Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap

Ellora Derenoncourt (), Chi Hyun Kim, Moritz Kuhn and Moritz Schularick
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Ellora Derenoncourt: https://irs.princeton.edu/people/ellora-derenoncourt-0

No 86, Opportunity and Inclusive Growth Institute Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Black Americans face higher cyclical unemployment risk than white Americans: job-finding rates during recessions are lower and the risk of becoming long-term unemployed is higher. Differences in unemployment risk across Black and white Americans imply that Black Americans optimally invest less in risky assets. We show that differences in unemployment risk can explain up to 90% of the gap in the stock market shares of Black and white portfolios, resulting in lower returns on wealth for Black Americans. Through this portfolio channel, adverse labor market conditions for Black Americans translate into lower wealth returns and exacerbate racial wealth inequality.

Keywords: Unemployment risk; Portfolio choice; Racial wealth gap (search for similar items in EconPapers)
Date: 2024-03-01
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmoi:97901

DOI: 10.21034/iwp.86

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