The coronavirus pandemic has shed fresh light on the various inequalities that exist within society, with both economic and racial inequality laid bare. New research from the University of Chicago highlights how this inequality is also likely to play a part in how well the most vulnerable are going to be able to respond to the economic volatility caused by Covid-19.
The paper highlights how Black and Hispanic households have greater difficulty coping with income shocks than their white counterparts, with this difficulty largely due to the persistent racial and ethnic wealth gap in the United States.
The researchers used bank account data alongside voter registration data to understand how race and ethnicity sat alongside household spending behaviors.
“Race and ethnicity are significant predictors of the degree to which households cut spending in response to income shocks,” the researchers explain. “And the differences in wealth between these groups appear to be an important factor in driving these differences.”
Spending changes
The researchers trawled through the spending patterns of around 20 million households from October 2012 to April 2018. The analysis revealed that Black and Hispanic households were more likely to engage in something known as “consumption smoothing” to ensure their lifestyle habits were maintained even as their income fell.
Consumption smoothing is a phenomenon whereby households attempt to balance spending and saving so that their standard of living can stay relatively consistent even when their income is quite volatile.
“On average, in comparison to white households, Hispanic households responded to income shocks with a 20% greater reduction in consumption while Black households responded with a 50% greater reduction,” the researchers say. “This is a significant finding for policymakers to consider as the economic crisis unfolds, particularly in light of how to date it has disproportionately affected minority racial and ethnic communities.”
Racial wealth gap
The researchers argue that this increased impact of income disruption on Black and Hispanic households is probably caused by the ethnic and racial wealth gap that explains the difference in accumulated assets between white and non-white households. When the liquid assets of households were controlled for, the financial behavior differences tended to vanish.
This was also found to have a profound impact upon the welfare of the household. By combining the income and consumption patterns of each household, the researchers found that eliminating income shocks would boost welfare by up to 56% in Black households and up to 32% in Hispanic households when compared to white households.
The researchers believe their findings are indicative of the struggles people have with common forms of income shocks, such as a reduction in hours or seasonal variation in the availability of work.
“These findings have important implications for any policy that aims to mitigate the impact of income volatility and to reduce economic inequality between racial and ethnic groups,” the researchers conclude.
