How do different types of households respond to economic volatility?
A recent paper by University of Chicago economists shows that income shocks—sudden but temporary reductions in income—affect Black and Hispanic households more strongly than their white counterparts, as a result of the persistent racial and ethnic wealth gap in the United States.
Using a dataset linking bank account data with voter registration records containing race and ethnicity, Assoc. Prof. Damon Jones and Asst. Prof. Peter Ganong of the Harris School of Public Policy—along with Asst. Prof. Pascal Noel of Chicago Booth—were able to examine household spending behaviors with unprecedented levels of specificity. Their findings revealed how Black, Hispanic and white households behave differently when faced with sudden income reductions—such as those precipitated by the ongoing coronavirus pandemic.
“Race and ethnicity are significant predictors of the degree to which households cut spending in response to income shocks,” Jones said, “and the differences in wealth between these groups appear to be an important factor in driving these differences.”