The Dynamics of the Racial Wealth Gap

ABSTRACT We study the dynamics of the racial wealth gap (the wealth of Black households relative to white ones) using a dynamic equilibrium model of overlapping generations. We match the model to the cross‐sectional distributions of wealth and earnings by race. We find that equalizing earnings is critical for permanent reductions in racial wealth inequality, and that one‐time transfers will have only transitory effects unless earnings are also equalized. Our results are robust to the introduction of racial differences in returns to saving, which only matter after earnings inequality is reduced.