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Understanding permanent black-white earnings inequality

  • Alejandro Badel

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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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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  1. Durlauf, S.N., 1992. "A Theory of Persistent Income Inequality," Papers 47, Stanford - Institute for Thoretical Economics.
  2. Diego Restuccia & Carlos Urrutia, 2004. "Intergenerational Persistence of Earnings: The Role of Early and College Education," American Economic Review, American Economic Association, vol. 94(5), pages 1354-1378, December.
  3. Gary S. Becker & Nigel Tomes, . "Human Capital and the Rise and Fall of Families," University of Chicago - Population Research Center 84-10, Chicago - Population Research Center.
  4. 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.
  5. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  6. Christopher H. Wheeler & Elizabeth A. La Jeunesse, 2007. "Neighborhood income inequality," Working Papers 2006-039, Federal Reserve Bank of St. Louis.
  7. Card, David & Rothstein, Jesse, 2007. "Racial segregation and the black-white test score gap," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2158-2184, December.
  8. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  9. 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.
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