The wealth gap between black and white families is one of the most striking facts of American life: As of 2009, the median wealth of white households was $113,149; for black households, it was $5,677. And more to the point, the wealth gap persists even when you compare households with similar annual incomes.
Sociologists cite a number of factors to explain why. One is that historical patterns of discrimination have prevented wealth from accumulating in black families over the generations. Another is that, all else being equal, black families tend to live in lower income neighborhoods where home values—a principle source of wealth—don’t appreciate as quickly.
Princeton graduate student Rourke O’Brien thinks he’s found another reason. In a paper published last month, he argues that middle and upper-income black families don’t accumulate wealth as quickly because rather than investing their money, they give more of it to poor friends and relatives.
This idea has been around for awhile, but O’Brien’s paper is one of the first to test it quantitatively. Middle-income blacks are more than twice as likely as middle-income whites to have a poor sibling and more than four times as likely to have parents below the poverty line. And because of these relationships, they’re called upon more often to provide financial assistance.
This chart from O’Brien’s paper shows the magnitude of the difference. Black families earning more than $100,000 a year are about twice as likely to have given money to friends and family compared to white families.
These transfers of money can have a big impact on wealth accumulation. Money that’s donated to poor friends and family usually goes to meet immediate material needs, rather than accumulating interest, earning dividends, or riding the stock market. Another study, cited by O’Brien, suggests that as much as 27 percent of the black-white wealth gap can be explained by the greater financial claims made on middle-income blacks.
*UPDATE 1/29/13- After writing this post I went looking for statistics to verify that differences in income do not explain differences in wealth between blacks and whites. Take a look at page 41 of this article by Dalton Conley at NYU, which breaks down net wealth by income and race. As you'll see, the median net wealth of white families earning $50,000-$75,000 a year is $140,000; black families in that same income range have a median net wealth of $54,000.
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