Decomposing the Black-White Wealth Gap: The Role of Parental Resources, Inheritance, and Investment Dynamics

Much research has shown that even after controlling for income, African Americans suffer from drastically lower net worths than their white counterparts; these differences in net worth have important implications for the overall well-being of blacks and whites. If not directly from labor market disadvantages-i.e., income differentials-then from what does this racial gap in wealth arise? The current study assesses two complementary accounts of this race difference in asset holdings. The first, the historical legacy thesis, suggests that net wealth differences in the current generation are largely a result of discrimination in past generations; that is, they can be traced to the "head start" that whites have enjoyed in accumulating assets and passing them on. The second theory, the contemporary dynamics thesis, holds that current dynamics of institutional racism in the housing and credit markets are more responsible for the gap. The current study tests the relative impact of multi-generational forces and contemporary property and credit dynamics by using two-generational data from the Panel Study of Income Dynamics. It finds that parental wealth and income levels and inheritance all have a significant impact on the wealth levels of the current generation net of respondent socioeconomic characteristics; however, parental wealth and inheritance fail to explain the black-white gap. Further, this study shows that even predicting net worth from that same family's net worth five years prior (also controlling for savings during the interim), there remains a significantly negative effect of African American race. However, breaking out initial net worth into asset types shows that it may be different investment types and returns that explain the difference in asset accumulation over a five-year period.