In some ways, the inequality of previous generations is transferred along with wealth when parents give their savings to their children, or when children are forced to support their parents. There is no question that minority families have lower earnings and wealth than white families because of a long history of institutionalized discrimination and oppression in the form of slavery, segregation and unjust legal treatment because of direct racism. However there is a growing body of evidence that concludes that one of the primary reasons minorities face disadvantages in wealth accumulation is because they receive less money on average in the form of inheritances and gifts from family. Because racial inequality is increasingly important to the economic analyses of US policies, the US government conducts very thorough surveys of large, representative samples that record the race of respondents. While there are some limitations – such as the complex situation for multi-ethnic and immigrant families – these data sources are useful tools for measuring the impact of structural exclusion on wealth disparities in the United States.
Young people rely on their parents and families to support them. The more support they receive, the more resources they can dedicate to their investments in education, health and other assets. One recent study by Avery and Rendall (2002) uses data from the Panel Study on Income Dynamics (PSID) (LINK) over the period from 1999 to 2007. After controlling for a variety of factors such as socio-economic status, education and differences in economic conditions other time, the study concludes that 12 percent of racial and ethnic wealth disparities can be explained by differences in intergenerational transfers. Hispanic families tend to loose wealth because children are more likely to be supporting their parents financially. Though there was no difference in the frequency of intergenerational transfers, there is considerable inequality in the quantity of each transfer. Black families receive much less than white families—the gap in wealth transfers is much larger than the income and earnings gap. These differences reproduce and perpetuate racial inequality by reducing the ability of minorities to make investments in education and other assets, such as housing. The authors advocate a policy approach that would increase access to education and homeownership.
Another illuminating study by McKernan et al. (2011) demonstrates that there are several other conditions that influence the structural exclusion caused by inequality of intergenerational wealth transfers. White families have more surviving parents and fewer siblings. Wealth increases with age, so families that have economically active parents for longer are able to accumulate more wealth over time. Additionally, families with fewer siblings benefit more because inheritance is divided among fewer people. This becomes a vicious cycle, because families with low net worth have shorter life expectancies and are likely to have more children.
Wealth gives the affluent a lot of privilege in the legal system. The affluent have a wide range of privileges that protect them in their encounters with police and the court and jail systems.
Police officers are significantly more likely to use higher levels of force in poor and minority neighborhoods. In contrast, affluent people encounter the police on a much less frequent and more civil basis because they are not typically viewed as a nuisance or threat. If arrested, the affluent can also afford to post bail whereas disadvantaged defendants are forced to spend time in jail until their case is resolved. This can cause major issues for the working poor who are caught up in the legal system and cannot immediately go back to work to provide for themselves or their families.
Poor defendants also must rely on busy public defenders and do not have access to the expensive attorneys and fact investigation that the affluent can afford. For example, Michael Jackson paid upwards of $20 million to acquit himself of child molestation charges. Furthermore, legal fees are sometimes tax-deductible for business owners and can significantly reduce the total costs of legal fees. One lawyer even argues that celebrities are in a unique position to write off legal fees because of the nature of their work.
Even when found guilty of a crime, celebrities and the rich often receive much lighter sentences than there less affluent counterparts. Lobbying efforts by the affluent have resulted in very small penalties for non-violent financial “white collar” crimes relative to similar illegal conduct in, say, a burglary or robbery. One thing that may also help explain why affluent people receive lighter sentences for violent criminal conduct is the absence of a prior criminal record. Affluent people have less contact with the criminal justice system because of the neighborhoods they live in and because petty crimes they do commit often go unprosecuted.
Wealth buys affluent people better jail cells too. For example, Huntington Beach, CA has a Pay-N-Stay Inmate Worker Program that allows inmates willing to pay $100-150 a night to work or attend school during the day while serving out their sentence at the city jail. Beverly Hills Police Department offers a similar program for $110 a night. These types of jail cells are widely available throughout the country. Thus, even while serving a jail sentence, an affluent inmate may work a real job and still maintain some freedom of movement.
An inheritance is essentially made up of resources and property that was not used up by previous generations. The median wealth for white households in 2009 was $113,149 compared with $6,325 for Hispanics and $5,677 for blacks.
Some factors that affect wealth transfer are: 1) A father’s education, 2) various indicators of a child’s socioeconomic background, 3) the number of siblings, 4) whether the household is dominated by a single female, 5) race and/or ethnicity, and 6) barriers to the accumulation of business or personal capital.
More than two or three times as many white households expect to receive inheritances in the future than black households. Furthermore, white households receive significantly larger inheritances than black households. This should come as no surprise when looking at the vast differences in total wealth between whites and minorities.
It is clear from studies published on the issue that inheritances are statistically significant factors explaining racial differences in household wealth. Ultimately, what this means is that whites are statistically more likely than other minorities to be able to benefit from an inheritance and that this inheritance is also more likely to be significantly larger. This financial privilege gives whites a distinct advantage over minorities when it comes to fostering future wealth creation.
Class status is measured by looking at the combination of a person’s education, income, occupation, and other forms of privilege. Race and ethnicity often predetermine a person’s class status. Often, race, ethnicity, and class segregate whole neighborhoods. Extreme poverty, poor health conditions, and poor levels of educational attainment largely characterize these neighborhoods. Racial discrimination and marginalization are major barriers to minorities seeking to eradicate poverty in their communities. Children in minority families are often far more likely to live in poverty than white children. Unemployment rates for blacks are also significantly higher than they are for whites. Blacks also earn a lot less on the job. Lack of access to adequate educational, medical, and mental health services are also barriers to rising out of poverty. Thus, the lack of financial resources combined with persistent discrimination confines people of color to a lower social status with no easy way to all the forms of privilege that define the elite.
In order to accumulate wealth, a family must save more than it consumes. Racial inequality in continuously reproduced by structural exclusion in the economic system because of wealth disparities. In general, it is harder for poor families to get out of poverty. Furthermore, poor families are more likely to end up in neighborhoods with poor schooling, fewer public services, barriers to accessing health scare and high crime rates. Poor women have children at an earlier age, and are more likely to become single working mothers. In poor communities it is common for a large portion of the young male population to be incarcerated.
When analyzing economic inequality it is important to distinguish between stock variables, which measure value at a specific time and date, and flow variables, which measure value over an interval of time. Wealth, which is a stock variable, is a measure of what a person or family owns, (assets) minus what is owed (liabilities). Assets include property such as homes, cars and machinery as well as financial assets such as stocks, bonds and cash. Liabilities are debts such as loans and mortgages. Income, on the other hand is a flow variable because it is measured as a rate, such as dollars per hour or per year. Net worth, or wealth, is a flow variable because it is measured at a given time in terms of total assets minus total liabilities.
According to a recent study conducted by the Pew Research Center, the great recession had a greater negative impact on black households and Hispanic households than on white households. Between 2005 and 2009, median Hispanic households lost 66 percent of their net worth while median black households lost 53% of their net worth. This is much more than the 16 percent of net worth that median white households lost. The study also shows that in 2009, 35 percent of black households had 0 or negative net worth. In other words, more than a third of black families had more liabilities than assets. The gap between the median net worth of black families and white families also grew after the great recession; the median black household had a net worth 20 times less than the median net worth of white families. In 2004 the ratio was 12 to 1. A home is the most valuable asset that most families own. This is why the housing crisis in recent years has been so detrimental for middle class and poor families. Hispanics, who are concentrated in areas hardest hit by the recession, lost the most wealth because of the declining values of their homes.
Without the ability to save, families are unable to make investments that can increase future incomes. Investments can be in the form of financial assets, property and human capital. Households can receive better interest rates on loans for business and education if they have more wealth to serve as collateral. Borrowers with negative savings are more risky to lenders because there is more uncertainty that the borrowers will be able to pay their loans back. This amplifies inequality because not only do racial minorities have fewer assets, but they get less of a payoff for the investments they are able to make. Furthermore, a lack of savings makes it difficult to pursue education and training that can increase future earnings because going to school requires people to forgo wages as workers for a period of time. College education is associated with higher earning potential, but minority students lag behind white students in post secondary education completion rates.
In addition to the income and education gap, much of the wealth disparities between racial minority households and white households is due to the fact that white households earn more dividends from their investments. There are also tax advantages to earning income from investments.