where H is the net change in wealth resulting from assets being brought into or removed from family holdings as a result of changes in household composition and
P is the net ow of funds out of pension annuities.
C. Descriptive Analysis 1. Wealth Levels
Before considering racial differences in wealth changes, we rst make use of the cross-sectional samples to look briey at racial differences in levels of wealth and
in portfolio composition. Our ndings here are consistent with those of Blau and Graham 1990 and Hurst, Luoh, and Stafford 1998, among others. As shown in
Table 1, the gap in wealth levels between African Americans and whites is stagger- ingly wide, regardless of whether it is measured in terms of mean or median holdings.
In 1994, the average African American family had a net worth of 38.0 thousand,
8
about one-fth of the average net worth of 192.9 thousand for white families. Per- haps even more jolting is the comparison in terms of medians. In 1994, the African
American family at the 50
th
percentile had a net worth of 8.2 thousand, less than one-eighth of the median wealth for whites.
Examining wealth by age, one sees that the prole for whites has the traditional hump shape—with wealth increasing through the prime earnings years and then
tailing off, while that for African Americans shows a greater tendency to be mono- tonic with age.
9
As measured by means, the ratio of African American to white wealth is highest for the families with heads in the youngest 0.35 and oldest 0.30
age groups, and much lower for those in families whose heads are in age groups where schooling has been completed, but retirement has not yet begun. It is striking
to see how wide the gaps in median wealth are even at young ages, with African American families having about one-seventh the wealth of their white counterparts
in the youngest age category. The wealth ratio does not rise substantially until the 45–54 age group. The yawning race gap for young household heads, even before a
family has had time to accumulate assets through saving from its own income, hints at the importance of intergenerational transfers—both inheritances and inter vivos
gifts—in causing young white and African American household heads to start off on an unequal footing Wilhelm 2001.
The pattern of racial wealth differences changes little when education is controlled for. The mean ratios within the four education groups shown in Table 1 are in the
neighborhood of 0.25. Though the wealth ratios by education group are a little higher than the 0.20 for all families, it is clear that the racial wealth gap is primarily attribut-
able to large differences at the same educational level, rather than to the fact that there is a smaller portion of African Americans relative to whites in the wealthier,
higher-education groups. In a broadly similar fashion, neither marital status nor
8. All dollar amounts are converted into 1998 dollars using the Bureau of Labor Statistics’s Consumer Price Index-All Urban Consumers CPI-U.
9. Though the hump shape in a cross-section can be consistent with the life-cycle model of wealth accumu- lation, it is evident that it cannot be taken as conrmation of it, since period and cohort effects may also
play a role. See Wolff 1988 and Jianakoplos, Menchik, and Irvine 1989 for additional discussion.
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Mean Values Median Values
African African
Americans Whites
Ratio Americans
Whites Ratio
All families 38.0
192.9 0.20
8.2 67.7
0.12 Age of head
Less than 25 9.7
28.1 0.35
0.7 4.7
0.14 25–34
16.7 73.3
0.23 2.4
16.5 0.15
35–44 27.9
143.3 0.20
4.4 52.8
0.08 45–54
60.9 268.5
0.23 30.8
115.9 0.27
55–64 51.8
330.4 0.16
35.6 185.6
0.19 651
79.5 265.3
0.30 34.1
121.0 0.28
Education of head Less than high school
24.7 108.4
0.23 0.7
36.2 0.02
High school graduate 35.0
133.8 0.26
7.7 59.4
0.13 Some college
43.5 178.3
0.24 13.7
72.6 0.19
College graduate 85.1
344.6 0.25
29.1 121.0
0.24 Marital status of head
Married 75.6
268.9 0.28
31.9 111.1
0.29 Not married
25.9 100.8
0.26 3.3
26.6 0.13
Income quartile First
19.2 74.0
0.26 0.3
13.5 0.02
Second 41.0
105.4 0.39
12.1 45.1
0.27 Third
49.1 151.7
0.32 27.5
73.1 0.38
Fourth 116.2
434.8 0.27
52.8 191.9
0.28
Notes: Wealth is measured in thousands of 1998 dollars. Ratios are African American wealth divided by white wealth. About 2 percent of families are excluded from the
calculations by the education of the head and about 7 percent by income quartile because of missing data. Calculations on cross-sectional samples use PSID family weights for details, see the appendix on the JHR website.
income class has much explanatory power, as the racial wealth gaps are primarily attributable to differences within groups dened by these variables.
In addition to racial differences in wealth levels, there are also important racial differences in portfolio composition, as shown in Table 2. In 1994, only 2.1 percent
of African American families had assets in a business or farm, less than one-sixth the comparable share for whites 13.1 percent. The lower rate of self-employment
for African Americans than for whites is consistent with past research Fairlie 1999; Fairlie and Meyer 1996, 1997. Fewer than two-fths of African American families
owned their own residences 37.8 percent, well below the nearly two-thirds for whites 65.8 percent. Finally, only 10.4 percent of African American families had
any holdings in stock. Though there was an increase in the share of African Ameri- cans holding stocks from 6.9 percent in 1984, the rise is well below that for whites
over the same time span, from 27.1 to 37.5 percent.
Despite the much lower rate of home ownership among African Americans than the rest of the population and the lower market value of African American homes
Long and Caudill 1992; Charles and Hurst forthcoming, home equity carries a much heavier weight in their portfolios, accounting for 45.8 percent of total wealth
in 1994, compared to 28.6 percent for whites. It is evident that home equity’s heavier weight in African American portfolios is due to the fact that whites are more likely
to have signicant holdings in other assets, as the value of home equity for whites was more than three times that for African Americans in 1994. Stocks as of 1994
were the second most important asset group in white portfolios, having more than doubled their share over the decade to reach 19.7 percent of total wealth. The share
of wealth in stocks also doubled for African Americans, but because it started from a much lower base, it was still well below 10 percent in 1994. Not surprisingly, the
share of white wealth in businesses and nonhome real estate is much greater than that for African Americans.
2. Wealth Accumulation We now turn to an examination of patterns of wealth accumulation using the longitu-
dinal samples. For the 1984– 94 trimmed sample, average wealth grew more quickly for African Americans than for whites, 71 percent versus 51 percent, leading to a
rise in the mean wealth ratio to 0.28 from 0.25, as shown in Table 3. At the same time, there was a similar increase in the race wealth ratio at the medians, though
not at the 25
th
and 75
th
percentiles. It is instructive to note that the ratio of African American to white wealth climbs steeply as one moves from the median to the 75
th
percentile, indicating that the upper part of the distribution is less compressed, in relative terms, for African Americans than for whites. The importance of the upper
tail in explaining movements at the mean is a theme that will recur in the analysis of patterns of wealth accumulation for African Americans.
Table 4 provides a summary of the distributions of the changes in wealth and their component ows: saving out of income, capital gains, intergenerational transfers, net
inows from changes in household composition, and net inows from annuities. At this point, it may be worth noting again that our measure of wealth excludes pension
and social security wealth; considerations related to retirement wealth will, in gen- eral, inuence the patterns of wealth accumulation for that part of total net worth
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Table 2 Portfolio Composition by Race, 1984, 1989, and 1994
1984 1989
1994 African
African African
Americans Whites
Americans Whites
Americans Whites
Percent Percent
Percent Percent Percent
Percent Percent Percent
Percent Percent
Percent Percent with
of with
of with
of with
of with
of with
of Asset type
asset wealth
asset wealth
asset wealth
asset wealth
asset wealth
asset wealth
Main home 37.1
55.2 62.9
33.0 37.9
46.5 63.9
31.4 37.8
45.8 65.8
28.6 Real estate
7.0 9.5
21.9 16.2
8.1 8.0
21.0 18.3
5.4 8.6
18.8 16.1
Business 1.2
4.6 12.7
19.9 1.8
18.1 13.2
17.9 2.1
3.1 13.1
14.4 Stock
6.9 3.9
27.4 8.5
6.4 2.7
31.1 10.3
10.4 8.3
37.5 19.7
Checkingsaving 44.6
9.8 86.1
14.4 48.1
12.6 86.4
13.9 40.8
13.2 82.2
12.9 Vehicles
56.7 13.4
87.1 6.3
58.2 12.7
87.1 5.8
59.8 14.7
87.7 6.3
Other savings 13.5
8.8 24.7
3.8 13.9
5.2 28.0
4.6 13.3
13.7 25.3
5.6 Debt
44.0 5.2
46.6 2.1
46.6 5.8
50.7 2.1
40.0 7.4
49.7 3.6
Notes: Real estate excludes main home while business includes both farm and nonfarm businesses. Calculations on cross-sectional samples use PSID family weights for
details, see the appendix on the JHR website.
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207
Table 3 Summary Statistics on Wealth, 1984–94
Start of period End of period
Percentile Percentile
Mean 25
th
50
th
75
th
Mean 25
th
50
th
75
th
1984–89 African Americans
30.1 0.0
4.4 37.7
39.8 0.0
9.2 48.0
Whites 133.5
15.7 70.6
173.4 176.2
24.3 90.7
227.4 Ratio African American to White
0.23 0.00
0.06 0.22
0.23 0.00
0.10 0.21
1989–94 African Americans
34.8 0.0
7.9 39.6
47.4 0.0
11.2 55.0
Whites 155.5
15.8 74.9
209.0 177.0
23.1 91.3
232.1 Ratio African American to White
0.22 0.00
0.11 0.19
0.27 0.00
0.12 0.24
1984–94 African Americans
31.4 0.0
5.8 41.7
53.6 0.0
13.2 59.4
Whites 126.7
19.0 76.9
180.4 191.1
34.1 111.0
267.3 Ratio African American to White
0.25 0.00
0.08 0.23
0.28 0.00
0.12 0.22
Notes: Wealth is measured in thousands of 1998 dollars. Calculations use the trimmed longitudinal samples for means and the untrimmed ones for percentiles for details, see
the appendix on the JHR website. PSID family weights are used.
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Table 4 Summary Statistics on Change in Wealth and Its Components, 1984–94
African Americans Whites
Share of Share of
Percentile Percentile
mean mean
change change
Components of Wealth Change Mean
25th 50th
75th percent
Mean 25th
50th 75th
percent 1984–89
Total 9.7
24.5 0.4
13.4 100.0
42.7 212.5
9.3 65.8
100.0 Saving
4.3 23.4
0.2 8.6
44.3 21.7
28.0 7.2
40.3 50.9
Capital gains 5.1
21.4 0.0
1.5 52.9
12.9 216.5
0.0 30.2
30.2 Inheritances
0.3 0.0
0.0 0.0
3.3 4.3
0.0 0.0
0.0 10.1
Change in household composition inows 20.1
0.0 0.0
0.0 21.2
3.4 0.0
0.0 0.0
7.9 Net inows from annuities
0.1 0.0
0.0 0.0
0.7 0.4
0.0 0.0
0.0 1.0
1989–94 Total
12.5 26.9
0.0 17.2
100.0 21.5
223.2 4.7
51.8 100.0
Saving 8.5
23.4 0.4
14.0 68.0
21.9 215.9
5.5 39.9
101.9
G ittle
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209 Capital gains
4.0 22.5
0.0 2.8
31.8 23.5
222.7 0.0
18.6 216.2
Inheritances 0.3
0.0 0.0
0.0 2.6
4.2 0.0
0.0 0.0
19.7 Change in household composition inows
20.4 0.0
0.0 0.0
22.8 0.2
0.0 0.0
0.0 0.8
Net inows from annuities 0.1
0.0 0.0
0.0 0.4
21.3 0.0
0.0 0.0
26.2 1984–94
Total 22.2
24.4 0.9
25.8 100.0
64.4 216.9
20.5 109.9
100.0 Saving
12.2 23.1
1.0 20.4
54.8 42.4
216.1 14.9
75.0 65.9
Capital gains 9.0
26.9 0.0
4.0 40.7
11.7 227.1
0.2 45.3
18.1 Inheritances
0.7 0.0
0.0 0.0
3.1 9.2
0.0 0.0
0.0 14.3
Change in household composition inows 0.0
0.0 0.0
0.0 0.2
3.5 0.0
0.0 0.0
5.4 Net inows from annuities
0.3 0.0
0.0 0.0
1.2 22.4
0.0 0.0
0.0 23.7
Notes: Changes in wealth and its components are measured in thousands of 1998 dollars. Calculations use the trimmed longitudinal samples for means and the untrimmed
ones for percentiles for details, see the appendix on the JHR website. PSID family weights are used.
which we do observe. Below we speculate on the effect the inclusion of retirement wealth would have on our results.
Given the vast gap between the races in mean wealth levels, it is not surprising that in each period the overall absolute climb in wealth is greater for whites than
for African Americans, and virtually always the case that increases in each of the ve categories are larger as well. Of greater interest is the relative contribution of
each category. Though each period has its particularities, several interesting ndings come to the surface. First, inheritances played almost no role in the gains of African
Americans over the 1984– 94 period, contributing 3 percent of their increase in wealth, versus 14 percent for whites. As noted in the appendix on the JHR website,
the PSID asks only about inheritances that are in excess of 10,000. Below we exam- ine the issue of whether the presence of a threshold at 10,000 biases these results.
It should be stressed that the question of how much inheritances contribute to racial differences in wealth accumulation is a very different one from the extent to
which transfers are responsible for racial differences in wealth levels, addressed in Menchik and Jianakoplos 1997 and Avery and Rendall 1997. Only inheritances
that occur during the period are considered here; thus, we ignore the appreciation of gifts received prior to 1984.
Second, over the time span examined, there is no evidence that capital gains play a more important relative role for whites than for African Americans. For the period
as a whole, in fact, capital gains account for 41 percent of the increase in wealth for African Americans, more than double the 18 percent share for whites. Third, the
contribution of saving to wealth accumulation is somewhat greater for whites 66 percent than for African Americans 55 percent. Finally, among whites, changes
in household composition are responsible for a nonnegligible portion of wealth accu- mulation 5 percent,
10
whereas changes in household composition make virtually no contribution to wealth gains among African Americans.
11
The positional statistics on changes in components of wealth, also shown in Table 4, make readily apparent the substantial heterogeneity of wealth accumulation behav-
ior within each racial group. Though this diversity comes as no surprise in the case of inheritances—received by only 12 percent of whites and 1 percent of African
Americans in the 1984– 94 sample—it is also apparent in the case of saving: For whites, nearly two-fths of this sample actually dissaved, and for African Americans
it was nearly one-half gures not shown. Consistent with our nding above of less compression in the upper part of the wealth distribution for African Americans than
for whites, the distribution of capital gains is also more dominated by the right tail for African Americans than for whites. For all periods, the mean for capital gains
among African Americans substantially exceeds its value for the 75
th
percentile, indi- cating that a small share of the distribution is exhibiting great inuence on the mean.
10. Most of the impact occurs in the rst ve-year period and is attributable more to the departure from the household of indebted individuals than to the entrance of those with high levels of net worth.
11. Juster, Smith, and Stafford 1998 also note the importance of net inows of assets as a result of family composition changes on wealth changes between 1984 and 1994 but do not delve into the causes.
Because the effect of family composition changes is measured only for this relatively short period, the effects of some changes in family composition are not captured. For instance, among married-couple fami-
lies who were married before 1984 and remained married over the whole period, the contribution of the union of the husband’ s and wife’s assets is completely missed.
Table 5 offers another method of assessing racial differences in wealth accumulation over the 1984–94 period, focusing on rates rather than on absolute levels. In all cases
where mean rates are given, they are calculated by rst summing the numerator and denominator over all families, rather than averaging the rates calculated for individual
families. Despite the modest rise noted above in the mean wealth ratio over the entire ten-year span, one cannot reject the hypothesis that the two races had the same rate of
wealth appreciation over the 1984– 89 period and the full 1984–94 period, though the hypothesis can be rejected for the 1989–94 period by itself. However, because of the
importance of the upper tail in the African American wealth distribution, the results are quite different at the median. Over the full decade, the rate of wealth appreciation is
35.4 percent at the median for whites, much larger than and statistically different from the 6.1 percent rise at the median for African Americans.
In their analysis of changes in wealth between 1989 and 1994, Hurst, Luoh, and Stafford 1998, tables 21–23, using both OLS and median regressions, nd a statisti-
cally signicant difference by race in only one out of a number of different specica- tions. Though we both make use of the same underlying wealth data, the two sets
of results are difcult to compare because the variable of interest differs percentage change versus change measured in dollar amounts. Moreover, Hurst, Luoh, and
Stafford also include controls in their regressions for permanent income and in some cases portfolio composition and active saving inows, and there are some differences
in the trimming of outliers for OLS regressions.
There are also notable differences by race in the individual components of wealth accumulation. We calculate that whites have a higher average saving rate than Afri-
can Americans, with this difference being statistically signicant in two out of three cases. For the entire 10-year span, the saving rate for whites is nearly double that
of African Americans, 7.6 percent of family income over the 1984– 94 period com- pared to 3.9 percent. An idea of how these saving rates translate into wealth gains
is offered by multiplying them by the ratio of income accumulated over the 10-year span to wealth at the start of the period, which is 4.38 for whites and 9.84 for African
Americans. Thus, because of a higher income-to-wealth ratio, the slower saving rate of African Americans actually translates into a faster increase in wealth, 38 percent
versus 33 percent. Though the differences in saving rates at the median are somewhat smaller than those at the mean, they are still present and statistically signicant at
the 1 percent level.
While the nding of race differences in saving rates is somewhat at odds with the conclusions of Blau and Graham’s 1990 review of the small and somewhat
dated literature on this subject, it is consistent with the widespread nding that saving rates increase with current income levels for example, Dynan, Skinner, and Zeldes
2000; Huggett and Ventura 2000, since the incomes of African Americans families averaged about 55 percent of those of their white counterparts in these samples. As
Friedman 1957 noted, a saving rate that rises with current income need not be inconsistent with the permanent income hypothesis, because this relationship can
potentially be explained by a failure to distinguish between permanent and transitory components of income and by measurement error. After rst demonstrating that sav-
ing rates rise with current income, Dynan, Skinner, and Zeldes 2000 address these concerns by using a number of different instruments for income and nd little change
in their results. It is beyond the scope of this paper to enter the controversy about
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As a proportion of total wealth at start of period Net Inows
from Changes in
Rate of wealth Rate of return
Inheritances and Household
Net Inows appreciation
Saving rate on capital
Gifts Composition
from Annuities Mean
Median Mean
Median Mean
Median Mean
Median Mean
Median Mean
Median 1984–89
African Americans 32.2
2.6 3.0
0.3 17.0
0.0 1.1
0.0 20.4
0.0 0.2
0.0 Whites
32.0 19.0
8.2 3.7
9.7 0.0
3.2 0.0
2.5 0.0
0.3 0.0
1989–94 African Americans
36.0 21.9
5.7 0.7
11.5 0.0
0.9 0.0
21.0 0.0
0.1 0.0
Whites 13.8
6.9 8.2
2.9 22.2
0.0 2.7
0.0 0.1
0.0 20.9
0.0 1984–94
African Americans 70.7
6.1 3.9
0.5 27.3
0.0 2.2
0.0 0.1
0.0 0.8
0.0 Whites
50.8 35.4
7.6 3.6
9.8 0.0
7.2 0.0
2.8 0.0
21.9 0.0
Notes: All rates are expressed as percentages. Means rates are calculated as the average for the numerator divided by the average for the denominator. Median rates are the
median of the ratio of the numerator to the denominator. Initial wealth is the denominator in all cases except for the saving rate, which is dened as saving divided by family income. Family rates are only calculated if the denominator is positive, which is always the case for family income but not for initial wealth. Hypothesis tests
are based on bootstrapping. Calculations use the trimmed longitudinal samples for means and the untrimmed ones for percentiles for details, see the appendix on the JHR
website. Calculations use PSID family weights. difference by race signicant at 10 percent level
difference by race signicant at 5 percent level difference by race signicant at 1 percent level
the cause of the relationship between income and saving rates found by these and other authors. Instead, we would merely like to stress that the consistency of our
ndings with those elsewhere helps to strengthen condence in the use of the PSID data to measure saving rates. Below we address the question of whether the saving
rate differential persists after controlling for income and demographic characteristics that may inuence consumption needs.
Despite speculation that African Americans experience lower rates of return on assets, either because of barriers to acquiring assets that historically have had high
returns or because of factors that may lower returns to specic assets, average rates of return on capital are actually higher for African Americans than for whites in our
sample, and this difference in rates of return is statistically signicant in 1989– 94 and for the full ten-year span. It is important to note once again that the difference
in rates of returns by race is driven by higher returns for African Americans at the upper tails and that there is virtually no difference at the medians.
While caution is advisable in interpreting calculations using asset-specic rates of return by race, because of their sensitivity to outlying observations, we nd that
a faster appreciation of the value of the main home contributed to the overall higher return for African Americans, particularly in the years 1984– 89. The higher appreci-
ation in 1989– 94 may be due, in part, to whites having been hit harder than African Americans by the troubles in the California real estate market in the early 1990s,
since the race gap in home appreciation is halved when California residents are excluded.
12
The tendency for the prices of African American homes to appreciate relative to those of whites over the decade is also consistent with the nding of
Denton 2001 of a relative appreciation in the value of African American homes during the 1980s. Without longitudinal data, it is impossible to distinguish the impact
of a rise in value of homes continuously held from that of a changing composition of homes and homeowners. However, Denton’s attempts to take account of changes
in composition through the use of synthetic cohorts still show a relative appreciation in the value of African American homes. In the 1989– 94 period, differences in rates
of return by race are also attributable to differences in returns to other real estate— owing in part to a decline in the value of holdings by whites—and to a higher average
rate of return for the small portion of African Americans owning stocks.
We should stress that we make no claim that the edge in average rates of return to capital experienced by African Americans is the norm. With such large differences
in portfolio allocation, clearly much depends on the path of prices for the individual asset categories. In fact, it seems likely that whites beneted more than African
Americans from the run-up in the stock market in the second half of the 1990s.
Though, as noted above, our trimming of the top and bottom 1 percent of the distributions of changes in wealth led to a modest increase in the mean wealth of
African Americans relative to their white counterparts, the trimming does not explain the higher capital gains for African Americans. The difference in the capital gains
is actually bigger without the truncation, as is the gap in saving rates. Moreover, the nding that whites have higher average saving rates but lower rates of return on
capital does not seem sensitive to the treatment of outliers. The differences are robust to a number of different rules for excluding these outliers, though as the share of
12. We are grateful to a referee for reminding us of trends in the California real estate market.
the distribution that is truncated rises, the racial gap in the saving rate and capital gains tends to narrow. We now turn to multivariate analysis to explore whether the
racial differences remain after controlling for other characteristics.
D. Multivariate Analysis
