Education plays huge role in bridging inequality gap
THE GROWING national concern about economic inequality raises many questions. One has to do with demographic groups. Are some doing better than others? If so, exactly why? A new study from the Federal Reserve Bank of St Louis shows that as most people assume, education is key both to mobility and to the accumulation of wealth. But another important factor is economic decision-making.
And when it comes to financial prudence, white people and Asian-- Americans appear to be doing a lot better than Hispanics and African-Americans.
Consider some numbers. From 1989 to 2013, the median wealth of white families stayed essentially constant, rising (in inflation adjusted dollars) from $130 102 (R1.5 million at yesterday’s rate) to $134 008. For Hispanic families, in contrast, the value grew significantly, but from a low starting point: $9 229 to $13 900. For African-American families, the story is similar: The median increased from $7 736 to $11 184.
The biggest advance by far was made by Asian-American families, who experienced an increase from $64 165 to $94 440 (including a significant spike since 2010). For most of the past two decades, their median income has been higher than that of white people, and if current trends continue, their median wealth will soon be higher, too.
What accounts for this? Since 1989, Asian-Americans have enjoyed an explosive growth in educational attainment. In 2013, 65 percent of Asian-Americans aged 35 to 39 had a four-year college degree – compared with 42 percent for white people, 26 percent for African-Americans and 16 percent for Hispanics. Over time, these differences are bound to produce increases in both income and wealth.
Hispanics and African-Americans have much less wealth than white people and Asian-Americans – 90 percent less. Revealingly, this difference between the races is much greater than the income gap. Hispan- ics and African-Americans earn 40 percent less than whites and Asian-Americans do.
Part of the explanation for the wealth disparity involves financial decisionmaking. African-Americans and Hispanics show less asset diversification, and they hold twice as much debt as their Asian-American and white counterparts. They appear to be borrowing at higher interest rates and investing in assets that have low returns, such as housing.
To evaluate financial decision-making, the authors of the Federal Reserve report looked at people’s savings rates, credit card balances, debt-to-income ratios and missed payments over the course of a year.
On these measures, which the researchers combined to produce a “financial health scorecard”, Asian-Americans and white people have been quite comparable since 1992 (with Asian-Americans doing better from 2007-2013) – and Hispanics and African-Americans have lagged.
You might think that education could explain the variations. After all, if one demographic group has more college grad- uates, it should do better not only in terms of income and wealth, but also on the financial health scorecard.
But that’s not what the study found. Within the same categories of educational attainment, the differences among demographic groups remain almost the same. On the financial health scorecard, the gaps between Hispanics and white people, and between African-Americans and white people, are the greatest at the higher levels of educational attainment.
And at every level of education, Asian-Americans show much better financial health than African-Americans and Hispanics. Holding income constant, they have managed to do relatively well in saving money and avoiding debt. While education matters to income and intergenerational mobility, economic well-being also depends on people’s financial decisions, which can enable them to accumulate wealth.
Reducing inequality – and promoting what governor Jeb Bush calls a “right to rise” – is a significant part of helping people to improve those decisions. – Bloomberg
Hispanics, as well as African-Americans have much less wealth than white people and Asian-Americans – 90 percent less.