The Interrelation between Labor and Capital Components of Racial Income Differences

Abstract

The isolation and projection of incomes from capital represents a recurring problem in the study of income inequality. Almost without exception, past studies of racial income or earnings differentials have attributed the residual remaining after skill adjustment to current discrimination or to other factors unconnected with property. If attempts to account for differences in capital holdings were made at all, they remained indirect and incomplete because of inadequate data.' To compensate some of this lack, the relation between the earnings, capital endowments, and incomes of the races is first clarified theoretically in this paper. The inference drawn from the model is then matched with what evidence there is on the actual racial distribution of incomes from capital. It is shown that in distributional equilibrium with capital accumulation, the earnings of whites relative to blacks equal the ratio of their total incomes, provided the savings propensities, the rates of return on capital, and the growth rates of labor (population) are identical. This initial theorem and its less restricted forms yield equilibrium solutions of the ratios of capital per man between the groups. The mathematical relations involved can be useful to researchers dissatisfied with the statistical sources on the racial breakdown of capital ownership and income. They should also permit one to improve upon the rather indefinite treatment typically accorded to incomes from capital and property in intertemporal income comparisons for the two races. The two-sector model used in this paper is adapted from the pioneering work of Joseph Stiglitz (1969).