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Understanding permanent black-white earnings inequality

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  • Alejandro Badel

Abstract

Average annual earnings of black US households have remained at around half the average earnings of white households for more than 30 years. Why are the earnings of black households so low compared to those of white households? Why can blackwhite earnings inequality of such magnitude be permanent? This paper provides a quantitative answer based on neighborhood effects. The economic and demographic characteristics of neighborhoods and the distribution of earnings are determined endogenously from the location and investment decisions of altruistic parents. Permanent racial inequality arises from residential segregation by race and earnings coupled with neighborhood effects that impact the productivity of parental investments. The model is calibrated by targeting observed segregation by race, segregation by earnings, housing price differences across neighborhoods, intergenerational earnings mobility, and the magnitude of parental investments in children. The benchmark steady state earnings distribution accounts for .72 of the observed black-white percent difference in household earnings. The paper argues that local housing markets, local human capital externalities and racial neighborhood preferences are necessary ingredients in explaining permanent black white inequality.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-047.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-047

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Keywords: Income distribution ; Wages -- Social aspects -- United States;

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  1. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  2. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  3. Becker, Gary S & Tomes, Nigel, 1986. "Human Capital and the Rise and Fall of Families," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages S1-39, July.
  4. David Card & Jesse Rothstein, 2006. "Racial Segregation and the Black-White Test Score Gap," NBER Working Papers 12078, National Bureau of Economic Research, Inc.
  5. Vigdor, Jacob & Glaeser, Edward & Cutler, David, 2008. "When Are Ghettos Bad? Lessons from Immigrant Segregation In the United States," Scholarly Articles 2666726, Harvard University Department of Economics.
  6. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
  7. Durlauf, Steven N, 1996. " A Theory of Persistent Income Inequality," Journal of Economic Growth, Springer, vol. 1(1), pages 75-93, March.
  8. White, T. Kirk, 2007. "Initial conditions at Emancipation: The long-run effect on black-white wealth and earnings inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3370-3395, October.
  9. Christopher H. Wheeler & Elizabeth A. La Jeunesse, 2007. "Neighborhood income inequality," Working Papers 2006-039, Federal Reserve Bank of St. Louis.
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Cited by:
  1. Dionissi Aliprantis, 2012. "Assessing the evidence on neighborhood effects from moving to opportunity," Working Paper 1233, Federal Reserve Bank of Cleveland.
  2. Daniel B. Jones & Werner Troesken & Randall Walsh, 2012. "A Poll Tax by any Other Name: The Political Economy of Disenfranchisement," NBER Working Papers 18612, National Bureau of Economic Research, Inc.
  3. Dionissi Aliprantis & Daniel Carroll, 2012. "Neighborhood dynamics and the distribution of opportunity," Working Paper 1212, Federal Reserve Bank of Cleveland.

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