Decomposition Analysis of Racial Income Inequality in the United States

Abstract

This study examines income inequality across races in the United States between 2000 and 2019. It empirically investigates the relationship between income and race controlling for variables such as age, education, gender, marital, and citizenship status. The analysis begins with multiple regression models that identify the importance of different factors in determining income. A Blinder–Oaxaca decomposition reveals which factors contribute to the racial gaps in income and how these components vary in importance when comparing other races to Whites. Multiple regression results identify a statistically significant gap in income between Blacks, Hispanics, and Asians relative to Whites. The Blinder–Oaxaca decomposition results reveal the greatest contributor to the income gap for Blacks is the coefficient effect (a pure group effect). For Hispanics and Asians, a greater contributor is the endowment effect, based on characteristics such as education and immigration. Unlike other groups, the overall contribution of endowments to White-Asian income disparity is in favor of Asians. There is a need to adopt multifaceted policies that target those differences across racial groups: reducing systemic discrimination for Blacks, providing market valued skills and better education opportunities for Hispanics and advancing immigration reforms for Asians.