Skip to main content
SpringerLink
Log in

Racial Differentials in the Wealth Effects of the Financial Crisis and Great Recession

  • Original Article
  • Published:
Journal of Economics, Race, and Policy Aims and scope Submit manuscript

Abstract

The financial crisis of 2007–2009 was arguably the most severe financial crisis in American history and the subsequent Great Recession was the worst economic downturn in the USA since the Great Depression. In this paper, we analyze data from the Panel Survey of Income Dynamics (PSID) to examine the effects of the crisis and recession on the wealth of White and Black families using graphical, cross section, and panel empirical models. While other studies have measured the short-term effects of the crisis and recession on American household wealth, we are able to look at longer-term wealth effects by incorporating data from the recently released 2015 wave of the PSID. Our results indicate that the negative consequences of the economic downturn on Black families’ wealth were severe and longer-lasting than for White families.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

Notes

  1. A good source of the timeline of the US financial crisis is available at the St. Louis Federal Reserve site: https://www.stlouisfed.org/financial-crisis/full-timeline. The National Bureau of Economic Research dates the US recession as beginning in December 2007 and ending in June 2009. See: http://www.nber.org/cycles.html

  2. While our focus is on wealth differences, there is also a related literature on income differences. Please see Gradin (2014), Hoover et al. (2018), and Nau and Soener (2017) for examples of the type of work being done in this area.

  3. An excellent recent study using both descriptive as well as OLS and decomposition techniques to examine the full range of possible factors to explain the Black-White as well as White-Hispanic wealth gaps generally is in Thompson and Suarez (2015). The authors find the Black-White gap has been increasing recently and attribute a significant portion of the wealth gap to differences in asset holdings. These are driven largely by observable factors such as standard demographic factors, income, home ownership, and types of financial holdings. Interested readers are encouraged to read Thompson and Suarez (2015) for more.

  4. The PSID allows up to four responses for race type of the head. For someone who listed more than one race, we assign that person only the race that aligns with his first choice.

  5. There are 221 observations that had heads switch from Black to White at least once during the relevant time period.

  6. From 2011 to 2013, the gap drops slightly from 7.6 to 7.2, but then rises to 7.7 in 2015

  7. As we can see from the relatively large standard deviations in Table 2, wealth is highly skewed. Hence, we report median values in Table 13 in the Appendix. Using medians as our statistic of choice does not change generally what we observe over time: that the ratio between White and Black wealth has increased from the beginning of the recession (2007, ratio of 8.6) to our most current wave (2015, ratio of 10.8). Using medians also paints a more bleak picture of wealth inequality in the country, as Table 2 shows a ratio of 6 in 2007 that increases to 7.7 by 2015. Hence, given that using means does not change our overall results, and also because the components of wealth we focus on (real estate equity, stock) have a median of $0 in many of our waves (particularly for Blacks), we will report means in the remainder of the paper.

  8. This is a consistent finding in the literature. See, for example, Shapiro et al. (2013) and Blau and Graham (1990)

  9. The PSID also asks respondents about “other real estate,” apart from primary home equity. This category includes the value of a second home, land, rental real estate, and land contracts minus any debt owed. Because assets in this category were likely affected by the housing bust, we also measure “total real estate” wealth by adding primary home equity and equity in other real estate together. We report mean total real estate equity in Table 14 in the Appendix. Aside from the fact that the percentage of total wealth held in this asset is larger for both Blacks and Whites than for primary home equity only (Table 3), the trend over time for the White/Black ratio is similar. Furthermore, the percentage of total wealth in real estate for Whites remains everywhere lower than for Blacks in all years, which is also evident when comparing the mean value. This finding is most likely due to a lower participation in the financial markets for Blacks.

  10. We choose 2009 as the beginning of the post-crisis period since by mid-2009, the worst of the financial crisis had passed (as measured by such crisis indicators as the TED Spread and A2/P2 Spread for Non-Financial Commercial Paper). Additionally, the Great Recession officially ended in June 2009. Because PSID interviews are conducted between March and November of survey years, there are potentially some interviews in 2009 that were conducted before financial conditions had completely recovered and the economy begun its expansion. We consider this potential overlap of periods to be of relatively minor concern.

  11. A dummy variable is included for each state, excluding one. These serve to control for characteristics specific to each state (e.g., tax laws, regulations).

  12. The inverse hyperbolic sine transformation is defined as log(yi + (yi2 + 1)1/2), and with the exception of very small values of y is approximately equal to log(2yi) or log(2) + log(yi). For interpretation purposes, we can treat the dependent variable which is transformed according to this transformation exactly as we would a standard logarithmic dependent variable. For those interested in more on this transformation, please see Burbidge et al. (1988), MacKinnon and Magee (1990), and Pence (2006). We would like to thank Frances Woolley for making us aware of this via her Worthwhile Canadian Initiative blog.

  13. Random effects estimation is another option we consider. However, a Hausman test strongly rejects the use of random effects. Statistics from this test are available upon request.

  14. Note that in the case of the Inverse Hyperbolic Sine transformation, we would interpret our results as we would a model where the dependent variable is natural logged. Hence, the coefficient estimate is interpreted based on (eβ − 1) ∙ 100 which in our case is (e−1.556 − 1) ∙ 100 =  − 78.9 which is interpreted as a  78.9% reduction in wealth.

  15. Sex and level of education were captured in our previous model by the inclusion of fixed effects. Education serves as a predictor of wealth, although it can sometimes be difficult to disentangle its effect from that of income effects. Individuals with more education can earn more income, and in turn save and accumulate higher wealth (Gittleman and Wolff 2000). Killewald et al. (2017) suggest that, in fact, education may even be a proxy for past income streams.

  16. As before, for all three cases, we limited the sample to include only families who had positive wealth in 2007.

  17. We note that we also ran these regression models without the inclusion family income since the crisis and recession may have also affected wealth via a change in household income. The results from these additional models indicate that Black families were even more likely than White families to have experienced negative on effects on their wealth, suggesting that an income effect might also have played a role in the wealth differences we see between races.

References

  • Addo FR, Lichter DT. Marriage, marital history, and black – white wealth differentials among older women. Fam Relat. 2013;75:342–62. https://doi.org/10.1111/jomf.12007.

    Article  Google Scholar 

  • Amuedo-Dorantes C, Borra C. Emerging wealth disparities after the storm: evidence from Spain. Rev Econ Househ. 2017; https://doi.org/10.1007/s11150-017-9363-3.

    Article  Google Scholar 

  • Amuedo-Dorantes C, Pozo S. The impact of the recession on the wealth of older immigrants and native household in the United States. IZA J Labor Policy. 2015;4(1):6. 1–27

    Article  Google Scholar 

  • Ando A, Modigliani F. The life cycle hypothesis of saving: aggregate implications and tests. Am Econ Rev. 1963;53(1):55–84.

    Google Scholar 

  • Barsky R, Bound J, Charles KK, Lupton JP. Accounting for the black-white wealth gap: a nonparametric approach. J Am Stat Assoc. 2002;97(459):663–73.

    Article  Google Scholar 

  • Blau F, Graham J. Black-white differences in wealth and asset composition. Q J Econ. 1990;105(2):321–39.

    Article  Google Scholar 

  • Bosworth B.. Economic consequences of the great recession: evidence from the panel study of income dynamics. Center for Retirement Research Working Papers; 2012. WP#2012-4. p. 1–26.

  • Bricker J, Bucks B, Kennickell A, Mach T, Moore K. Drowning or weathering the storm? Changes in family finances from 2007 to 2009. NBER Working Paper; 2011. p. 16985.

  • Bricker J, Dettling LJ, Henriques A, Hsu JW, Moore KB, Sabelhaus J, et al. Changes in US family finances from 2010 to 2013: evidence from the survey of consumer finances. Fed Reserv Bull. 2014;100(4):1–41.

    Google Scholar 

  • Burbidge JB, Magee L, Robb AL. Alternative transformations to handle extreme values of the dependent variable. J Am Stat Assoc. 1988;83(401):123–7.

    Article  Google Scholar 

  • Campbell LA, Kaufman RL. Racial differences in household wealth: beyond black and white. Res Soc Stratif Mobil. 2006;24(2):131–52.

    Article  Google Scholar 

  • Chiteji NS, Hamilton D. Family connections and the black-white wealth gap among middle-class families. Review of Black Political Economy. 2002;30(1):9–28.

    Article  Google Scholar 

  • Choi L. Household net worth and asset ownership among the economically vulnerable. Community Development Research Brief. Federal Reserve Bank of San Francisco; 2013.

  • Choudhury S. Racial and ethnic differences in wealth and asset choices. Soc Secur Bull. 2002;64(4):1–15.

    Google Scholar 

  • Currie J, Duque V, Garfinkel I. The great recession and mothers’ health. Econ J. 2015;125:F311–46.

    Article  Google Scholar 

  • D’Ambrosio C, Rohde N. The distribution of economic insecurity: Italy and the US over the great depression. Rev Income Wealth. 2014;60(S1):S33–52.

    Article  Google Scholar 

  • DeVaney SA, Anong ST, Yang Y. Asset ownership by black and white families. Fin Counsel Plan. 2007;18(1):33–45.

    Google Scholar 

  • Gittleman M, Wolff EN. Racial wealth disparities: is the gap closing? Levy Economics Institute Working Paper No. 311; 2000.

  • Gittleman M, Wolff EN. Racial differences in patterns of wealth accumulation. J Hum Resour. 2004;39(1):193–227.

    Article  Google Scholar 

  • Gorbachev O, O’Flaherty B, Sethi R. Ethnicity, immigration, and wealth fluctuations in the United States. Rev Income Wealth. 2017; https://doi.org/10.1111/roiw.12317.

  • Grabka MM. Income and wealth inequality after the financial crisis: the case of Germany. Empirica. 2015;42(2):371–90.

    Article  Google Scholar 

  • Grable JE, Joo S. Financial help-seeking behavior: theory and implications. Fin Counsel Plan. 1999;10(1):13–24.

    Google Scholar 

  • Gradin C. Race and income distribution: evidence from the USA, Brazil, and South Africa. Rev Dev Econ. 2014;18(1):73–92.

    Article  Google Scholar 

  • Grinstein-Weiss M, Yeo YH, Zhan M, Charles P. Asset holding and net worth among households with children: differences by household type. Child Youth Serv Rev. 2008;30(1):62–78.

    Article  Google Scholar 

  • Gutter MS, Fontes A. Racial differences in risky asset ownership: a two-stage model of the investment decision-making process. Fin Counsel Plan. 2006;17(2):64–78.

    Google Scholar 

  • Hanna SD, Wang C, Yuh Y. Racial/ethnic differences in high return investment ownership: a decomposition analysis. Fin Counsel Plan. 2010;21(2):44–59.

    Google Scholar 

  • Hoover GA, Compton RA, Giedeman DC. More on the impact of economic freedom on the black-white income gap. Public Finance Rev. 2018;46(2):205–23.

    Article  Google Scholar 

  • Houle J. Mental health in the foreclosure crisis. Soc Sci Med. 2014;118:1–8.

    Article  Google Scholar 

  • Huyser KR, Perez JM, Ybarra VD, Hellwege JM, Sanchez L. Differential influence of the great recession on political participation among race and ethnic groups. Soc Sci Q. 2017; https://doi.org/10.1111/ssqu.12399.

    Article  Google Scholar 

  • Hwang J, Hankinson M, Brown KS. Racial and spatial targeting: segregation and subprime lending within and across metropolitan areas. Soc Forces. 2015;93(3):1081–108.

    Article  Google Scholar 

  • Killewald A. Return to being black, living in the red: a race gap in wealth that goes beyond social origins. Demography. 2013;50(4):1177–95.

    Article  Google Scholar 

  • Killewald A, Pfeffer FT, Schachner JN. Wealth inequality and accumulation. Annu Rev Sociol. 2017;43:379–404.

    Article  Google Scholar 

  • Lusardi A. Financial literacy: an essential tool for informed consumer choice. Working Paper, Dartmouth College; 2008. Downloaded November 13, 2017.

  • MacKinnon JG, Magee L. Transforming the dependent variable in regression models. Int Econ Rev. 1990;31(2):315–39.

    Article  Google Scholar 

  • Maroto M. Growing further apart: racial and ethnic inequality in household wealth across the distribution. Sociol Sci. 2016;3:801–24.

    Article  Google Scholar 

  • Massey DS, Rugh JS, Steil JP, Albright L. Riding the stagecoach to hell: a qualitative analysis of racial discrimination in mortgage lending. City Community. 2016;15(2):118–36.

    Article  Google Scholar 

  • McKernan S-M, Ratcliffe C, Steuerle E, Zhang S. Do racial disparities in private transfers help explain the racial wealth gap? New evidence from longitudinal data. Demography. 2014a;51(3):949–74.

    Article  Google Scholar 

  • McKernan S-M, Ratcliffe C, Steuerle E, Zhang S. Disparities in wealth accumulation and loss from the great recession and beyond. Am Econ Rev. 2014b;104(5):240–4.

    Article  Google Scholar 

  • McKernan S-M, Ratcliffe C, Steuerle E, Zhang S. Impact of the great recession and beyond: disparities in wealth building by generation and beyond. Urban Institute Working Paper; 2014c. p. 1–21.

  • Nau M, Soener M. Income precarity and the financial crisis. Socio Econ Rev. 2017; https://doi.org/10.1093/ser/mwx020.

  • O’Brien RL. Depleting capital? Race, wealth and informal financial assistance. Soc Forces. 2012;91(2):375–96.

    Article  Google Scholar 

  • Oliver ML, Shapiro TM. Black wealth, white wealth : a new perspective on racial inequality. 2nd ed. New York: Routledge; 2006.

    Google Scholar 

  • Ozawa MN, Lee Y. The effect of children on the income status of female-headed households: an intercountry comparison, vol. 22. New York: Oxford University Press; 2008. p. 357–73.

    Google Scholar 

  • Panel Study of Income Dynamics. Public use dataset. Produced and distributed by the Survey Research Center. Ann Arbor: Institute for Social Research, University of Michigan; 2017.

    Google Scholar 

  • Pence KM. The role of wealth transformations: an application to estimating the effect of tax incentives on saving. Contrib Econ Ana Pol. 2006;5(1):20.

    Google Scholar 

  • Pfeffer FT, Danziger S, Schoeni RF. Wealth disparities before and after the great recession. Ann Am Acad Pol Soc Sci. 2013;650(1):98–123.

    Article  Google Scholar 

  • Robert SA, Reither EN. A multilevel analysis of race, community disadvantage, and body mass index among adults in the U.S. Soc Sci Med. 2004;59(12):2421–34.

    Article  Google Scholar 

  • Ruel E, Hauser R. Explaining the gender wealth gap. Demography. 2013;50(4):1155–76.

    Article  Google Scholar 

  • Rugh JS, Albright L, Massey DS. Race, space, and cumulative disadvantage: a case study of the subprime lending collapse. Soc Probl. 2015;62(2):186–218.

    Article  Google Scholar 

  • Shapiro T, Meschede T, Osoro S. The roots of the widening racial wealth gap: explaining the black-white economic divide. IASP Research and Policy Brief; 2013. p. 1–8.

  • Thompson JP, Suarez GA. Exploring the racial wealth gap using the survey of consumer finances. Finance and Economics Discussion Series 2015–076. Washington: Board of Governors of the Federal Reserve System; 2015. https://doi.org/10.17016/FEDS.2015.076.

    Article  Google Scholar 

  • United States, Department of Labor, Bureau of Labor Statistics (BLS). Labor force statistics from the current population survey. Retrieved June 26, 2018 from: https://www.bls.gov/cps/cpsaat01.htm.

  • Wolff EN. The asset price meltdown and the wealth of the middle class. NBER Working Paper; 2012. p. 18559.

  • Zhang S, Feng S. Understanding the unequal post-recession wealth recovery for American families. B E J Econ Anal Policy. 2017;17(4):20160229. https://doi.org/10.1515/bejeap-2016-0229. ISSN (Online) 1935-1682

    Article  Google Scholar 

Download references

Acknowledgements

We wish to thank Colin Jones for valuable research assistance and seminar participants at Lakehead University for helpful comments. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. University of Manitoba, Winnipeg, MB, R3T 5V5, Canada

    Ryan Compton

  2. Grand Valley State University, Grand Rapids, MI, 49504, USA

    Daniel Giedeman & Leslie Muller

Authors
  1. Ryan Compton
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Daniel Giedeman
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Leslie Muller
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ryan Compton.

Appendix

Appendix

Table 13 Median total wealth
Full size table
Table 14 Total real estate equity
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Compton, R., Giedeman, D. & Muller, L. Racial Differentials in the Wealth Effects of the Financial Crisis and Great Recession. J Econ Race Policy 1, 126–141 (2018). https://doi.org/10.1007/s41996-018-0015-7

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s41996-018-0015-7

JEL Classifications

Keywords

Search

Navigation