Journal of Human Resources 48(3):510-544. Summer 2013.
Analysts often examine the black-white test score gap conditional on current family income. We describe a method for identifying the gap conditional on the family’s permanent income. Current income explains only about half as much of the black-white test gap as does permanent income, and the gap among families with the same permanent income is only 0.2 to 0.3 standard deviations in two commonly used samples. When we add permanent income to the controls used by Fryer and Levitt (2006), the unexplained gap in third grade shrinks below 0.15 SDs, less than half of what is found with their controls.