The Racial Wealth Gap facing Black America

What would happen if we addressed the Black wage gap in the economy? Two million Black Americans would join the middle class.

The opportunity for Black Americans to enter the middle class for the first time is not possible if barriers aren’t broken. Two million Black Americans would join the middle class by addressing wage gaps in the economy. The research done by the McKinsey Institute shows the major differences Black Americans face compared to others in the workforce.

For Black workers, there are racial gaps throughout the US labor market. For example, there is a concentration in low-wage jobs for Black workers. In addition, relative to their contributions to the labor force, Black workers are underrepresented in higher-paying positions. On average, they are paid less than white workers within the same areas of work, in managerial and leadership roles primarily.

Black workers’ incomes would rise by 30 percent and one million additional Black workers would be employed if representational imbalances and racial pay gaps were confronted. More than half of the imbalance would diminish if efforts were made in only 20 occupational categories. Improving Black workers’ low-wage jobs needs to be prioritized when 43 percent of Black workers earn less than $30,000 a year.

For Black business owners, there are very few Black-owned businesses and the ones that exist are small in size across all sectors. The lower rates of realized entrepreneurship and lack of access to capital is the reason for this. Sole proprietorships are the most common type of Black-owned business. In addition, “only 2 percent of private US firms with more than one employee are Black-owned; those that do exist are smaller than non-Black-owned peers on average in nearly all sectors.”

Small-scale care providers make up a third of the sectors which shows that there is a lack of representation in others. If there were similar rates of realized entrepreneurship and firm sizes in Black-owned businesses as there are in non-Black-owned businesses they would generate an additional $1.6 trillion in revenue. Black enterprises can be fostered and with the opportunity of reaching talent parity, it could create 615,000 new Black-led workplaces. This is only possible through the increase in access to capital, networking, mentorship, and professional opportunities.

For Black consumers, there is room for greater consumption due to an unsatisfied demand, low incomes, and poor access. The access to fresh food, affordable housing, broadband, and healthcare providers for Black communities are consumer “deserts.” For instance, 54 percent of Black renter households are cost-burdened with about 8.3 million Black Americans living in food deserts.

The McKinsey Institute believes that there is an untapped market in underserved neighborhoods to expand into and profit. Furthermore, their survey found that many Black consumers are not satisfied with a lot of products and services. In areas such as personal care, food and restaurants, financial services, and healthcare Black consumers feel that there is a large room for improvement. If improvements are made to better meet the respondent’s needs they are willing to pay more—and the Mckinsey Institute estimates that about $260 billion in spending could shift.

For Black savers and investors, the racial wealth gap is at the root of intergenerational transfers, lower incomes, and lack of financial inclusion. For example, “the median Black household has just one-eighth the wealth of the median white household, with inheritances driving 60 percent of the disparity in annual flows.” Also, Black households save $75 billion less annually than white households when receiving smaller paychecks.

The opportunity for Black households to own their homes and to have retirement accounts is less likely by one-third. Labor market improvement and building business equity can progress this advancement gradually. Finally, the 14 percent of Black adults who are unbanked can avoid predatory debt traps by providing a banking service.

For residents, the public sector’s efforts through fundamental services are not enough to support Black America, resulting in a limit to their economic participation. Participation barriers and disparities in spending are not uncommon due to the fact that some public programs have limiting eligibility requirements. Some affordable housing programs exclude millions of renters struggling to make ends meet, showing how public programs are underfunded for the number of people in need.

Programs with some aspects that reinforce racial disparities receive at least 30 percent of public spending. “Locally funded education, where school districts with concentrated Black student populations receive $1,800 less per pupil nationally, and Social Security, where disparities reduce benefits for Black retirees by $31 billion every year,” is included in this spending. The limited access to healthcare and other factors leaves the pre-pandemic racial gap in life expectancy at 3.5 years. 2.1 million more Black Americans could be alive now if this racial gap diminished.

As the McKinsey Institute describes, public investment is crucial, but the involvement of the private sector can take the progress of Black Americans in the workforce even further. Fixing wage gaps, confronting workplace biases, fairly ensuring access to capital, and investing time and money into neglected communities are what companies should focus on. All Americans can benefit from utilizing the Black talent that is so undervalued, not only to redeem wrongdoings throughout history but to make the future more positive as a whole.

By Julia Johannesen

Article taken from: McKinsey.com
III, Shelley Stewart, et al. “The Economic State of Black America: What Is and What Could Be.” McKinsey & Company, McKinsey & Company, 14 July 2022, https://www.mckinsey.com/featured-insights/diversity-and-inclusion/the-economic-state-of-black-america-what-is-and-what-could-be 

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