Why racial disparities in stock market investing persist – Marketplace

Stocks continue to be an important source of family wealth. Thanks to the booming stock market, American household wealth rose sharply last year, according to Federal Reserve data. Yet the data show deep and persistent racial disparities in asset ownership, with broad implications for overall household wealth.

Chris Farrell, Marketplace’s senior economist, is looking into this. He spoke with “Marketplace Morning Report” host David Brancaccio. The following is an edited transcript of their conversation.

David Brancaccio: Okay, just a clarification: We’re talking about wealth and wealth inequality. This is not income; it’s something else.

Chris Farrell: That’s right. So in economics, wealth is defined as the total value of assets with any liabilities owed. Yet wealth is much more than the equation implies. I mean that wealthy families, can accept unexpected obstacles, have the resources to find a house, start a business. So wealth also increases the chances of generational mobility – that the next generation, the new generation, will do better.

Brancaccio: OK, so I saw some general statistics about the huge wealth gaps by race in America. But what are we talking about when it comes to stocks specifically?

Farrell: This is stocks, mainly. That’s because of a professional paper by four economists, and they note that white workers hold about 35% of their wealth in the form of stocks, and that’s compared to 27% for Black workers. So the gains in the stock market over the past four decades have contributed to the increase in inequality that we’ve seen.

Brancaccio: So the question is, what would be responsible for this? I mean, we’ve met people of all races, from generations past, who didn’t like the stock market because they saw what happened to their parents and grandparents in the stock market crash. 1929. What do we know when you look at this? by race?

Farrell: So the key is the job market – or, to put it more precisely, the unemployment rate. The chances of being given a pink slip are much higher for Black workers than their white peers, especially during recessions. And the risk of joining the long-term unemployed is very high. For example, David, one-third of unemployed Black heads of households report being out of work all year, compared to 17% of white heads of households.

Brancaccio: So, if the chances are high that you could lose your job, it makes sense to be more careful about what you do with the wealth you have.

Farrell: The long-term risk of the job market suggests that it is wise to keep most of your money in safe assets. The risk of investing heavily in volatile stocks is very high. Black workers and their families are not wrong to invest; portfolio selection is reasonable.

Brancaccio: One of my favorite words from economics is counterfactual. So if you were to erase racial differences in the likelihood of losing your job during a recession, what would happen to wealth?

Farrell: The racial wealth gap should have only increased by 3% between 1980 and 2020. Instead, it has increased by 15% over this period. So, you know, David, whenever we look at inequality – whether it’s housing, it’s money, it’s wealth – the decision comes back to the need to significantly improve wage levels and the labor market, for example, for workers the Blacks.