Banking Access and Racial Inequality: Wealth and Human Capital Accumulation of Young Men

There are large racial differences in access to the financial system among young adults. Lack of access to savings and investment opportunities results in low financial returns on savings. Low returns, in turn, reduce ex-ante incentives to save, work, and invest in human capital. Using a structural model of schooling, labor supply, and savings with unequal financial access and endogenous borrowing constraints, I quantify the effects of racial differences in financial access and labor market discrimination on the observed racial wealth gap. Counterfactual policy experiments suggest that a financial inclusion policy that provides full access increases African American youths’ median net worth level and reduces racial wealth inequality. In comparison, a college tuition reduction policy is less effective in reducing wealth inequality.