A Racial Inequality Trap

Alejandro Badel ()

No 2015-34, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Why has the U.S. black/white earnings gap remained around 40 percent for nearly 40 years? This paper''s answer consists of a model of skill accumulation and neighborhood formation featuring a trap: Initial racial inequality and racial preferences induce racial segregation and asymmetric skill accumulation choices that perpetuate racial inequality. Calibrated to match the U.S. distribution of race, house prices and earnings across neighborhoods, the model produces one-half of the observed racial earnings gap. Moving the economy from the trap to a racially integrated steady state implies a 15.6 percent welfare gain for black households and a 2.7 percent loss for white households.

Keywords: Racial Inequality; Neighborhood Externalities; Human Capital; Segregation; Incomplete Markets; Earnings Inequality (search for similar items in EconPapers)
JEL-codes: E24 J15 J24 O18 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-09-11
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac and nep-ure
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Citations: View citations in EconPapers (3)

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