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Understanding Permanent Black/White Earnings Inequality

  • Alejandro Badel

    (St. Louis Fed)

For more than 30 years, the ratio of average black earnings to average white earnings has remained close to 0.6. Additionally, US cities have remained dramatically segregated by race. This paper provides a joint theory of pre-market skills and residential segregation for quantitatively studying these phenomena. It is established that the magnitude of racial and earnings sorting observed in US cities implies 70 percent of observed black-white inequality. While the mechanism posed is intricate, all of its three non-standard components are essential for permanent black-white inequality to arise in a steady state: neighborhood human capital externalities, house price differences across neighborhoods, and preferences over neighborhood racial composition.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1122.

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Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:1122
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," Working Papers diegor-02-03, University of Toronto, Department of Economics.
  2. Durlauf, S.N., 1992. "A Theory of Persistent Income Inequality," Papers 47, Stanford - Institute for Thoretical Economics.
  3. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  4. Christopher H. Wheeler & Elizabeth A. La Jeunesse, 2007. "Neighborhood income inequality," Working Papers 2006-039, Federal Reserve Bank of St. Louis.
  5. David Card & Jesse Rothstein, 2006. "Racial Segregation and the Black-White Test Score Gap," NBER Working Papers 12078, National Bureau of Economic Research, Inc.
  6. 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.
  7. Cutler, David M. & Glaeser, Edward L. & Vigdor, Jacob L., 2008. "When are ghettos bad? Lessons from immigrant segregation in the United States," Journal of Urban Economics, Elsevier, vol. 63(3), pages 759-774, May.
  8. Gary S. Becker & Nigel Tomes, 1994. "Human Capital and the Rise and Fall of Families," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 257-298 National Bureau of Economic Research, Inc.
  9. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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