Beyond Income

The Stubborn Racial Wealth Divide in the UK

Introduction

Last July, the London School of Economics International Inequalities Institute published a study on racial wealth disparities in the UK entitled, “The scale and drivers of ethnic wealth gaps across the wealth distribution in the UK: evidence from Understanding Society.”  Unlike the USA, where there has been considerable work done on racial wealth gaps (largely due to the efforts of William “Sandy” Darity and Darrick Hamilton), there has been very little of this type of work done for the UK. To the best of my knowledge, the LSE study is a first for the UK and in my opinion, we owe the author, Eleni Karagiannakia huge debt of gratitude for this contribution. Typically, this type of research is not read by the non-specialist, people find the words too long and the language too intellectual to be bothered with it and so this type of research is largely confined to the academic community and other specialists. In my view, the study is extremely important from the point of view of ethnicities who wish to understand the social and economic constraints that keep them poor and marginalised in British society. So, my purpose here, in this Letter is to simplify and disseminate the information from the study so that ordinary people (non-experts) can gain some understanding of the factors that relate to wealth inequality among and between Black, Brown, and other non-White ethnic groups in the UK.

The study records seven main findings that I set out below. Before I do so there is one word I would like to clarify because it is used repeatedly in the research, and it is one of the words that I think may cause people some problems. Throughout the study the author refers repeatedly to the distribution. In the context of this research, "distribution" refers to the way wealth is spread or allocated across different groups or individuals in a population. When discussing wealth distribution, economists and researchers often divide the population into segments or percentiles based on their wealth levels. This allows for analysis of how wealth is distributed from the poorest to the richest members of society. The wealth distribution is often divided into segments such as: Bottom -The poorest segment of the population. Middle - Those with average or median wealth levels. Top - The wealthiest segment of the population.

I would also like to say that unlike several other theorists that I do not believe the solution to exclusion and racism is that the whole entire race of Black or Brown people become wealthy. That seems to me, to be entirely fanciful because that is not the way that capitalism works. Capitalism relies on workers to generate value for the owners of capital and until or unless the character of the system changes there will always be a need for a class of people who sell their labour power in return for wages. So, I don’t see that as a viable solution to the problems of non-white people in the UK or anywhere else.

The Research Findings

While Indians stand out as an exception, the research uncovers substantial differences in wealth distribution across various racial groups and nationalities. Factors such as age, income, education, household composition, and region, though important, do not entirely account for the wealth gap experienced by ethnic minorities. These observable characteristics play a more significant role in explaining disparities at the lower end of the wealth distribution, particularly concerning financial wealth rather than housing wealth. Interestingly, age composition emerges as a leading factor in understanding the wealth gaps between ethnic groups. Despite efforts to control for observable factors, a significant portion of the wealth gap remains unexplained, indicating the influence of unobserved elements such as discrimination, homeownership barriers, inheritance disparities, savings behaviours, and returns on wealth. The research highlights the continued challenges faced by ethnic minority groups, emphasising the need for comprehensive policy interventions to address systemic barriers and promote wealth equality across different wealth levels and asset types in the UK. The main findings are as follows:

1.      Apart from Indians, all other ethnic minority groups in the UK have substantially less household wealth than the White British group across the wealth distribution, with large variations between minority groups.

The study reveals that the wealth disadvantage experienced by ethnic minority groups, with the exception of Indians, persists even after taking into account differences in observable characteristics such as age, income, education, household composition, parental background, and region. This finding suggests that these factors alone do not fully explain the ethnic wealth gaps. However, the significance of these characteristics in explaining the wealth gap varies depending on the position in the wealth distribution and the specific ethnic group being considered.

Notably, differences in characteristics play a more significant role in explaining wealth gaps at the bottom of the distribution compared to the middle and top, where their effect is negligible. Furthermore, for most minority groups, characteristic differences account for a larger proportion of the financial wealth gap than the housing wealth gap, particularly at the bottom of the distribution. In contrast, characteristic differences have little explanatory power when it comes to housing wealth. Characteristic differences in the context of this research refers, to age, income, parental background, education etc. These are observed differences, there are other unobserved differences that speak to discrimination and other such factors.

Among the observable factors, age composition differences between ethnic groups are the most significant in explaining the wealth gaps. Differences in household composition, income, and parental background also contribute to explaining the gaps for certain groups, especially at the bottom of the distribution, although to a lesser extent than age.

In summary, while characteristic differences, particularly in age, explain some of the ethnic wealth gaps, especially at the bottom of the distribution, a significant unexplained disadvantage persists for minority groups compared to White British individuals with the same observed characteristics. This finding points to the potential influence of unobserved factors, such as discrimination, barriers to homeownership, or differences in inheritances, savings behaviour, and returns to wealth, in perpetuating the ethnic wealth gap.

2.      The ethnic wealth gaps are largest for Bangladeshis, Black West Indians and Black Africans. The median individual in these groups has zero or negligible net worth, compared to £140k for White British.

The study points to several factors that contribute to the particularly large wealth gaps experienced by Bangladeshis, Black West Indians, and Black Africans when compared to the White British population.

Firstly, these groups have very low homeownership rates, with only 26% of Bangladeshis, 36% of Black West Indians, and 19% of Black Africans owning their homes, in stark contrast to the 69% of White British homeowners. Given that housing is a key source of household wealth, this disparity puts these ethnic groups at a significant disadvantage.

Secondly, high levels of financial debt are prevalent among these groups, with around 68-70% of individuals holding financial debt, compared to 56% for White British. Moreover, non-whites are more likely to hold high-cost debt, such as credit cards and overdrafts.

Thirdly, these groups have low levels of high-return investment assets. For instance, only 6-7% of Bangladeshis and Black Africans have investment accounts, compared to 19% of White British people.

Fourthly, the demographic composition of these groups differs from the White British population, with younger age profiles. Since wealth tends to accumulate with age, this contributes to lower overall wealth levels. Additionally, household structures vary among these groups.

Lastly, Bangladeshis and Black West Indians, in particular, have lower incomes and more disadvantaged parental backgrounds compared to White British individuals.

However, the decomposition analysis reveals that even after controlling for observable characteristics, a significant portion of the wealth gap remains unexplained for these groups, especially in terms of housing wealth. This suggests that other unobserved factors play a crucial role, such as discrimination in housing and credit markets, lower intergenerational transfers and inheritances, migration history and length of time in the UK, and cultural differences in savings behaviour and attitudes towards debt.

While some of the wealth gap can be attributed to demographic and socioeconomic differences, the substantial size of the wealth disadvantage experienced by these groups likely reflects systemic barriers and discrimination, alongside other unobserved factors. Overcoming this disparity would require tackling the roots of ethnic disadvantage across multiple markets and spheres, addressing issues such as discrimination, access to affordable housing and credit, and promoting financial literacy and inclusion.

3.      Differences in net financial wealth explain more of the ethnic wealth gap at the bottom and top of the distribution, while net housing wealth differences matter more in the middle.

The ownership patterns and distribution of financial and housing wealth play a crucial role in explaining the varying importance of these assets in shaping ethnic wealth gaps across the wealth distribution.

At the bottom of the wealth distribution, most households have little housing wealth, as property ownership is concentrated in the middle and top of the distribution. Consequently, differences in financial assets and debts play a larger role in shaping ethnic wealth gaps at this level. The paper finds that for most minority groups, their financial wealth disadvantage at the bottom is largely explained by observable characteristics such as age, income, and household structure, which are associated with low savings and high debt.

In the middle of the wealth distribution, homeownership becomes more common, making housing equity a more important component of household wealth. However, there are large ethnic gaps in homeownership rates at this level, with minority groups being much less likely to own housing compared to White British people. These differential rates of housing asset ownership play a significant role in explaining ethnic wealth gaps in the middle of the distribution. Importantly, the ethnic gaps in housing wealth in the middle are not well explained by observable characteristics, suggesting the influence of other unobserved factors.

At the top of the wealth distribution, high-wealth households tend to hold significant financial assets in addition to housing. The ethnic gaps in financial asset holdings are also larger at the top in absolute terms. For example, the wealthiest 5% of White British individuals have £893k in financial assets, compared to only £304k for Black Africans. Moreover, high-wealth minorities are less likely to own high-return investment assets than their White British counterparts. As a result, the financial wealth component plays a larger role relative to housing in explaining ethnic wealth gaps at the top of the distribution. Again, these financial wealth gaps are not well explained by observable characteristics.

In summary, the ethnic gaps in financial wealth are starkest at the bottom and top of the wealth distribution and are less well explained by observable characteristics at the top. Housing wealth gaps, on the other hand, are most important in the middle of the distribution, where homeownership is more widespread, but minorities face lower ownership rates. These patterns suggest that while demographic and economic characteristics shape the financial wealth gaps at the bottom, unobserved factors play a larger role in wealth gaps higher up the distribution, especially for housing wealth.

Addressing ethnic wealth inequality therefore requires different strategies across the distribution. At the bottom, policies should focus on financial inclusion and reducing indebtedness. In the middle, improving access to homeownership is crucial. At the top, tackling barriers to financial asset accumulation and addressing the unexplained ethnic penalties in housing wealth likely requires addressing wider structural and systemic factors. A comprehensive approach that considers the varying importance of financial and housing wealth across the distribution is necessary to effectively reduce ethnic wealth inequality.

4.      Home ownership rates vary substantially by ethnicity, being highest for Indians and White British (73-74%) and lowest for Black Africans (19%), Bangladeshis (26%) and Black West Indians (37%).

The substantial differences in homeownership rates among ethnic groups in the United Kingdom can be attributed to the complex relationship between demographic, socio-economic, and structural factors.

Firstly, income and wealth disparities play a significant role. Ethnic groups with lower homeownership rates, such as Bangladeshis and Black Africans, also tend to have lower incomes and overall wealth levels. This makes it more challenging for them to save for a down payment and qualify for a mortgage. However, it is important to note that income differences alone do not fully explain the homeownership gaps, particularly for Black West Indians.

Second, age and household structure contribute to the observed differences. Ethnic minority groups with lower homeownership rates typically have younger age profiles on average. They also tend to have larger household sizes and, in some cases, more single-parent households. These factors can make it harder for them to accumulate savings and qualify for mortgage lending.

Third, parental wealth and intergenerational transfers play a crucial role. Ethnic groups with higher homeownership rates, such as White British and Indians, are more likely to receive financial assistance from parents when purchasing a home. This reflects the intergenerational transmission of wealth disparities.

Fourth, migration history and credit access can impact homeownership rates. More recently arrived immigrant communities may lack credit histories in the UK, which can limit their access to mortgages. They may also have lower savings rates if they are remitting money abroad. However, this factor does not apply equally to all low-ownership groups.

Fifth, geographic concentration is a significant factor. Ethnic minority groups are disproportionately concentrated in expensive urban housing markets, such as London. This makes homeownership less affordable for these groups, especially those with lower incomes.

Sixth, discrimination in housing and mortgage markets cannot be overlooked. Studies have found evidence of ethnic discrimination in UK housing and mortgage markets. This can manifest in the form of limited access to credit, poorer loan terms, or outright denial of applications. Discrimination may persist even for minority applicants who are similarly qualified to their White British counterparts.

Lastly, cultural preferences and norms may influence homeownership rates. Some minority groups may have lower preferences for homeownership compared to renting due to cultural reasons. There may also be norms around savings and debt that affect the likelihood of seeking home financing. However, these factors are difficult to disentangle from structural barriers.

In summary, the ethnic gaps in homeownership reflect a complex mix of economic constraints, demographic differences, and discriminatory barriers in the housing market. Importantly, observable economic and demographic characteristics do not fully explain the gaps for most minority groups. This suggests that both current and historical discrimination play a significant role in reducing minority homeownership. Disparities in intergenerational transfers stemming from long-term wealth inequality also contribute to sustaining homeownership gaps over time. To fully close the homeownership gap, concerted policy efforts are needed to address wealth inequality, expand access to affordable home financing, and combat discrimination in housing and credit markets.

5.      Ethnic minorities are less likely to hold high return investment accounts and more likely to hold financial debt, especially high-cost debt, than White British people.

Ethnic minorities in the United Kingdom experience lower ownership of high-return investment assets and higher levels of financial debt compared to their White British counterparts. This disparity can be attributed to a combination of factors, each contributing to the overall financial disadvantage faced by these groups.

Income and wealth constraints play a significant role in this issue. Many ethnic minority groups have lower incomes and overall wealth levels than White British people, leaving them with less disposable income to invest in financial assets after covering essential expenses. Furthermore, lower income and wealth increase the likelihood of needing to rely on debt to cover costs, exacerbating the financial challenges they face.

Labour market disadvantages also contribute to the problem. Ethnic minorities face higher unemployment rates and wage gaps compared to White British workers, which can lead to greater reliance on debt to smooth consumption during periods of financial instability. Moreover, these disadvantages make it harder for ethnic minorities to build up a financial cushion that they can draw upon for investment purposes.

Access to affordable credit is another barrier faced by ethnic minorities. They may encounter difficulties in accessing mainstream financial services and affordable credit products, leading to a greater reliance on high-cost credit options, such as payday loans or credit cards. Discrimination in credit markets can also result in minorities being offered worse loan terms compared to their White British counterparts.

Limited financial literacy and exposure to financial systems can further compound the issue. Some ethnic minority groups, especially newer immigrant communities, may have less familiarity with the UK financial system. This lack of familiarity can lead to lower awareness of investment options and less confidence in navigating financial markets. Additionally, minorities may have less exposure to social networks and norms that encourage investment, further limiting their engagement with high-return assets.

Cultural attitudes towards debt and investment also play a role in shaping financial behaviours among ethnic minorities. Different cultural norms and attitudes around borrowing and investment may influence the financial decisions made by individuals within these communities. Some minority groups may view debt as more acceptable or necessary than others, while there may also be differing levels of risk aversion or preferences for certain types of assets.

Addressing the disparities in investment asset ownership and financial debt levels among ethnic minorities in the UK requires a multi-faceted approach. This should include initiatives to improve access to affordable credit, financial education programs to increase financial literacy, and policies aimed at reducing labour market disadvantages faced by these groups. Additionally, fostering a more inclusive financial system that considers the diverse cultural attitudes and experiences of ethnic minorities is crucial in promoting their financial well-being and reducing the wealth gap between these communities and their White British counterparts.

6.      The wealth disadvantage of poorer ethnic minority groups compared to White British persists even after accounting for differences in observable characteristics like age, income, education etc.

The wealth disadvantage experienced by poorer ethnic minority groups in comparison to their White British counterparts persists even after accounting for observable characteristics such as age, income, education, and other standard socio-economic variables. This suggests that there are unobserved factors at play, contributing to the persistent wealth gap.

One potential explanation is the presence of discrimination and structural barriers. Ethnic minorities may face discrimination in various markets, including housing, labour, and credit, which limits their ability to accumulate wealth. This discrimination can manifest as overt actions or subtle barriers and biases embedded in institutional practices. Structural factors, such as residential segregation or disparities in school quality, may also constrain wealth-building opportunities for ethnic minorities.

Intergenerational wealth transfers also play a significant role in perpetuating wealth disparities. White British people are more likely to receive financial assistance and inheritances from their families, which are not fully captured by observed characteristics like current income and education. The cumulative effects of historical wealth disparities can thus persist across generations, contributing to the persistent wealth gap.

Social networks and cultural capital may also influence wealth accumulation. White British people may benefit from social networks that provide financial opportunities, advice, and support. They may also possess cultural capital, such as knowledge, skills, and norms, that facilitate wealth accumulation. These social and cultural resources are not fully captured by formal education measures and can contribute to the unexplained wealth gap.

For immigrant minority groups, migration history and country of origin may impact wealth accumulation. Differences in educational systems, financial institutions, or cultural norms around saving and investment in their countries of origin can influence their financial behaviours and outcomes in the UK. More recent immigrants may also face specific barriers related to credit history, language, or legal status, which can hinder their ability to build wealth.

Measurement and modelling limitations may also contribute to the unexplained wealth gap. The data and modelling approaches used in the study may not fully capture unobserved characteristics or non-linear relationships that impact wealth accumulation. Additionally, wealth data may be subject to measurement error or reporting biases that differ by ethnicity, affecting the accuracy of the analysis.

Finally, the cumulative effects of disadvantage across multiple domains can compound over time, contributing to the persistent wealth gap. Minor differences in income, homeownership, financial inclusion, and other factors can accumulate, creating a significant disadvantage for ethnic minorities. A static model of current characteristics may not fully capture this cumulative disadvantage.

In summary, the persistent unexplained wealth gap for poorer ethnic minorities likely reflects the complex relationship between current and historical disadvantages across multiple socio-economic domains. Discrimination, intergenerational transfers, social and cultural capital, migration-specific factors, measurement and modelling limitations, and the cumulative effects of disadvantage may all contribute to the persistent wealth inequality.

From a policy perspective, closing the ethnic wealth gap requires a multi-faceted approach that goes beyond equalising current incomes or education levels. It necessitates tackling discrimination and structural barriers across markets, supporting intergenerational wealth transfers for disadvantaged groups, and providing targeted support and advice to facilitate wealth accumulation. Policymakers should also strive to collect more granular data and develop more sophisticated modelling approaches to better understand the specific drivers of persistent ethnic wealth inequality and design effective interventions to address this pressing issue.

7.      Observable characteristics explain more of the wealth gap at the bottom than the middle and top of the distribution. They explain financial wealth gaps more than housing wealth gaps.

In understanding the ethnic wealth gap in the UK, it's crucial to consider how observable characteristics play a role in explaining this disparity. Notably, the impact of these characteristics differs across the income distribution and between types of assets like financial wealth and housing wealth.

At the lower end of the wealth distribution, households in the bottom quintile (a quintile represents 20% of the total population or dataset) typically have low incomes and limited savings. Their wealth mostly consists of financial assets and debts rather than property. For these households, factors like current income and demographic features such as age and family structure strongly predict their wealth levels. Therefore, observable characteristics can account for a significant portion of the ethnic wealth gap here.

In contrast, households in the middle and top quintiles have higher incomes and more diversified assets, including housing. Wealth accumulation for these households is influenced by a broader set of factors beyond just income and demographics. This may include historical advantages, intergenerational transfers, social connections, and institutional barriers. Unobserved factors likely have a greater impact on explaining ethnic wealth gaps in these segments of the distribution.

For financial wealth disparities, income levels, employment trends, and spending habits directly affect financial assets and debts. Ethnic variations in these factors can explain much of the gap in financial wealth, although other elements like financial literacy and access to financial services also play a role.

On the other hand, housing wealth accumulation is a longer process influenced by historical and intergenerational factors. Differences in homeownership rates and housing wealth are shaped by a more intricate web of economic, social, and institutional conditions. These factors, such as parental wealth disparities and housing market biases, are not fully captured by observable traits, resulting in a greater unexplained gap in housing wealth.

Conclusion

In addressing ethnic wealth inequality, policy interventions must recognise the above nuances. For narrowing gaps at the bottom and in financial wealth, strategies focusing on income support, job opportunities, and financial services accessibility could be effective. However, reducing disparities at the middle and top levels and in housing wealth requires a more comprehensive approach. This might involve reforms in housing and credit markets, along with targeted initiatives to foster wealth creation among marginalised communities. Ultimately, the study emphasises the significant and enduring ethnic wealth disparities in the UK, revealing varying scales and drivers of inequality across different wealth levels and asset types.

From the point of view of Black, Brown and other non-White people in the UK, understanding the disparities highlighted in the study can be a first step towards addressing them, both at a personal and community level – a type of empowerment through knowledge.