CD360 Notebook

Education makes a difference, but doesn't close racial gaps

Rob Grunewald | Economist

Published June 6, 2018

Two recent papers by Fed researchers show that while education attainment is correlated with higher employment, income, and wealth, more education doesn’t close racial and ethnic gaps on these measures.

In “Racial Gaps in Labor Market Outcomes in the Last Four Decades and over the Business Cycle," a Federal Reserve Board of Governors staff working paper, authors Tomaz Cajner, Tyler Radler, David Ratner, and Ivan Vidangos examine labor market outcomes by race and gender. They use data from the Current Population Survey to measure differences in observable characteristics related to labor market outcomes, including age, education, marital status, and state of residence. They also include an estimate of the component unexplained by the observables.

Figure 1 depicts the black-white male gap for the employment-to-population ratio (ratio of employment to civilian population) and the contribution observable characteristics make to differences between black and white men. The total black-white male gap is denoted by the span between the zero line and the jagged black line that appears in the lower half of the chart. While the black-white gap has been persistent over the past 40 years, there has been some narrowing during the past few years. The colored bars show observables associated with a higher or lower black male population-to-employment ratio relative to the white male population-to-employment ratio.

Black-white male employment-to-population ratio gaps

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The chart shows that age, shown in orange, indicates that the relatively younger black population is associated with a higher employment-to-population ratio than white men. In contrast, marital status and education attainment are associated with a lower employment-to-population ratio. Meanwhile, the blue part of the bars indicate that a large majority of the black-white gap is not explained by the observable variables. At the Minneapolis Fed’s Opportunity and Inclusive Growth Institute spring conference on May 11, co-author Ivan Vidangos noted that other studies suggest the unexplained components may be explained by possible differences in unobserved skills between racial groups, occurrences of discrimination, rates of incarceration, or other factors such as family background, school quality, and childhood neighborhood characteristics.

In regard to education, the height of the green bars is notably less than the total black-white gap in the employment-to-population ratio. This means that even if gaps in education attainment were to close completely, substantial gaps in employment-to-population ratios would remain.

Hispanic-white male employment-to-population ratio gaps

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As shown in Figure 2, the overall situation is different for the Hispanic-white male employment-to-population ratio gaps. The Hispanic employment-to-population ratio over the past four decades has been largely higher than the white ratio, due primarily to the lower average age of the Hispanic civilian population. However, male Hispanic education attainment is associated with a lower Hispanic employment-to-population ratio.

In "How Education, Race and Birth Year Shape Financial Outcomes," William Emmons, Ana Hernández Kent, and Lowell Ricketts at the St. Louis Fed's Center for Household Financial Stability show that even after accounting for education attainment, parental education, and age, income and wealth gaps across races and ethnicities remain substantial. Their results are based on data from the Federal Reserve Board’s Survey of Consumer Finances.

Figure 3 depicts key findings for income. (A figure for wealth, which follows a similar pattern as income, is available in the full report.) The first three partitions incorporate characteristics that are natural or inherited, such as age (“Middle-aged” refers to age 40 to 61), having a parent with a college degree, and race and ethnicity. Whites have a higher median income than people of other races and ethnicities. Middle age is associated with higher income, as are having a parent with a college degree and attaining one’s own college degree.

Among families whose parents do not have a college degree, attaining a college degree is associated with substantial gains in income and wealth compared with not attaining a degree. In turn, among families whose parents have a college degree, not attaining a college degree is associated with a substantial drop in income and wealth compared with attaining a college degree.

Finally, after accounting for age and parental education, attaining a college degree does not close the income and wealth gaps between white families and those of other races and ethnicities. For example, white families who have a college-educated parent in the previous generation and whose heads of household have a four-year degree have a median income of $158,756 annually, while families of other races and ethnicities with similar characteristics have a median income of $102,681. Similar differences in income and wealth by race and ethnicity are found across other levels of parent education.

Family income by inherited characteristics and own education

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