The Economics of Race

Black America has had less wealth, less income, less education, and poorer health than white America for as long as records have been kept. To account for this disparity, economists have advanced three types of explanations: genetic, cultural, and structural. While the first of these had mostly fallen out of favor among social scientists by the mid-20th century (until a worrying revival in recent decades), the latter two have been adopted by somewhat distinct research communities that frequently collide. According to the theory that emphasizes culture, racial disparities are the result of social capital deficits. This is the view that has been most widely adopted by the mainstream of the economics profession, and I refer to it as the neoclassical economics of race. By contrast, the structural theory argues that racial disparities in socioeconomic outcomes are created and maintained over time by American institutions, which privilege white Americans at the expense of Black Americans. This view is known as stratification economics, and, as I argue here, it offers a more accurate and empirically sound explanation for racial disparities in America than its counterpart. The neoclassical and stratification approaches disagree over the causes of and remedies for racial disparities in socioeconomic outcomes and differ substantially in their understanding of income, education, wealth, and health.

Income

Outside of market imperfections, neoclassical economists see variations in income as a result of differences in human capital—the stock of skills, talent, and experience deployed by individuals in the labor market in exchange for a wage. This is the basis from which they reason about income disparities by race: either, the account goes, Black Americans lack the sort of skills that are valued in the labor market, or they are being irrationally discriminated against by employers. Gary Becker’s 1957 book The Economics of Discrimination pioneered this view. In it, Becker posits employers and coworkers discriminate because of an irrational preference against hiring or working alongside Black people. Because racially-biased employers implicitly devalue Black labor, they would only employ a Black worker if they could do so at a discount—reducing the starting wage of Black hires. Similarly, racially biased white workers would expect a wage premium to work alongside Black workers. In theory, this type of preference-based discrimination cannot persist over time, as talented Black workers eventually find non-discriminatory firms to employ their skills, and these nondiscriminatory firms prove more productive than their racially biased counterparts in the long run.

In a 1973 paper, Kenneth Arrow introduced statistical discrimination—a more contemporary neoclassical take on income and hiring discrimination. The theory of statistical discrimination rationalizes discriminatory behavior at the individual level; in this view, employers have limited information with which to judge the future productivity of all prospective hires, and thus rely on group-level statistics, heuristics, and stereotypes to decide whether to make an offer of employment and what that offer should be. Educational attainment is one signal employers might rely on to make these predictions, but, according to the theory of statistical discrimination, employers tend to believe that Black educational attainment is a noisier signal than white educational attainment, or that Black workers are in general either less productive or less reliably productive than white workers.

Supposed cultural or social capital deficiencies also play a role in neoclassical explanations of racial disparities in income and employment. Economist Glenn Loury and sociologist William Julius Wilson both suggest that decades of diminished cultural expectations brought on by limited opportunities for social and economic advancement have left Black communities deficient in the skills, cultural habits, and social connections necessary to succeed in the modern labor market. Though no inherent disparities exist between Blacks and whites, Blacks enter the labor market unprepared to compete with white workers and are thus justifiably paid less.

The primary flaws of neoclassical explanations for racial income disparities are that they are both ahistorical and apolitical; that is, such explanations do not deal with the empirical, historical circumstances which brought about these disparities, and they do not account for the role of direct political decisions (or the lack thereof) in perpetuating said disparities.

By contrast, stratification economics contends that racial disparities in income and employment persist over time and across the educational distribution because there is an economic benefit to employers and white workers. For employers, racial wage or occupational differentiation among employees reduces their capacity for collective bargaining; so long as white workers maintain a higher wage or occupational rank relative to Black workers, their relative superiority can be enough to suppress more extensive workplace demands.

Stratification economics also rejects the notion that statistical discrimination based on perceived group-level characteristics or signal reliability is justified behavior on the part of employers, and views supposed human capital and cultural deficiencies among Black Americans as an ex post justification for observed labor market disparities. Stratification economists have looked to audit studies for proof that race-based discrimination is neither the result of human capital deficiencies, nor of an irrational reasoning process which is resolved by the market in the longrun. In studies where resumes of varying quality were sent to employers, differing only in whether the resumes were assigned a white or Black-coded name, white resumes received significantly more callbacks for interviews. In many cases white resumes received more callbacks than Black resumes with significantly more “human capital” (as measured by education), and fewer “cultural deficiencies” (as measured by contact with the criminal justice system). The unjustified belief that Blackness adds so much uncertainty to a signal of candidate quality is racism itself; it serves to preserve privileged occupations for white job candidates.

The empirical persistence of racial disparities in income and employment repudiates Becker’s theoretical analysis of taste-based discrimination and calls into question the plausibility of Arrow’s statistical discrimination hypothesis—if the source of discrimination was indeed some lack of signal reliability, it is unlikely that firms would simply remain unable to properly judge Black resumes. Unless one adopts an unfalsifiable view of “the long-run,” it is hard to argue the case that racial discrimination is punished by the market over time. It seems more consistent with the evidence at hand that such discrimination is in fact rational for businesses, or at least for businessowners. On this theory, then, there is no need to justify Blacks’ consistently higher unemployment rate and lower wages ex post through an appeal to cultural deficiencies.

Education

Racial disparities in educational attainment and achievement are widespread and have only narrowed slowly over the past 40 years in the United States. Neoclassical economists have attempted to explain these gaps through an individualist lens. They argue that individual Black students lack the motivation or talent to excel at schooling because of a cultural undervaluation of education. “Oppositional culture” theory is a set of ideas imported from sociology used to explain Black students’ supposed lack of investment in their education. The theory holds that Black students may purposefully avoid doing well in school so as to not be seen as “acting white.” Another explanation popular in behavioral economics suggests that Black students (and Black people generally) place higher value on the present than the future, leading them to underinvest in activities that take a long time to pay off like education. There is little evidence that Black students value education less than their white counterparts, or that Black people broadly associate education with white identity; in fact, Black people have been found to invest more in education when compared to white people of similar socioeconomic background.

Stratification economists advance empirical evidence to dispute claims that racial disparities in educational attainment stem from individual or cultural deficiencies amongst Black people. At the macro level, they point to the fact that public school funding is determined by property taxes, and thus reflects the stark trends in racial inequality seen in wealth and homeownership. School districts where the majority of students are non-white receive over $23 billion less in funding than majority white school districts every year in the United States. This translates into larger class sizes and less funding per student—an obvious structural source of disparities in educational outcomes that has nothing to do with deficiencies in the students themselves.

Unequal treatment of students of color is widespread within schools as well. Tracking—the process by which certain students are given access to higher quality education through advanced coursework and smaller class sizes than others—is a common practice that adversely affects students of color in the United States. Black students are less likely to be recommended for or allowed to take these advanced courses than white students, even with comparable or better test scores. These inequities are strongest for young Black women attempting to take courses in mathematics. Contemporary intra-school segregation is another example of how differences in the structure of education systems can generate racial disparities in educational outcomes without individual or cultural deficiencies on the part of Black students, and how these systems can be designed to preserve positions of privilege for white students.

The stratification economics approach to racial disparities in education rejects the notion that Black students are somehow predisposed to perform poorly in academic settings, and focuses squarely instead at inequities in the resources provided to students as the root cause of differences in outcomes. The policy prescriptions which follow from this understanding stand in sharp contrast with those of neoclassical economics, which tend to emphasize increasing parental involvement in Black students’ educational outcomes—as if the source of achievement gaps lies somewhere with the student’s lack of preparation coming into the school, rather than a difference in treatment at the school.

Wealth

Racial wealth disparities are extreme and persistent in the United States. Across income and education groups, wealth disparities remain both massive and widely misunderstood. While the median Black family only holds about $10 for every $100 of wealth held by the median white family, a 2019 study showed that Americans perceive the racial wealth gap to be about 80 percentage points smaller than it actually is (in real terms, they would perceive Blacks as having about half the wealth of an average white family). The gap between Black and white wealth continues to grow as wealth inequality increases overall. If these trends continue, the median Black household is expected to have $0 of wealth by 2053, while the median white household is expected to own $137,000 in wealth.

As with income and education, neoclassical explanations for wealth disparities focus on differing characteristics of poor and rich households. For some working from a neoclassical perspective, wealthy households are simply better at investing and maintaining their wealth, and therefore the goal should be to teach poorer households the financial strategies necessary to turn their poverty into prosperity. This individualistic approach encourages household investment in education to close wealth gaps, assuming that more education will lead to the adoption of wealth promoting behavior. The racial implications of this perspective are clear; to close racial wealth gap, Black households need to be taught how to manage their investment and spending so that they can gain the financial literacy that white households seem to have.

By contrast, stratification economics begins by noting that at America’s founding, and for much of its early history, Black people themselves constituted the wealth of white households and large institutions like banks and universities were designed to facilitate the intergenerational transfer of wealth for white people. Even after the abolition of slavery, Black Americans were consistently excluded from government programs critical to building a white middle class, denied access to bank loans necessary to start businesses and purchase homes, segregated into neighborhoods where homes were undervalued, and had whatever homes and businesses they were able to build destroyed by acts of white terrorism. When combined with the fact that intergenerational wealth transfers are a chief source of wealth concentration in the United States, the argument that racial wealth disparities have little to do with individual financial literacy is strong. The contemporary effects of residential segregation and undervaluation of homes in majority Black neighborhoods, mass incarceration, predatory lending, and the lack of financial return on educational investment for Black students make it near impossible to deny that there are structural causes for racial wealth disparities.

Given that stratification economists see racial wealth disparities as a result of historical and on-going processes of exclusion and predation rather than the individual failings of the poor, their solutions are focused on redress and fundamentally changing forms of wealth accumulation in the United States. Reparations for slavery, Jim Crow, and mass incarceration in the form of wealth transfers to the descendants of those affected by these policies provide a clear path towards remedying Blacks’ historical exclusion from wealth building opportunities. As Darrick Hamilton and Sandy Darity have proposed, baby bonds are a less direct but also effective way to address long standing racial wealth gaps. In either case, stratification economics advocates for a shift in focus from individuals to the structure of the economy and the different resources available to different communities.

Health

Health outcomes are arguably the most important indicator of societal well-being. The length and quality of a person’s life are the bases on which other socioeconomic indicators like income and wealth find their value. The fundamental importance of health makes continuing racial disparities in health outcomes that much more tragic. Racial disparities in mortality and morbidity have existed for as long as the National Vital Statistics Service has been collecting data on deaths in the United States. Black Americans still live shorter, sicker lives than their white counterparts, suffering higher death rates from and earlier onset of most diseases. Though perverse increases in mortality driven by “deaths of despair” among white Americans caused a brief convergence of mortality rates at the beginning of the 21st century, even this trend shows signs of slowing as fentanyl has begun to enter Black communities. Black men remain the group with the lowest life expectancy of any demographic group in the United States, and Black women have among the highest rates of sickness and physical disability as they age.

In the neoclassical framework, individual health outcomes are determined by individual characteristics: decisions to invest in healthcare and other healthful goods rather than other potential wants and needs. In a neoclassical world, the healthiest individuals are those who choose to make the right decisions with respect to diet and exercise, and abstain from risky behavior. This is either because they are genetically predisposed to better health, or because they place a higher value on the future rather than the present.

While the neoclassical approach to health disparities may explain differences between individuals, it is less useful in explaining racial health disparities. Against this limited framework, stratification economics prioritizes structural inequities between Black and white communities with respect to healthful resources and health depleting circumstances. Racial disparities in income, education, and wealth all contribute to gaps in access to health care, safe neighborhoods, and even the time to exercise and cook healthy meals. Black communities are also disproportionately exposed to psychosocial stressors like discrimination and financial strain, which have been shown to lead to hypertension, inflammation, and other morbidities under chronic exposure. Studies even show that Black people face disparate treatment when seeking healthcare; in a cruel twist of irony, the reluctance of doctors to legitimate Black pain may have prevented the opioid epidemic from reaching the Black community for so long. These structural factors affect large portions of the Black community and can explain the persistence of racial gaps in health outcomes even across socioeconomic categories.

Conclusion

Racial disparities in income, education, wealth, and health are widespread in the United States. They are a defining aspect of our history as a nation, and our inability to confront and address these disparities in a substantive way may be one of our great national failures. A first step to doing so, though, is to properly understand their causes and consequences. In economics there have been various attempts to do just that. One community of scholars, those engaged in the neoclassical economics of race, focus on finding ways to correct the behaviors and dispositions of Black Americans, on the assumption that their historically poor outcomes are the result of having cultivated a culture of poor decision making. Another, the stratification economics community, instead looks at the history of the United States and its institutions, how those institutions have so often been designed at the expense of Blacks, and holds that if changes are to be made they must be made at the structural rather than individual level. To the extent that solving racial disparities is indeed a priority for policymakers and interested scholars, the stratification economics approach deserves greater attention and study. The policy-avoidant approach to addressing racial disparities implied and endorsed by the neoclassical economics of race has contributed to the slow progress in closing these persistent gaps. We can make real progress by creating policies at the structural and institutional levels to directly address racial disparities at their root, rather than continuing on a path of misguided and patronizing attempts to shape individuals and culture.