Leverage, Monopsony, and the Racial Wealth Gap : A Dynamic Model

This paper presents an inter-generational, dynamic model of household wealth that demonstrates the endogeneity among the black-white gaps in wages, income and wealth. The model shows that because households with less wealth have more inelastic labor supply, monopsony-employers can use race to infer workers' labor supply elasticity via their househould inter-generational wealth. As a result, monopsony-employers pay lower wages for black labor than they do for equally-productive white labor since the inter-generational wealth of black households is known by monopsony-employers to be less than that of white households. Additionally, I use the model to examine the dynamic effects of various policies intended to sustainably eliminate the racial wealth gap. I find that the historical persistence in the black-white wealth gap is a steady state that results from black households' unequal access to credit and lending. This means the only policy that sustainably eliminates the racial wealth gap entails removing barriers to black households' credit and lending access. Finally, I use 2019 values of the black-white income and wealth ratios to impute the wealth ratio's approximate speed of convergence towards unity once black households' barriers to credit and lending are removed. I find that the difference between unity and the black-white wealth ratio shrinks by approximately 21.4 percent every 30 years