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Economic inequality and race

In the aftermath of recent incidents of police brutality and civil unrest, our nation again struggles to come to terms with its treatment of African Americans.

Outrage initially directed at the criminal justice system has now spilled into other aspects of Black lives, including economic disparities that have afflicted the community. On average, Black workers earn much less than White workers. The unemployment rate for Black workers is double that of White workers. And the median Black family has a tenth the wealth of the median White family.

Historically, the federal government has been responsible both for policies that produced and reinforced racial disparities and for policies that attempted to remedy them.

Against this backdrop, the Federal Reserve Bank of Minneapolis invites students in its 33rd annual essay contest to answer this question: What, if anything, should the federal government do to alleviate persistent economic disparities faced by African Americans?

What is the nature of the problem?

Government and nongovernment policies and practices created and reinforced disparities between African Americans and Whites over hundreds of years through slavery, segregation, and many other forms of unequal treatment. Only since the 1960s has the federal government outlawed racial discrimination in employment, housing, and lending, among a host of other areas. Competition between firms might be expected to erode wage and unemployment gaps between Black and White workers as firms compete for the most productive workers regardless of skin color. This has not proven to be the case, however.

Economists have attempted to understand the origin and persistence of these economic gaps in several ways.

Some have focused on differences in human capital possessed by Black and White workers that are the lingering product of institutional racism. They argue that historical and contemporary discrimination in housing, educational opportunities, and the criminal justice system, among other areas, results in fewer labor market opportunities for Black workers. White workers, whose parents and grandparents faced fewer societal barriers, possess higher levels of education on average along with other forms of “social capital.”

However, these explanations don’t account for all disparities, which exist even among Black and White workers with similar backgrounds other than race. So other research has focused, for example, on how implicit bias or “statistical discrimination” can lead to ongoing disparities in labor market opportunities.

Many other explanations and other kinds of economic disparities exist outside labor markets, such as disparities in homeownership, the transfer of wealth from one generation to the next, and student debt. In your essay, you might advocate for an approach that focuses on one of these aspects or on another.

Why government intervention?

Do the economic disparities between Blacks and Whites justify intervention?

Though competitive markets generally work well at allocating scarce resources, many economists argue that government interventions can be justified when markets fail or when the market produces undesirable social problems as a side effect. In practice, many markets may fail to be competitive in the way economic theory often assumes.

Arguably, government policies from slavery through Jim Crow and mass incarceration have contributed to the disparities. Therefore, the government may be able to play a role in reducing them. Also, besides being morally repugnant, these disparities could be seen as economically inefficient. For example, how many innovations has society lost because would-be scientists could only find work as farm hands or domestic servants?

Under this view, civil rights legislation, by dismantling the legacy of Jim Crow, was an efficiency-enhancing intervention. Since then, other interventions adopted or still in evolution, such as affirmative action policies, educational reform, and criminal justice reform, may be avenues to correct discrimination that still distorts economic outcomes.

Some economists have argued that economic disparities caused by discrimination or other factors can become self-reinforcing rather than resolving themselves easily over time, even after the discrimination is gone. There might be a role for the state or other institutions to provide the push to escape these “poverty traps.”

As with any government intervention, however, there is the risk of unintended consequences. One criticism of affirmative action, for example, is that, by making it easier for minority students to qualify for college, it results in a stigma that leads to further discrimination against minority professionals.

Successful essays will examine these costs, benefits, and unintended consequences and make a convincing case for an approach that balances them.

Many possible approaches

Racial disparities are an immensely complex socioeconomic problem. This primer is meant to be only an introduction. Students should draw upon other information not covered here, and their essays may take any number of angles.

Judges will reward creative thinking, careful research, persuasive writing, and solid economic reasoning. Please make special note that while work by scholars and others affiliated with the Federal Reserve Bank of Minneapolis has promoted certain policies meant to alleviate racial economic disparities, students shouldn’t feel required to discuss them, nor should they expect to gain an advantage by doing so.

If you have any questions, email