The racial/ethnic gap in financial literacy in the population and by income

Marco Angrisani,Luisa R. Blanco,Sergio Barrera,Salvador Contreras

doi:10.1111/coep.12507

Abstract

AbstractWe investigate the determinants of the racial/ethnic gap in financial literacy in the general population and within income classes, with a focus on childhood family circumstances and neighborhood socioeconomic characteristics. Our model explains 48% and 57% of the observed gap for Blacks and Hispanics, respectively. For both groups, differences in individual characteristics and neighborhood socioeconomic status contribute the most to the explained gap. The White–Minority gap narrows when moving from low‐ to high‐income classes, but the ability of the model to explain it decreases monotonically. Identifying which additional barriers put minorities at a disadvantage is key to improve financial literacy.

Highlights

The level of financial literacy in both developed and developing economies is generally low
Given the fundamental role of financial literacy in informing financial decisions, differences in financial literacy are likely to be reflected in differences in financial outcomes, thereby contributing to growing inequalities across segments of the population
Interventions aimed at improving financial knowledge, and, financial wellbeing among minorities and more disadvantaged segments of the population require a better understanding of what determines financial literacy disparities across groups

Summary

Introduction

The level of financial literacy in both developed and developing economies is generally low. The National Financial Education Council (NFEC) notes that there is a “financial illiteracy epidemic” in the United States in its recent 2019 report (NFEC, 2019). In 2018, the NFEC administered the National Financial Literacy Test to over 5,500 individuals between 15 and 18 years of age. The fraction of correct answers was 66%, only a few points higher than the average score in 2017 and 2016 (62% and 60%, respectively). Financial illiteracy is a global phenomenon, as reveled by cross-country comparisons. Lusardi (2019, 3) points out that “financial literacy is low across the world and higher national income levels do not equate to a more financially literate population.” Financial illiteracy is a global phenomenon, as reveled by cross-country comparisons. Lusardi (2019, 3) points out that “financial literacy is low across the world and higher national income levels do not equate to a more financially literate population.”

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Conclusion