Explaining the racial gap in stock market investment
Explaining the racial gap in stock market investment
Stocks are increasingly an important source of household wealth. Thanks to the booming stock market, U.S. household wealth surged to a record high last year, per Federal Reserve data. Yet data also show deep and persistent racial differences in stock ownership, with broader implications for the overall wealth of families.
Chris Farrell, Marketplace’s senior economics contributor, has been taking a closer look at this. He spoke with “Marketplace Morning Report” host David Brancaccio. The following is an edited transcript of their conversation.
David Brancaccio: All right, just definitions: We’re talking about wealth and wealth disparities. This is not income; it’s something else.
Chris Farrell: Right. So in economics, wealth is defined as the total value of assets owned minus any liabilities owed. Yet wealth is a lot more than that equation suggests. I mean, wealthier households, they can absorb unexpected setbacks, they have the resources to tap to own a home, to start a business. So wealth also boosts the prospects for generational mobility — that the next generation, the younger generation, will do better.
Brancaccio: All right, now I’ve seen general statistics about enormous wealth gaps by race in America. But we’re talking about when it comes to stocks in particular?
Farrell: This is stocks, in particular. It’s thanks to a scholarly paper by four economists, and they note that white workers hold about 35% of their wealth in the form of stocks, and that compares to 27% for Black workers. So the gains in the stock market over the past four decades, they have contributed to the rise in inequality that we’ve seen.
Brancaccio: The question then becomes, what would account for this? I mean, we’ve met people of all races, from older generations, who never liked the stock market because they saw what happened to their parents and grandparents in the great stock market crash of 1929. What do we know when you look at this by race?
Farrell: So key is the job market — or, to put it more accurately, it’s the risk of unemployment. The odds of getting handed a pink slip are much higher for Black workers to their white peers, especially during recessions, during economic downturns. And the risk of joining the long-term unemployed, it’s a lot higher. For example, David, some one-third of unemployed Black household heads report being out of work for a full year, compared to 17% of white household heads.
Brancaccio: So, if the odds are higher that you might lose work, it makes sense that you’d be more conservative in your approach to what you do with the wealth that you have.
Farrell: The longstanding job market risk suggests it’s smart to keep more of your money in safer assets. The risk of investing heavily in volatile stocks, it’s simply too great. Black workers and their families aren’t making an investing mistake; the portfolio choice is rational.
Brancaccio: One of my favorite terms from economics is the counterfactual. So if you could erase the differences by race in chances that you might lose a job in a downturn, what would happen to wealth?
Farrell: The racial wealth gap would have only increased by 3% between 1980 and 2020. Instead, it increased by 15% during this period. So, you know, David, whenever we’re looking at disparities — whether it’s housing, it’s income, it’s wealth — the conclusion always comes back to the need to significantly improve the pay and labor market conditions, for example, for Black workers.
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