Algorithms and AI Can Make Hiring More Diverse
The cost is likely minimal to achieve a fairer outcome.
Algorithms and AI Can Make Hiring More Diverse
Federico Gastaldi
Income Shocks Hit Black and Hispanic Families Twice as Much
- By
- October 12, 2020
- CBR - Economics
The majority of US families are underprepared for major changes in household income. According to the government-sponsored Current Population Survey, 42 percent of Americans don’t have money set aside to weather emergencies or unexpected expenses.
But Black and Hispanic households are particularly sensitive to income shocks, according to research by University of Chicago Harris School of Public Policy’s Peter Ganong and Damon Jones; Chicago Booth’s Pascal Noel; and JPMorgan’s Diana Farrell, Fiona Greig, and Chris Wheat. This sensitivity extends well beyond atypical or one-off shocks such as being laid off. Looking at the kinds of typical fluctuations that affect families from one month to the next—including seasonal work, and changes in working hours or pay—the researchers find that Black and Hispanic households are 20–50 percent more sensitive to income volatility than their white counterparts.
The survey evidence suggests policymakers should be particularly worried about Black and Hispanic households, finding that Black and Hispanic families are up to twice as vulnerable as white households to normal changes in their disposable income.
To break down the impact of normal income volatility by race and ethnicity, the researchers created a novel data set using bank and voting records from three US states: Florida, Georgia, and Louisiana. Chase bank-account records provided data from checking accounts, credit cards, and customer debit cards. The voting records included race, which voters self-identified as part of a mechanism designed to curb discrimination. In total, the matched sample contained data from nearly 2 million families.
To ensure the findings from these three states represent the country as a whole, the researchers compared racial differences in their matched sample with the differences observed nationally across checking-account balances and public records such as the Federal Reserve’s Survey of Consumer Finances. They were broadly similar.
US households, irrespective of race, had a significant sensitivity to normal income fluctuation, the researchers find. For every 10 percent reduction in income in a given month, the average family cut spending by 2 percent.
But this sensitivity to income change was up to 50 percent greater among Black and Hispanic households, who had to cut their spending more when faced with the same income shock as white households.
Families with greater financial resources were substantially less vulnerable to changes in income. In fact, when Black and Hispanic families had the same access to liquid assets as whites, they reacted to income volatility the same way.
This suggests that differences in spending when income is in flux have their roots in the racial wealth gap, which stems from a long history in the United States of barriers that have prevented Black and Hispanic families from accumulating assets. The median Black household has only one-sixth of the liquid wealth as the median white household, and this leads to greater disruption and hardship in an income shock.
The findings are significant in the COVID-19 pandemic, as unemployment is particularly acute among Black and Hispanic workers.
Even if Black and Hispanic families suffered the same amount of job or income losses as white households, their cost would likely be higher, says Noel. And add to that the fact that the health consequences of COVID-19 are falling disproportionately hard on these families, who are also suffering more in terms of unemployment than white households, he notes. The research findings provide another reason to be worried about the disparities across racial groups in the US today.
Peter Ganong, Damon Jones, Pascal Noel, Diana Farrell, Fiona Greig, and Chris Wheat, “Wealth, Race, and Consumption Smoothing of Typical Income Shocks,” Working paper, April 2020.
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