The economic impact of closing the racial wealth gap

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The United States has spent the past century expanding its economic power, and it shows in American families’ wealth. Despite income stagnation outside the circle of high earners, median family wealth grew from $83,000 in 1992 to $97,000 in 2016 (in 2016 dollars). 1

Beyond the overall growth in top-line numbers, however, the growth in household wealth (defined as net worth—the net value of each family’s liquid and illiquid assets and debts) has not been inclusive. In wealth, black individuals, families, and communities tend to lag behind their white counterparts. Indeed, the median white family had more than ten times the wealth of the median black family in 2016 (Exhibit 1). In fact, the racial wealth gap between black and white families grew from about $100,000 in 1992 to $154,000 in 2016, in part because white families gained significantly more wealth (with the median increasing by $54,000), while median wealth for black families did not grow at all in real terms over that period.

The widening racial wealth gap disadvantages black families, individuals, and communities and limits black citizens’ economic power and prospects, and the effects are cyclical. Such a gap contributes to intergenerational economic precariousness: almost 70 percent of middle-class black children are likely to fall out of the middle class as adults. 2 Other than its obvious negative impact on human development for black individuals and communities, the racial wealth gap also constrains the US economy as a whole. It is estimated that its dampening effect on consumption and investment will cost the US economy between $1 trillion and $1.5 trillion between 2019 and 2028—4 to 6 percent of the projected GDP in 2028 (Exhibit 2; see also sidebar “Quantifying the economic impact of closing the racial wealth gap”).

Despite the progress black families have made in civic and economic life since the passage of the Civil Rights Act of 1964, they face systemic and cumulative barriers on the road to wealth building due to discrimination, poverty, and a shortage of social connections (including role models and mentors in their communities) as both mechanisms and results of racial economic inequity. 3 These adverse elements have helped maintain a persistent—and widening—wealth gap.

Because understanding the scope of a problem is vital to solving it, we use this report to quantify the economic impact of closing the racial wealth gap, identify the underlying issues that help perpetuate the gap, and set the stage for discussions about ways to close the gap. Unsurprisingly, the barriers to wealth building for black families are numerous enough to merit in-depth exploration, so we have dedicated this report to understanding the pieces of black Americans’ financial lives that add up to significantly less than those of their white peers.

To help break down and articulate the problems that contribute to the wealth gap, we have developed a new framework to capture the factors that perpetuate it. Our research found that economic barriers affect black families across the following dimensions (see sidebar “Components of wealth generation for a family”):

• Community context. The collection of public and private assets in a given community
• Family wealth. The net value of a family’s pool of financial and nonfinancial assets
• Family income. The cash flow a family receives from entrepreneurship or its members’ participation in the labor market
• Family savings. The tools and benefits a family can access to turn income into savings and wealth for families and the community

This same framework will help us identify solutions in subsequent reports. Indeed, the public, private, and social sectors will need to contribute to rectify structural inequities that contribute to the racial wealth gap. A number of simultaneous and mutually reinforcing initiatives will likely be necessary. This work will be neither simple nor easy, but targeted, productive efforts will likely strengthen the economy, increase economic and social equity, and improve the quality of life for families.

Unmet needs in family-wealth building
The ideal wealth-building scenario requires favorable circumstances across the dimensions of community context, family wealth, family income, and family savings. Our analysis found that black families’ wealth building is constrained by unmet needs and obstacles across these dimensions compared with white families: a factor that contributes to a widening gap between white families and black families.

Community context
The 16 states that are home to 65 percent of the black residents in the United States perform below the national average on all categories of performance. This can compound the disadvantages black citizens face based on the communities that they live and work in (Exhibit 3). 4

In particular, the states in which black residents are concentrated are well below the national averages in economic opportunity, employment, healthcare access, healthcare quality, public health, and access to broadband. At the neighborhood level, black families are up to 4.6 times more likely than white and Hispanic families to live in areas of concentrated poverty. 5 Not even high-income black families are exempt: the average black family with a household income of $100,000 lives in a neighborhood where the average income is $54,000. 6

This kind of racialized disadvantage has historical roots. Institutional forces, such as the National Housing Act of 1934, contributed to structural racial and socioeconomic segregation, limiting many black families’ housing options to those in D-rated neighborhoods, which are characterized by distressed housing stock, lower-income residents, and overall decline. 7 The majority of black families have remained in these neighborhoods. Such circumstances often make it more difficult for families to build wealth within a single generation, let alone across generations.

 

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Family wealth

Equity capital, liquid savings, credit, and access to investable assets are key to a stable base of family wealth. Black families have uneven access to each of these components, which constrains their ability to develop material and diversified asset portfolios. Black families begin with lower levels of wealth: only 8 percent of black families receive an inheritance, compared with 26 percent of white families (Exhibit 4). 8When an inheritance does come, it is 35 percent of the value of that of a white family. 9 This difference in “starter” wealth also affects other components of the wealth-generation process: recent research shows that black college graduates’ wealth actually declines after graduation because they are more likely than white college graduates to support their parents financially instead of the other way around. 10

In addition to supporting family members financially, black families are 1.3 times more likely than white families to have student debt, and they have balances that are 1.7 times higher than those of white families. 11 Because education is an intangible asset that cannot serve as collateral, black families that face temporary financial difficulties are often unable to service their student loans. At scale, this dynamic means that black borrowers are 2.3 times more likely than white borrowers to default on student loans—this translates to roughly one out of every two undergraduate black students. 12

Black consumers are 73 percent more likely than white consumers to lack a credit score. 13 Black consumers also face discrimination in credit access based on where they live via a phenomenon called “credit redlining.” A Federal Reserve Board study (using data from a major credit bureau) of more than 285,000 people found that consumers living in neighborhoods where white residents are predominant were more likely to get credit cards than consumers living in neighborhoods where black residents are predominant. 14 These factors result in a credit-denial rate on loans (such as mortgages) that is twice the rate of those for white consumers. 15

The difficulty of accessing credit for hard assets and an outsize student-loan debt leaves black families with less-diversified asset portfolios. Only 7 percent of black Americans’ assets are in business equity (often a product of entrepreneurship), compared with 16 percent for white families. 16 But even when it comes to the most common way for Americans to hold wealth, only about 40 percent of black families own a home, compared with 73 percent of white families. 17 When black families do own homes, their homes are less likely to appreciate in value—and they appreciate more slowly when they do. Neighborhood differences and the quality of homes can explain only part of this low rate of appreciation. Researchers posit that racial animus can account for the remaining difference in appreciation between black-owned and white-owned homes. 18

An additional pathway to building wealth is through investments in securities, but black families are less likely to own stocks than white families are, partly because black families have fewer funds with which to invest, and partly because black communities have historically struggled to trust the stock market. As of 2016, middle-class black families are making progress toward closing the investment gap: 67 percent of black Americans with incomes of at least $50,000 were invested in the stock market or mutual funds, compared with 86 percent of white Americans. 19 In 2010, the split was 60 percent and 79 percent, respectively. But holding securities is not enough. Black Americans must match white Americans’ level of investment in securities before they can derive comparable benefits from these investments.

Family income
Black Americans can expect to earn up to $1 million less than white Americans over their lifetimes. 20 This discrepancy is the product of a lifetime of diverging circumstances. For instance, without a resource-rich community or family of origin, individual families may improve their economic positions with their earnings. A family can increase its earning potential by attaining more education to develop its store of human capital. However, black families face serious obstacles on the journey through the education system and converting education to stable employment that provides rising incomes. Obstacles that reduce lifetime earning potential come in the form of poor school quality, differential treatment in the criminal-justice system, workplace discrimination, career selection, and a lack of role models who can guide professionals’ career advancement (see sidebar “Damaging interactions with the criminal-justice system”).

Early in life, black children are exposed to factors that can constrain lifetime earnings. Significantly, 45 percent of black children attend high-poverty schools (in which at least 75 percent of students are eligible for free or reduced-price lunch), nearly six times the rate of white children. 21 Growing up in such schools lowers children’s probabilities of graduating from high school and attending college—crucial ways to increase earning potential. 22 As a result, only 24 percent of the black population over the age of 25 holds a bachelor’s degree or higher as of 2017—ten percentage points lower than the comparable white population. 23

Once in the workforce, black workers experience higher churn and more vulnerable workforce positioning compared with their white peers. Black workers also experience lower rates of professional advancement, as seen by the attrition of black professionals at each successive level of responsibility—and compensation—on the path from entry-level worker to executive (Exhibit 5). 24

In addition, black workers are unemployed at twice the rate of white workers, a pattern that holds even when controlling for education, duration of unemployment, and reason for unemployment. 25 The effect is large enough that black workers who hold bachelor’s degrees experience a rate of unemployment similar to that of white workers with no college education. 26

Like other minorities and disadvantaged groups, black workers also face discrimination in the workplace. A 2015 study found that black workers are “subject to more scrutiny” or held to a “higher standard” than white workers. 27 Black workers make up 13 percent of the US workforce, but racial discrimination against this group accounts for 26 percent of all claims filed with the Equal Employment Opportunity Commission and its partner agencies (see sidebar “Intersecting minority identities and earning power”). 28 In aggregate, these factors constrain black families’ ability to build human capital and earning power.

Because they are likely to be excluded from information networks about high-potential professions, fields, and opportunities, black professionals tend to take supportive roles in established industries instead of roles in high-growth industries. Indeed, black employees are underrepresented in seven of the eight highest-paying industries and five of the eight fastest-growing industries.

Significantly, black workers are underrepresented in self-directed, creative roles (such as software developer), which have lower-than-average automation potential, and overrepresented in supportive roles (such as truck driver), which have higher-than-average automation potential. This distribution of black employment makes even employed black workers vulnerable, especially as automation spreads throughout the economy. Supportive roles are predicted to grow at 1.5 percent over the next decade, significantly lower than the 8.8 percent growth predicted for self-directed roles over the same period (Exhibit 6). These roles offer lower pay, with an average wage of around $32,000, compared with nearly $68,000 for workers in self-directed roles. 29 Furthermore, these roles have higher proportion of time that can be automated with currently available technology (Exhibit 7). 30 As the work shifts due to automation, black Americans are likely to be disproportionally affected. Broadly, we calculate that black Americans are at risk of losing 459,000 more jobs than white Americans are because of these jobs’ higher automation risk. 31

Family savings

While savings can be a source of financial stability, black families are less able to accumulate savings than white families are (because of their high expenses relative to incomes), have less access to affordable financial tools, and are entitled to lower employment-linked benefits. As a result, a typical black family has only one-sixth the liquid savings of a white family. Even a black family’s support network is literally poorer: in an emergency, most black families would not know someone who could lend them $3,000. 32

To begin with, it is more expensive to be a black family, which eats away at families’ ability to save. For example, a study found that Chicago car dealers offered higher prices to black prospective car buyers than to white, male prospective buyers, even though participants used identical bargaining strategies. 33 In addition, 30 percent of black families spend more than 50 percent of their income on housing. 34 Black families are also twice as likely as white families to lack enough liquid savings to pay each month’s expenses. 35These cost burdens have cascading effects on the lower levels of the economic ladder: prolonged difficulty affording monthly expenses makes evictions more likely. As a result, while black Americans make up 13 percent of the US population, they make up 40 percent of the homeless population. 36

When black families can consider saving, they have less access to private savings tools through institutions like the mainstream banking system. 37 The relative lack of access to mainstream banking, high availability of high-cost financial services (such as payday lending in neighborhoods where black families disproportionately live), 38 and lower levels of social benefits lead to higher expenses and contribute to the racial gap in family savings (Exhibit 8).

Black families are underserved and overcharged by institutions that can provide the best channels for saving. For instance, banks in predominantly black neighborhoods require higher minimum balances ($871) than banks in white neighborhoods do ($626). 39 Unsurprisingly, 30 percent of black families are underserved by their banks, and 17 percent are completely disconnected from the mainstream banking system because of a lack of assets and a lack of trust in financial institutions (Exhibit 9). 40

As discussed in the family-income section of this report, black families are more likely than white families to be unemployed or employed part time. This locks them out of the employment-linked benefits (such as healthcare and retirement-savings accounts) that can protect families from things like economic shocks resulting from poor health and that can help families build savings. In addition, other tax-linked benefits, such as mortgage deductions, are less accessible to black families because of racial gaps in homeownership.

Mainstream financial institutions can help families accumulate wealth, and health insurance can help families avoid losing wealth by protecting them against unforeseen medical expenses. But 10.6 percent of black Americans are uninsured, compared with just 6.3 percent of white Americans. 41 A lack of insurance contributes to worse health outcomes and makes black citizens less able to participate in the full-time workforce, which exposes families to financial hardship. Taken together, these factors make it difficult for black families to save over the long term.

Black families face systemic, intersecting barriers that limit their wealth building. Left unchecked, these gaps could continue to grow and constrain the US economy, not just black families. The first step toward a cure is an accurate diagnosis, and the culprits behind the racial wealth gap are numerous. With the right targets in sight and a framework from which to address the challenge comprehensively, we can begin to identify the initiatives and policies that are most likely to give black families a boost. The country has over a trillion dollars to gain from the effort.

The economic impact of closing the racial wealth gap | McKinsey

 

[OfTheCross]

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