Authors: William A. Darity Jr. and Stephan Lefebvre
Journal: AEA Papers and Proceedings
Abstract: We address the Federal Reserve’s model for Black–White wealth inequality. The Fed view has it that the Black–White wealth gap, when measured with an “expanded wealth concept,” is smaller than previously thought and primarily explained by income differences shaped by personal decisions around human capital acquisition and family structure. We argue that the expanded wealth concept inappropriately treats future income flows from Social Security and defined benefit pensions as an asset. Even using this measure, the absolute Black–White wealth gap increases with the adjustment. We present results using the PSID that demonstrate that parental wealth better captures transmission of intergenerational (dis)advantage.
Key Findings
- The Federal Reserve (Fed) view of the Black-White wealth gap, under a new calculation method that incorporates pensions and Social Security insurance, argues that this is smaller than previously thought, and that the racial wealth gap is primarily explained by income differences shaped by personal decisions around human capital acquisition, family structure, risk-taking, and the legacy of residential segregation.
- In this paper, the authors show that while the ratio of wealth changes under the new calculation method, the absolute monetary wealth gap is larger.
- Moreover, the authors explore an endogeneity problem with this calculation that understates the importance of parental wealth. Using a longitudinal dataset, this paper shows that parental wealth explains a much larger proportion of one’s wealth (70%) than is stated by the Fed (13-14%).
Citation: Darity Jr., William A., and Stephan Lefebvre. 2025. “Root Causes of the Racial Wealth Gap: A Critique of the Fed View.” AEA Papers and Proceedings 115: 462–65.
DOI: 10.1257/pandp.20251119