collage of money, charts, student working and graduating

Race and Wealth: Results from the Great Recession

By now, most readers are aware of what has transpired on the MIZZOU campus this week.  We have been deeply involved in issues related to race.  Many people have been effected by the events and, as is often the case, some people have achieved their goals, some are tired, some are angry, and others have lost their job.  One thing you may have forgotten is that we had our Personal Finance Symposium last Wednesday and one of the papers presented was entitled Why Didn’t Higher Education Protect Hispanic and Black Wealth, by William Emmons, PhD, of the Federal Reserve Bank of St. Louis.  It seems timely to provide you, our readers, with some bullets from his presentation.  It will be clear that both human and financial capital could do much to lessen the divide separating us from one another.

We all know that education can be a great equalizer but is it sufficient for equal outcomes?  To begin, we will focus on median level of income and net-worth, by education and race.  The following table is instructive.
Case Study: Large Racial/Ethnic Income/Wealth Gaps Even Among College Grads.

Case Study: Large Racial/Ethnic Income/Wealth Gaps Even Among College Grads.

Median Family Income in 2013  
Four Year College Graduates Non-College Graduates Median College Income as a Multiple of Median Non-College Income
All Families $87,250 $36,523 2.4
White $94,351 $41,474 2.3
Asian $92,931 $32,668 2.8
Hispanic $68,379 $30,436 2.2
Black $52,147 $26,581 2.0
Median Family Net-Worth in 2013  
Four Year College Graduates Non-College Graduates Median College Wealth as a Multiple of Median Non-College Wealth
All Families $273,586 $43,625 6.3
White $359,928 $80,692 4.5
Asian $259,637 $25,632 9.8
Hispanic $49,606 $12,160 4.1
Black $32,780  $9,006 3.6

The importance of education is clear. Regardless of race, those with four years of college have greater income and net-worth, than do those with only a high school education.  The impact of education appears to be greatest for Asian and White households, when compared to Hispanic and Black households. What is striking is the lower median income and, in particular, net-worth, for Hispanic and Black compared to White and Asian households.  One should note that in 2013, all college graduates (39% of the population) actually owned 75% of all the wealth. This leaves 25% of the wealth for the other 61% of the population.

Moreover, it should be noted that for those with some college or a college degree, between 1989 and 2013, their net worth increased by 7% for those with an associate’s or bachelor’s degree and 23% for those with a graduate or professional degree.  For those with only a high-school education, median net-worth fell by 31%, while it fell by 61% for those with less than a high school education.  Clearly, education matters when it comes to saving and investing.

During the Great Recession, however, the resiliency (or, lack of resiliency) of net-worth by race is striking.  We see in the picture below that for all households, except college educated Asians, net-worth

graph

Change in Median Real Net Worth between 2007 and 2013

fell between 2007 (before the recession) and 2013 (after the recession).  What is striking is for both Asians and Whites, net-worth for the college educated recovered more than it did for the non-college educated.  For Hispanic and Black college educated households the opposite held true.  For these races, the college educated Blacks and Hispanics a 71.9% and 59.7% decrease, respectively, in their median net-worth was found.  Similar results are found over the period 1992 and 2013 (not shown), where Hispanic and Black college educated households saw their median real net-worth decrease, 27.4% and 55.6%, respectively.  Meanwhile, White and Asian households saw their net-worth increase by 86.4% and 89.6%, respectively.  What are some possible explanations?

  • Whites and Asians had more favorable short-term income trends, if college educated.  Black, college-educated had their median income fall by 21.3% during the recession, while it was only 5.9% for White households.
  • Blacks and Hispanics had a larger proportion of their net-worth in owned housing which took a large hit in the recession.
  • College educated Blacks and Hispanics entered the recession with greater debt-to-income ratios (Whites, 102.2%; Asians, 86.5%; Hispanics, 134.5%, and Blacks, 164.7%).  Thus, their greater borrowing may have forced them to spend existing savings and wealth.
  • A larger share of Black and Hispanic college graduates are female and they face greater barriers in the labor market.
  • Hispanic and Black college graduates are less likely to graduate from a highly selective college.
  • A smaller proportion of Hispanic and Black college graduates receive a post-graduate degree.

The above is just a snapshot taken from the Survey of Consumer Finances, perhaps the best data set for these analyses in the world.  It is clear, however, that there are links between Black and Hispanic college graduation and wealth accumulation that we do not understand.  Thus, the implication is that more research needs to be done. This is especially true when there are such large differences in earnings and wealth accumulation between Blacks/Hispanics and Whites/Asians.  These differences will continue to lead to greater and greater gulfs between populations and, while your race does not predetermine your income and wealth, the widening of that gulf makes financial success an ever elusive goal for subpopulations in the United States.

For more information see:  https://www.stlouisfed.org/publications/in-the-balance/issue12-2015/why-didnt-higher-education-protect-hispanic-and-black-wealth