A Racial Inequality Trap

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 pref- erences 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.