate, for example, has consistently been twice as high as the rate for Whites, even among Black college graduates.
The financial returns of a college education are higher for Whites than Blacks, with Whites receiving up to $55,869 in returns and Blacks as low as $4,846.
After graduation Blacks and Hispanics are more likely to have student loan debt which depletes their wage savings. Also, disparate experiences in the labor market post-graduation contribute to lower education returns for Latino and Black families.
“Blacks and Latinos at all education levels, including college and advanced degrees, earn less than their White counterparts, which means lower lifetime earnings.” — John Schmitt, Research Director at the Washington Center for Equitable Growth
A degree by itself is not the solution to solving the United State’s racial wealth gap. But having a degree may be a way for individual families to attain greater financial security. So what can African American students do to improve their future household’s net worth? Consider a STEM (science, technology, engineering, mathematics) major.
African Americans make less than 10 percent in STEM careers: About 9 percent of computer science majors, 4.5 percent mathematics, and 4.2 percent engineering.
Majors that lead to lower-paying jobs, will mark students as lower-wage earners after graduation. For example, early childhood education is a common bachelor’s degree among African Americans but it is one of the lowest-paying majors with a median of $38,000 annually. In contrast, computer science majors tend to earn a median annual income of $65,000.
Among high-paying majors, Blacks tend to land in lower-paying fields. For example studying biology, which is the lowest-paying science field. Or study civil engineering, the lowest paying engineering sector.
Over the span of an entire career, low-paying majors affect economic growth. A bachelor’s degree in early childhood education vs a bachelor’s degree in petroleum engineering, for example, will create an earnings difference of $4 million.
For more details, review the chart below.
African Americans comprise 12 percent of the population but make up 20 percent of human services and community organizer jobs. The individuals in these service-oriented jobs are essential to minority communities and help shape social and political movements.
Why not encourage these young Black students to develop careers in technology, business, and STEM that will allow them to include elements of community service? A business executive, for example, can advocate for community development by providing small business loans and creating jobs while allowing herself or himself to make a better living wage.
College education disparities only make up a small contribution towards the racial wealth gap, and education policies so far have only made a minor difference in reducing the gap.
Making college more affordable should be a priority for policymakers. This would reduce financial hardships for students and their families by reducing tuition debt.
closing the racial wealth gap
Public policies created the wealth gap. Policies such as slavery, Jim Crow, redlining, mass incarceration, and subprime lending practices.
Individuals cannot close the wealth gap by changing their behavior. Something has to be done on a national scale. Changes that can make a difference have to come from systemic solutions that will have a giant impact. Here are some strategies that may help close the racial wealth gap:
Institute Universal Preschool
Invest in Affordable Housing
Raise the Minimum Wage
Institute Healthcare for All
Posting Banking
Guarantee Employment
Create Baby Bonds
Raise Taxes on the Ultra-Wealthy
Wealth generates more wealth. The wealthy have access to more favorable credit terms and healthy inheritance. They can purchase assets that appreciate.
Individuals who do not have wealth cannot suddenly overcome decades of public practices with their own individual acts. While Blacks have been excluded from intergenerational wealth, they may be able to attain gains within their families. Higher-paying jobs, higher education, and homeownership help, but on the whole, these gains are not enough to close the wealth gap.
CONCLUSION:
Some ways to close the racial wealth gap include spreading the word or creating awareness, supporting policies against engendering parity and discrimination, and providing financial education. Creating awareness spreads the word about the racial wealth gap to make people conscious of the issue, its severity, and how it negatively affects the economy. The Road to Zero Wealth Study is a good place to start.
Government policies encouraged white households to build wealth to the disadvantage of blacks. Tax reforms, an audit of the racial wealth divide, and enhanced data collection techniques can help narrow the gap. There’s a need to support and elect people, especially blacks, to legislative positions to institute policies and reforms that can reduce the racial wealth gap.
Black households must invest in financial education to make smart money decisions and fight wealth insecurity.
Read more About It
learn more About It
African Americans College Majors and Earnings, Georgetown University, 2016.
Porter, Eduardo. “Why America Will Never Get Medicare for All.” The New York Times, Eduardo Porter, 14 Mar. 2020, https://www.nytimes.com/2020/03/14/sunday-review/medicare-for-all-america-racism.html.
George Town Center on Education and the Workforce — Resources
Mollenkamp, Daniel Thomas. “Racial Wealth Gap Definition.” Investopedia, 12 Feb. 2021.
Semuels, Alana. “Segregation in the South - The Atlantic.” The Atlantic, 17 Feb. 2017.
“A Bad Check for Black America - Boston Review.” Boston Review. Accessed 4 Oct. 2022.
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“A Five-Point Framework | Urban Institute.” Urban Institute, Accessed 3 Oct. 2022.
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The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide
‘How Redlining’s Racist Effects Lasted for Decades.” New York Times, 24 Aug. 17.
Patricia Cohen. (2015). Racial Wealth Gap Persists Despite Degree, Study Says: Business/Financial Desk. The New York Times.