Black-White Wealth Inequality: Is Inheritance the Reason?

I. INTRODUCTION On average, black Americans have less wealth than white Americans. Previous studies of wealth reveal that blacks hold on average between 10% and 25% of the wealth held by whites as reported in Terrell [1971], Smith [1975], Sobol [1979], Blau and Graham [1990], and Wolff [1992]. A number of possible explanations for this gap have been suggested, particularly differences in income and various socio-economic characteristics between black and white households. However, the average difference in black-white household income is much less than the difference in black-white household wealth. Wolff [1992] reports that black household income averaged 63% of white household income in 1989, a ratio which had persisted over the previous twenty years. Consequently, there must be additional factors which explain the greater racial wealth differential. Recently, economists such as Blau and Graham [1990] and Wolff [1992] have surmised that differences in intergenerational transfers might account for much of the unexplained racial difference in wealth. We document the large difference in wealth between blacks and whites and then attempt to account for this difference, paying particular attention to the effect of inherited wealth. A number of investigators have speculated on the possible importance of inheritances in explaining racial differences in wealth. In a comment on Smith's [1975] analysis of black-white wealth differentials, Vito Natrella [1975] noted that Smith only explained 25% of the wealth differential through differences in economic variables. Natrella conjectured that the "really significant determinants" not included in Smith's analysis were "prior income, inherited wealth, and the propensity to save" [p. 370]. Wolff [1992] suggested that differences in intergenerational transfers provide a "plausible explanation" of the black-white wealth gap, but provided no supporting evidence. In a recent article Blau and Graham [1990] attempted to explain racial differences in wealth at the household level as a result of differences in household income, location, and demographic factors. However, they found that three-quarters of the racial difference in wealth remained unexplained. They speculated that "racial differences in inheritance and other intergenerational transfers most likely play an important part" [p. 338] in explaining the remaining black-white differences in wealth. If true, this explanation would have important policy implications, e.g. higher rates of inheritance taxation could reduce wealth differences between races. II. DATA In this paper we attempt to empirically verify the hypothesized importance of inheritances in explaining the differences in black and white household wealth. Our empirical analysis makes use of two data sets which report both household wealth and household inheritances: the 1976 National Longitudinal Surveys of Mature Men (NLS76), and the 1989 Survey of Consumer Finances (SCF89). The NLS76 sample was chosen to be representative of the U.S. male population aged 45 to 59 years old in 1966, with an oversampling of black households. Our analysis focuses on the sample of 2,019 respondents who survived through 1976 and reported all variables required for our analysis.(1) More information about the NLS76 can be obtained from the Center for Human Resource Research [1992]. The SCF89 sample was chosen to provide a comprehensive picture of the financial situation of all U.S. households in 1989. The SCF89 oversampled high-income households. We make use of the complete sample encompassing the multiple imputation procedure employed by researchers at the Board of Governors of the Federal Reserve System. More information about these data can be obtained in Kennickell and Shack-Marquez [1992]. Since both data sets employ oversampling of particular population segments, all sample statistics reported in this paper are sample weighted. In the NLS76 respondents were asked to report whether they (or their spouse) had received any "girl, inheritance, or prize (such as a lottery or award)" greater than $1,000. …