TOWARDS AN UNDERSTANDING OF THE BLACK/WHITE WEALTH GAP

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DESCRIPTION (Adapted from applicant's abstract): A great deal has been written about differences in earnings between black and white Americans. Much less attention has been paid to differences in net worth. Thus it is surprising that there has been relatively little work that focuses on racial differences in wealth and virtually no analyses that attempt to explain, rather than simply document, wealth differences between the races. The goal of this project is to begin to fill this void by evaluating various possible explanations for the wealth gap. Our first aim is to characterize more adequately than previous work the statistical relationship between wealth and income for the two groups. Here we stress the implications of the observation that wealth levels are highly nonlinear in labor income. Our preliminary calculations suggest that these considerations explain a significant fraction, but by no means all, of the wealth observation. Our second aim is to focus on the extent to which life-cycle theory, extended to allow for altruistic transfers within the family' can explain the accumulation behavior of whites and blacks, conditional on the lifetime pattern of earnings and the distribution of ages of retirement and mortality. Life cycle theory suggests that differences between blacks and whites in replacement rates, earnings growth (both within and between generations), life expectancy, retirement age, and rates of return on assets ought to be important determinants of differences in wealth/income ratios. Here we propose a number of tabulations and simulations which should shed light on the relative importance of each of these considerations. Finally, we aim to explore the implications of low wealth levels for the financial well being of the black population. We will explore the extent to which the very low level of assets among the black population leads to sharp falls in consumption (relative to whites) at the time of retirement, and to what extent these low levels of assets have implications for the inherited wealth of future generations of blacks.