The Racial Wealth Gap

What Is the Racial Wealth Gap?

The racial wealth gap refers to the difference in wealth among different racial or ethnic groups. The term covers the disparities in access to opportunities, means of support, and resources. Federal surveys reveal that a large disparity exists in the United States among these groups. Data from the 2019 Survey of Consumer Finances, for instance, reveals that White families had eight times the wealth of Black families and five times the wealth of Hispanic families.

Understanding the Racial Wealth Gap

In the United States, racial wealth gaps exist between the minority and majority populations.

• Data from the Federal Reserve Board’s 2019 Survey of Consumer Finances show that White families have greater wealth than other racial groups, with Black and Hispanic families having the least. At middle and older ages, for example, the median wealth of White families is four to six times greater than the median wealth of Black families.
• White families with an unemployed head of household had almost double the wealth of Black families with a fully employed head of household, according to a 2017 article in the Federal Reserve Bank of St. Louis Review.
• In 2017, more than one in four Black households had a nonexistent or negative net worth. That compares to fewer than one in 10 for White families, according to the Economic Policy Institute.

Studies of the racial wealth gap vary somewhat in their relative measures of the different groups’ wealth. However, all confirm a gap of many multiples between the wealth of White families and the wealth of Black and Latinx families. Observers have described the situation as being “as bad or worse than it was before Civil Rights.” (Note that many economic researchers use Hispanic; Investopedia prefers Latinx, but in reporting, uses terminology that matches the research being cited.)

Racial wealth gap vs. racial wage gap

The racial wealth gap is greater than the racial wage gap alone, although they are related. Whereas the wage gap is the difference in income among different races and ethnicities, the wealth gap describes the disparity of cumulative wealth across races and ethnicities. This disparity results from differences in income and in the historical accumulation of wealth across generations. In this context, the broader concept of wealth stands in as a measure of economic health, and it predicts the ability to survive financial instability, such as periods of unemployment or low income, as well as to save for education and provide for retirement and an inheritance for offspring.

What Causes the Racial Wealth Gap?

Specific government policies and discrimination have fed into the creation of a gap, but it’s also important to consider general trends of wealth accumulation over time. In this sense, the current gap is generally viewed as the result of long historical and continuing patterns of wealth inequality.

Income inequality

Over time, income inequality can cause a disparity in wealth. Having a stable, high-earning income provides the opportunity to put away money while maintaining a decent standard of living, which is important in creating wealth. Disenfranchised minorities also have significantly less access to housing wealth, and government policies have kept them from accessing it. Wealth estimates suggest that as much as two-thirds of a typical American household’s wealth comes from home ownership.

Housing policies

Continual displacement has contributed to diminished wealth. Housing policies kept Blacks from tapping into land equity, and mismanagement by Congress of the Freedman’s Saving Bank, founded in 1865 and closed in 1874, also fueled inequality. The Federal Housing Administration (FHA) has historically tried to encourage White middle-class home ownership using techniques such as redlining and restrictive covenants that restricted minority access to federally subsidized housing and refused to insure mortgages for Black communities. These policies pushed Blacks into urban housing projects and kept them out of suburban communities, where housing appreciated in value and increased White wealth.

More recently, the Great Recession saw predatory, high-interest housing loans targeted at Blacks and other minority groups, leaving high unemployment and high rates of foreclosure for these communities in its wake. Since then, data reveal that there has been a staggered and slow recovery. Wealth inequality by race has grown in the middle- and upper-income categories, but narrowed between low-income White families and Black and Hispanic ones. Median home values of minorities have also lagged behind those of Whites since the Great Recession.

Political representation

Representation and political enfranchisement also play a part. The post-Reconstruction era reversed political gains made by freed Blacks. Racist laws and explicit violence, including the massacre of “Black Wall Street” in the Greenwood District in Tulsa, Okla., leveled historical attempts to grow wealth. The poll tax—a tax that had to be paid in order to vote and was levied with an eye towards suppressing minority votes—was outlawed only as recently as 1964 with the passing of the 24th Amendment.

Other factors

Education has historically influenced the creation of a wealth gap, as well.

Studies have also concluded that economic mobility is segregated in the United States along racial and geographic lines, in part due to access to social networks, a category that includes access to housing, support structures, and referrals for employment. This can provide a tilted playing field for those seeking employment or recovering from economic loss.

The impact of the coronavirus and of the resultant business closures was also not experienced evenly by different racial groups. Less access to healthcare, higher rates of underlying disease, and a larger share of “essential” jobs have led to higher rates of infection among minority populations.

White Families Have More Wealth Than Black, Hispanic, and Other or Multiple Race Families

Source: Federal Reserve Board, 2019 Survey of Consumer Finances.

Notes: Figures display median (top panel) and mean (bottom panel) wealth by race and ethnicity, expressed in thousands of 2019 dollars.

The History of the Racial Wealth Gap

Enslavement of Africans and Native Americans provided a cheap source of labor for early American colonists, making wealth inequality older than the United States itself. European immigrants to the U.S. used chattel slavery—along with their access to political and economic structures denied to minority populations—to spur development and grow wealth. This system persisted into the 1860s in large parts of the country. Furthermore, Blacks and other minority groups were often denied basic property and contract rights.

Post-Civil War

After the Civil War Amendments ended slavery in the mid-1860s, the country entered the Reconstruction period (1865-1877), during which there were promises to encourage wealth creation among newly enfranchised Blacks, including efforts at increasing education.

That period, however, ended with compromises with White southerners, ceding power in the South back to the former slave masters. George White, the last Black congressman from a southern state for many years when he left in 1901, commented on the Reconstruction-era improvement in the economic status of Blacks in the U.S. when he decided that running for re-election to Congress in North Carolina would be futile due to the predominance of white supremacy. According to Congressman White, between 1868 and 1900, the Black illiteracy rate dropped by 45%, the aggregate of Black-owned property rose in value to about $920 million, and the property per capita for Blacks was about $75. He then noted, “All this we have done under the most adverse circumstances,” citing lynchings, disfranchisement, and factories and labor unions being closed to Black workers, among other obstacles.

Post-Reconstruction, the reversal of Black progress and the dominance of white supremacy ultimately resulted in Blacks’ political and economic disenfranchisement, stunting the growth of wealth among minority populations, and leading to the introduction of the infamous “Black codes” of the Jim Crow era. Jim Crow laws and practices entrenched racial segregation across large parts of the country, limiting minorities’ access to land and other economic and cultural structures.

Similarly, other minority populations were denied access to economic structures. In the 19th century, native Americans, for instance, were subjected to a brutal period of dispossession, eventually becoming “civilized” through Indian schools and either assimilated or put into the Reservation System, a system that to this day is marked by poverty.

The 20th century

The 20th century would see a flourishing of civil rights movements, but it would also see the continuation of federal policies that blocked minorities from acquiring wealth.

In education, jobs, housing, and income, the interwar period, for example, saw an increase in racial wealth inequality, which has been linked to Black Americans and members of other minority groups receiving less support than White Americans from federal programs such as Franklin Delano Roosevelt’s New Deal and Harry Truman’s Fair Deal.

Richard Rothstein’s 2017 book, The Color of Law, describes the role of the Federal Housing Administration during the New Deal era in keeping Black Americans from accessing land wealth. The FHA, founded in 1934 during the Roosevelt administration, engaged in redlining by withholding insurance for mortgages to Black communities, while also giving subsidies to builders to mass-produce housing that was open to White residents but unavailable to Black residents. Rothstein labeled this a “state-sponsored system of segregation.”

The Civil Rights era (1954-1968) saw the passage of several important pieces of legislation to combat racial inequality, including the Civil Rights Act of 1964, one of the most comprehensive pieces of civil rights legislation since the Reconstruction era. The 1964 law sought to curb discrimination on the basis of “race, color, religion, sex, and national origin.” Specifically, Title VII prohibited racial wage discrimination. The Lyndon B. Johnson administration also launched affirmative action programs to undo some of the racial inequality in the country.

However, since the Civil Rights era, the racial wealth gap in the United States has grown significantly.

Attempts to explain why that is rely on structural arguments. Historians argue that Black Americans were vulnerable to large political and economic trends in the post–Civil Rights period. These include the deindustrialization and decline of unions in the 1970s, which caused well-paid union jobs to vanish; the expansion of private prisons and the War on Drugs, which led to higher rates of incarceration that negatively impacted familial wealth, particularly among minorities; and continued discrimination in housing, which kept many Black Americans from tapping into housing wealth.

Economic studies point to disparate levels of family support, inheritance, retirement planning, and emergency savings, as well as average family income, unemployment, and the volatility of the labor market, which had a greater impact on Black than on White populations. In addition, with technology and globalization increasingly impacting the U.S. economy, the returns on capital have grown at a faster rate than the rate of increase for wages and salaries. All of these factors frustrated attempts to thwart the racial wealth gap.

The 21st century

The Great Recession (2007-2009) hit minority populations hard. Slow and staggered recoveries tilted wealth further.

Attempts to combat the racial economic gap have also continued. The 2009 Lily Ledbetter Fair Pay Act, passed during the Obama administration, mandates that employers take steps to ensure they do not discriminate with respect to wages and salaries.

But wealth gaps persist. COVID-19 has impacted minority populations the most, exacerbating the racial wealth gap. Minority groups have faced higher risk from the coronavirus, resulting in high rates of hospitalization and death. They have also faced, among other things, discrimination and poorer housing conditions, and, as noted above, they have had a higher proportion of essential jobs, which put them at a higher risk of exposure.

Since his inauguration, President Joseph R. Biden, Jr., has announced policies and legislative proposals, including the American Rescue Act, which include measures intended to alleviate racial disparities in access to healthcare, income, and wealth. It remains to be seen how these efforts will develop and whether they will ultimately shrink these gaps.