Wealth Inequality Across American Families: A Demographic Perspective The Business of Us All: Inequality in Theory and Practice Washington University in St. Louis November 3, 216 Lowell Ricketts* Senior Analyst, Center for Household Financial Stability Federal Reserve Bank of St. Louis www.stlouisfed.org/hfs *These are my own views, and not necessarily the views of the Federal Reserve Bank of St. Louis, Federal Reserve System, or the Board of Governors
Why Does Wealth Inequality Matter? Wealth is key to financial stability and economic mobility. When confronted with a negative shock, asset-poor families are 2-3 times more likely to experience material hardship than non-asset-poor families (McKernan et al. 29). Financial capital is among the three strongest predictors of upward economic mobility (Butler et al. 28). Net worth is a key predictor of opportunity from one generation to the next (Conley 29).
Overview Why do demographics matter? Three demographic factors affect your wealth: Your race or ethnicity How much education you have When you were born
Why are Demographics Important? Much of the debate on wealth inequality is framed with wealth distribution (e.g. the wealth of the 1%) However, there is considerable movement over time across the entire distribution. It s difficult to draw conclusions when the underlying groups have changed. Demographics serve as exogenous and stable identifiers.
The Demographics of Wealth Three essays written by Center staff in 215. Explores connection between wealth and a person s race (or ethnicity), level of education and age. Wealth is distributed unequally across all three demographic categories.
RACE OR ETHNICITY
Extensive Gaps by Race or Ethnicity in 1989 Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Gap Closes Modestly in the 9s Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Gap Closes Modestly in the 9s Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Gap Closes Modestly in the 9s Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Racial Wealth Gap Remains Wide and Persistent Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 21 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Racial Wealth Gap Remains Wide and Persistent Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 21 24 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Racial Wealth Gap Remains Wide and Persistent Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 21 24 27 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Recession Hits and Destroys Wealth Across Groups Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 21 24 27 21 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Black and Hispanic Families See Continued Decline Median Real Net Worth, by Race or Ethnicity Thousands of 213 Dollars 2 1989 1992 1995 1998 21 24 27 21 213 16 12 8 4 African-American or Black Hispanic, Any Race Asian or Other White, Non-Hispanic
Black and Hispanic Families Hurt the Most Loss of Net Worth Between 27 and 213, by Race or Ethnicity Percent 6 5 4 42 42 37 46 Median Mean 3 2 1 27 1 1-1 -1 African-American or Hispanic, Any Race Asian or Other White, Non-Hispanic Black
5 4 3 2 1 Asian Families Have Been Catching Up Median Family Net Worth Relative to Median White Family Net Worth Percent 8 Asian or Other 7 Black 6 Hispanic, Any Race 1989 1992 1995 1998 21 24 27 21 213
The Racial Wealth Gap In 213, the median black (Hispanic) family owned 8 (1) cents for every dollar that the median white family owned. Between 24 and 213, the median wealth of black (Hispanic) families fell by 55 (27) percent. For white families in 213, the odds of picking one family at random with at least $1 million in wealth was 1 in 8. Among Hispanic and black families, only about 1 in 1 had at least $1 million.
EDUCATIONAL ATTAINMENT
Important Considerations for Education Educational attainment is different than age/birth year and race/ethnicity in several ways. Most notably, it is not determined at birth. However, it is predetermined by early adulthood for almost everyone. Therefore, it can be considered exogenous in an econometric sense with our data (especially when we restrict the sample to family heads 4 or older).
Important Considerations for Education It may proxy imperfectly for socioeconomic status or class. If we had the parents education, we might prefer to use that rather than or in addition to the respondent s education. The return to education consists of at least three parts: The contribution to human capital of education itself. A return on the characteristics that lead someone to achieve a particular education. A (possibly substantial) random or idiosyncratic component.
7 6 5 4 3 2 1 Returns to Education Have Never Been Higher Median Net Worth of Families Headed by Someone 4 or Older Thousands of 213 Dollars 8 Graduate or Professional Degree Associate or Bachelor's Degree High School Diploma or GED No High School Diploma 1989 1992 1995 1998 21 24 27 21 213
6 5 4 3 2 1 Increasing Returns to Graduate School Median Net Worth of Families Headed by Someone 4 or Older Relative to Median Graduate- or Professional Degree Net Worth Percent 1 Associate or Bachelor's Degree 9 8 High School Diploma or GED 7 No High School Diploma 1989 1992 1995 1998 21 24 27 21 213
Less-Educated Families Lost More Wealth Loss of Net Worth Between 27 and 213, by Education of Family Head Percent 6 54 5 4 3 2 1 33 45 26 42 22 Median Mean Linear Trend (Median) 18 14 No High School High School 2- or 4-year College Diploma Diploma/GED Degree Postgraduate Degree
The Educational Wealth Divide A graduate or professional degree confers 2.5 times the wealth of an associate or bachelor s degree. Compared to those with (without) a high school diploma, a graduate degree yields 6.2 (17.2) times the level of wealth. Since 1989, real median net worth for graduate degree holding families has increased by 45 percent. Meanwhile, those with (without) a high school diploma have seen their real median net worth decline by 36 (44) percent.
AGE AND BIRTH COHORT
25 2 15 Middle-aged and Young Families Hit Hardest Median Family Net Worth by Age of Family Head Thousands of 213 Dollars 3 Old (62+) Middle-aged (4-61) Young (<4) 1 5 1989 1992 1995 1998 21 24 27 21 213
25 2 15 1 5 Wealth Milestones Depend on Birth Cohort Median Family Net Worth by Age of Family Head Thousands 213 Dollars 3 1989 27 213 Change between 1989 and 27 17-29 3-39 4-49 5-59 6-69 7-79 8-89 9+ Change between 27 and 213 Age of family head at time of survey
All Age Groups 6 + Are Richer; Under 6 Are Poorer Change in Median Net Worth from 1989 to 213, by Age of Family Head Percent 1 8 88.8 6 4 2 38. 33.5 54.2-2 -6.7-22.1-4 -6-43.7-49.5 17-29 3-39 4-49 5-59 6-69 7-79 8-89 9+ Age of family head at time of survey
The Generational Wealth Divide The life cycle is a source of natural wealth inequality. However, when you are born matters: Young and middle aged families suffered the most during the Great Recession. Those families had greater leverage, particularly in housing debt. It will be difficult if not impossible to recover that lost wealth (and potential wealth) during their lifetime.
Conclusion Three demographic lenses reveal substantial wealth divides across American families. Families that are young, black or Hispanic, or lack a college degree face considerable headwinds to their financial stability and upward mobility. While demographics are not destiny, they deserve greater consideration in public policy that seeks to strengthen the balance sheets of American families.
Additional Information and HFS Work Center for Household Financial Stability stlouisfed.org/hfs In the Balance Research Essays stlouisfed.org/publications/in-the-balance What It s Worth, Meet the Thrivers and Strugglers of America youtube.com/watch?v=a4oacxfebla