The Racial Wealth Gap and Recovering from Income Shocks

The racial wealth gap in the United States is a legacy of nefarious actions and policies such as slavery, Jim Crow laws, and redlining. Based on data from the Survey of Consumer Finances in 2016, the median white family had a net worth of $188,200, nearly eight times that of the median Black family and over five times that of the median Hispanic family.

Until recently, research on how the racial wealth gap impacts spending in the face of everyday income changes, such as irregular hours, seasonal work, commissions, or unemployment, was scarce. In a recent working paper published by the Becker Friedman Institute for Economics at the University of Chicago, Ganong et al. investigate how Black and Hispanic families are forced to make more drastic cuts to their household spending than white families in response to income shifts of similar magnitudes. The authors use data from bank accounts and public voter registration files to study shifts in spending, utilizing a statistical specification that isolates how involuntary changes in employment affect household consumption. The degree to which families have to cut spending, the authors verify, is primarily a function of their liquidity and their access to readily available assets in the form of cash or money from checking and savings accounts. The larger the assets of a household, the less impacted they are by changes in income.

Ganong and co-authors highlight that even temporary fluctuations in income can affect the well-being of families. Without a financial safety net to fall back on, individuals may face impossible choices between things like paying the bills or buying groceries. Over the long term, income stability increases Hispanic households’ lifetime spending by 1.9% and Black households’ lifetime spending by 2.3%. The authors note that an increase in lifetime spending of 0.5% is considered “large,” and so public policy measures that stabilize income for these populations could play an important role in helping families build and maintain their wealth.

These findings have especially critical implications during a global pandemic. As detailed in a poll conducted by NPR, the Robert Wood Johnson Foundation, and the Harvard T.H. Chan School of Public Health, most Latino, Black, and Native American households have reported facing serious financial problems during the pandemic. Over 40% of the households polled have already used up most or all of their savings.

Furthermore, according to pandemic data from the Economic Policy Institute (EPI), Black women experienced the greatest job losses of all groups studied by the EPI. In a population where women are more likely to be heads of households, this loss of income is particularly devastating to their financial health and their dependents’ well-being. EPI data show that Black individuals are also more likely to be front-line workers, putting them at increased risk of contracting COVID-19 and thereby jeopardizing the stability of their income streams. Viewed through the lens of Ganong et al.’s paper, it is clear that these job losses will have far-reaching impacts on the financial well-being of Black families.

In the wake of income shocks like those caused by COVID-19, how can public policy step in to give Black, Indigenous, and People of Color families greater financial stability? One critical avenue is for policymakers to take meaningful steps towards reparations for Black and Indigenous families, as detailed by Marvin Slaughter in his piece, Reparations Is the Only Choice. The Urban Institute notes that social programs like universal children’s savings accounts and subsidies that promote emergency savings can also help build wealth. Ganong et al. find that, in response to equivalently-sized income shocks, families with comparable levels of liquid wealth adjust their spending in similar ways, irrespective of race. It is a promising finding, as the United States navigates a pandemic-battered and receding economy. Bridging the racial wealth gap should be a key policy priority to help get families on a path to financial well-being in the post-COVID-19 era.

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Ganong, Peter, Damon Jones, Pascal Noel, Diana Farrell, Fiona Greig, and Chris Wheat. 2020. “Wealth, Race, and Consumption Smoothing of Typical Income Shocks.” University of Chicago, Becker Friedman Institute Working Paper no. 2020-49. http://dx.doi.org/10.2139/ssrn.3583707.