Growing wealth gap harms families and the economy

Clark Goldenrod
Jul 12, 2013

Over the last 25 years, the wealth gap between white and African-American families in the U. S. has nearly tripled, growing from $85,000 in 1984 to $236,500 in 2009, according to a recent report from the Institute on Assets and Social Policy.

Wealth is more than just income; it's all the resources people have minus what they owe. Without the ability to build assets, families are unable to access the opportunities for higher incomes and economic security that education offers, and they don't have the economic security to weather job loss or a major illness without significant hardship. A strong middle class is a key component of a strong economy, but the growing wealth gap shows that whole communities are being left behind.

The Roots of the Widening Racial Wealth Gap finds that almost half of the growing wealth gap between whites and African-Americans can be explained by two factors: years of homeownership and household income. Other important contributors to whites having greater wealth include fewer and shorter periods of unemployment, higher levels of education and access to family financial support. These advantages are often the result of "opportunities and barriers in workplaces, schools, and communities that reinforce deeply entrenched racial dynamics in how wealth is accumulated."

Homeownership is the largest source of wealth for most families, and the largest explaining factor of the racial wealth gap. Institutional factors such as differences in credit access, discriminatory lending practices and residential segregation drive down the homeownership rate for black families. White families have the advantage of drawing on their own family wealth to purchase homes earlier, and this continues a pattern of increased stability for white families.

Income is, of course, an important source of wealth for everyone. However, the brief found that increases in income have very different effects on wealth for these two groups. A increase of $1 in income yields over $5.19 of white wealth growth, while this same amount increases black wealth growth by $0.69. "This dramatic difference in wealth accumulation from similar income gains has its roots in long-standing patterns of discrimination in hiring, promoting, and access to benefits that have made it much harder for African-Americans to save and build assets," according to the brief. This means that while white families are able to save their earnings, black families are using their earnings to fulfill basic needs and have little left over to save.

The brief proposes some policy changes that could significantly narrow the wealth gap. These include:

  • Strengthening mortgage and fair housing policies so that homeownership offers the same wealth opportunities to white and black families;
  • Boosting the incomes of African-Americans by increasing the minimum wage;
  • Changing federal tax policy to end preferential treatment of investments over wage income.

These policy changes are key steps to strengthening the economy by ensuring all families have the opportunity to buy a home, send their kids to college and build economic security.