The Racial Wealth Gap: Narrowing the Racial Wealth Gap through Business Ownership

“The growing racial and ethnic wealth gap presents a challenge for funders striving to build assets and tackle inequality in the United States. One of the key reasons for the racial wealth gap is that African American and Latino households hold lower levels of business and financial assets. This is one of the key reasons for the racial wealth gap, so it stands to reason that business ownership may be an important means to narrow the gap. However, people of color have historically been challenged to secure the resources—such as capital, education, and experience, as well as access to markets—needed to start and grow businesses. Micro- and small-business development strategies and programs have traditionally sought to engage underserved racial and ethnic groups as a means to opening opportunities for entrepreneurship. This paper examines the available research on business ownership, its connection to wealth creation for diverse populations, and identifies proven tools and strategies funders can employ to strengthen the access to and effectiveness of business ownership as a means to build wealth and reduce the racial and ethnic wealth gap.

….Although business ownership may be an important means to build wealth in our economy, African Americans and Latinos have encountered challenges in acquiring the capital, knowledge, and market access needed to grow their firms. Non-White entrepreneurs have historically had lower rates of self-employment and business ownership than Whites. This is partly due to the fact that they have fewer assets to invest. Research by Robert Fairlie, chair of the economics department at the University of California Santa Cruz, found that lower levels of assets among African Americans account for more than 15% of the difference between the rates of business creation among Whites and African Americans. In addition, Fairlie’s research also found that low levels of assets explain more than half of the business entry rate gap for Latinos” (p.3-4).

(Abstractor: Author)

“Funder Recommendations • Invest in known strategies o Invest in Community Development Financial Institutions (CDFIs) and mission-based lenders that provide capital to firms and worker-owned cooperatives owned by African Americans and Latinos (p.8). o “Invest directly in cooperatives” (p.8). o “Support business development services that advance the business ownership skills of African-“American and Latino entrepreneurs, and expand their ability to access broader markets” (p. 9). o “Invest in incubators and co-working spaces for African-American and Latino entrepreneurs” (p. 9). o “Build the infrastructure to support the success and growth of worker cooperatives” (p. 9). • “Explore and support new approaches and strategies o “Examine and develop strategies for expanding exposure to small business among targeted communities and groups” (p. 10). o “Fund research aimed at gaining a deeper understanding about the role of both individual and collective models of business ownership in building assets among people of color” (p. 10). o “Support the development of models that promote savings and build credit for potential entrepreneurs” (p. 10). o “Support policy efforts that seek to address lending practices resulting in disparate outcomes” (p. 10). “Widening inequality and the growing lack of opportunity are undermining too many of our families and communities. The racial wealth gap is exacerbated by barriers that have inhibited the formation and growth of businesses owned by African Americans and Latinos. Because business ownership plays a critical role in generating wealth in our economy, addressing the disparities on the level of business assets owned by African Americans and Latinos must be a central element of our nation’s efforts to narrow the racial wealth gap. Micro- and small-business development programs, and worker-owned cooperatives, are showing promise as strategies that allow Latinos and African Americans to enter into and succeed in business ownership. Grantmakers have an important role to play in investing in the research, programs, and policies that can allow communities of color to realize the wealth-building potential of becoming business owners” (p.11).

• Last Updated:
• Created:
• Resource Publication Date: 2015
• Author(s): Klein, Joyce; and Liang, Jenna
• Organizational Author(s): Asset Funders Network, Field at the Aspen Institute
• Resource Availability: Publicly available
• Posted by: Long Dang
• Posted in: Workforce System Strategies