Every year, more people are talking about the economic inequalities that have created a racial wealth gap in this country. But while equity talk is fashionable, equity solutions are not. Our challenge is to help people shift from talking about the problem to creating practical solutions that close that gap.
Why has such a formerly-taboo topic shifted to an acceptable, even savvy, one? For one thing, it’s becoming impossible to ignore the impact of demographic changes. According to the U.S. Census Bureau, “whites will become a ‘minority’ by 2044, replaced by a ‘majority’ of minority groups, mostly blacks and Hispanics.” And if this new “majority” lacks the resources to participate fully in our capitalist society, new socio-economic problems will likely accompany this demographic shift.
Today, the racial wealth gap is stark: in 2013, whites had a median net worth more than 15 times greater than that of African Americans ($111,740 versus $7,113) and more than 13 times that of Latinos ($111,740 versus $8,113), according to the Center for Global Policy Solutions. When people of color are unable to buy middle class goods and services, the engines of our economy will shift into lower gears. The lack of prosperity of people of color will drag down our whole society and seriously shortchange our economic competiveness.
Just talking about the racial wealth gap doesn’t get us where we need to go, though. Nor does framing these issues as win/lose propositions enable us to maintain our competitive edge. We need to ensure that our country’s systems for creating wealth and opportunity work equally well for everyone.
So what can we do? One solution: increase the number and scale of businesses owned and run by people of color.
How Entrepreneurship Helps
Increases in business ownership can help people of color achieve greater social mobility. Numerous studies have shown that entrepreneurship (business ownership or self-employment) creates higher levels of asset creation. According to a study cited by Michael Barr, “families who owned a business at the end of a five-year period…were more likely to have moved into a higher income group than were other families over the same period; in fact, families who did not acquire or start a business over the survey period were more likely to either stay in their income category or to fall into a lower one.”
Focusing policies and resources to help entrepreneurs of color succeed will have the added benefit of significantly impacting the racial employment gap. Data collected from organizations that work with entrepreneurs of color have documented that minority businesses hire people of color at a substantially higher rate than white-owned businesses. For example, the Metropolitan Economic Development Association conducted studies of its client base of minority-owned businesses for over twenty years. This data shows that these businesses have hired people of color for 40-50% of their workforce. In addition, supporting the success of new businesses is a proven way to increase the tax base, which helps all communities grow and thrive.
Ways to Help Grow the Number of Entrepreneurs of Color
Institutionally imposed hurdles hamper the asset creation and economic success of people of color, making it more challenging for them to become successful entrepreneurs. But these three key areas can help improve their chances of success:
- Support: Minority-owned businesses need appropriately-structured support in order to thrive. We have found that businesses’ level of startup capital is directly correlated to their long-term success. Training and technical support are also critical to forging successful businesses. To ensure the growth of businesses owned by people of color, it is imperative that we support the programs and organizations that provide these types of assistance.
- Asset creation: Insufficient asset creation is one of the main reasons that so many entrepreneurs of color fail to thrive. According to a report by the Minority Business Development Agency: Low levels of wealth and liquidity constraints create a substantial barrier to entry for minority entrepreneurs because the owner’s wealth can be invested directly in the business, used as collateral to obtain business loans or used to acquire other businesses. Previous studies found that relatively low levels of wealth among Hispanics and African Americans contribute to their lower business creation rates relative to their representation in the U.S. population.
- Education: Not surprisingly, education is a key ingredient in successful business development. The crucial roles of adequate education and resources for asset creation have both been well-documented, including in a study on race and its relationship to entrepreneurial success by economists Robert Fairlie and Alicia Robb. In this study, Fairlie and Robb found that “Black and Hispanic entrepreneurs…have lower education levels and [fewer] years of managerial experience than Asian and White entrepreneurs.” According to these two economists, “[t]he relative lack of success among black-owned businesses is attributable in part to their owners having less startup capital, disadvantaged family backgrounds and less education.”
There is some reason for optimism, however. Between 1976 and 2008, the number of African Americans earning bachelor degrees in business increased 316%. Over the same period, the number of African American earning MBAs increased by nearly 1,400%. These trends could portend a tipping point for the success of African Americans starting new businesses.
Impact of Entrepreneurs of Color
Even though they are challenged and disadvantaged by existing systems, structures and biases, people of color who independently own businesses are already making a big difference.
In a groundbreaking study, William Bradford successfully makes the case that African American entrepreneurs reduce the racial wealth gap. Bradford’s analysis, based on his study of income data on family wealth between 1999 through 2009, shows that African American entrepreneurship significantly reduces wealth disparities between African American and white families in the United States. He also found that the upward wealth mobility of African American entrepreneurs is equivalent to that of white entrepreneurs. In fact, according to Bradford, self-employed entrepreneurs of any race have higher wealth levels and more upward mobility than do those who are employed in the labor force.
Bradford’s findings demonstrate that entrepreneurship is an effective way to address the racial economic opportunity gap.
From Equity Talk to Action
We need to move beyond our often cordial conversations and start taking the bold actions needed to address our nation’s racial economic inequalities. And of all the steps we need to take, the most strategic and imperative is to strengthen Community Development Financial Institutions (CDFIs).
Throughout our country, CDFIs work to build the capacity of entrepreneurs of color. These organizations are uniquely positioned to provide education, training, technical assistance and access to capital to help bridge the economic opportunity gap for entrepreneurs of color. CDFIs use market-based approaches to deliver measurable results. However, many CDFIs lack the support and infrastructure to bring these efforts to scale.
By strengthening CDFIs and creating public-private partnerships that grow and sustain the base of successful entrepreneurs of color, we would substantially increase investments in the capital resources, training and technical support that these entrepreneurs need to grow their businesses. These large-scale, strategic steps will move us from talk about the racial wealth gap—to real action.
Gary L. Cunningham, President and CEO
Metropolitan Economic Development Association