racial

(Frank Mckenna, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Sean Fleming, Senior Writer, Formative Content


The US has spent the past century expanding its economic power. As it has grown, so too has the wealth of American families. But not everyone has benefitted, according to a new report.

The racial wealth gap between black and white families in the US grew from about $100,000 in 1992 to $154,000 in 2016, according to an analysis of data from the Federal Reserve Board, Oxford Economics and others by McKinsey & Company.

Image: Urban Institute

Across their lifetimes, black Americans can expect to earn up to $1 million less than white Americans, who accrue seven times as much wealth. Fixing the gap would, of course, benefit black individuals and communities. And, says the report, it could help generate an additional $1.5 trillion dollars for the US economy.

How the wealth gap impacts individuals manifests in a number of ways. The children of middle-class African American families, for example, are at risk of dropping out of the middle class altogether, according to the report.

The racial wealth gap in the US is the product of a series of interactions between social, historical, political, and institutional forces. While it’s a complex picture, in much the same way that addressing the gender pay gap has been shown to create positive ripples throughout a country’s economy, closing the racial wealth gap is in everyone’s interests.

Here are five key points from the report.

1. Family wealth

The net value of financial and nonfinancial assets within a family influence the economic standing of current and subsequent generations.

Only 8% of black families in America can expect to be in receipt of an inheritance, compared with 26% of white families. Even then, the value of that inheritance is likely to be as much as one-third less.

Black college graduates are more likely to need to support their families, inhibiting their individual wealth-creation opportunities in the earlier part of their careers. One consequence of that is the smaller proportion of black Americans with money to invest.

A complex array of factors affect the race wealth gap.

A complex array of factors affect the race wealth gap.
Image: McKinsey & Company

2. The role of housing

Historical institutional forces, such as the National Housing Act of 1934, led to segregation and limited housing options for black families. As a result, many African American families today live in areas “characterized by distressed housing stock, lower-income residents, and overall decline.”

Even high-income black families are caught up in this long-standing example of racialized disadvantage: The average black family with a household income of $100,000 lives in a neighborhood where the average income is just $54,000.

Home ownership is one of the most accessible forms of wealth accrual. Even when this is the only major owned-asset in a family, it can be a valuable inheritance for the next generation. But only about 40% of black families own a home, compared with 73% of white families.

3. Debt burdens and access to credit

If you’re black and American you’re far less likely to have a credit score, and therefore find it harder to access personal financial products and services.

Combined with a lack of inherited wealth, not only can this mean African American families start out disadvantaged, but they are unable to develop a diverse portfolio of savings, investments, and credit facilities.

Overall, black families are 1.3 times more likely than white families to have student debt and 73% more likely than white consumers to not have a credit score.

Inheritance plays an important role in setting out early success markers for later wealth creation.

Inheritance plays an important role in setting out early success markers for later wealth creation.
Image: McKinsey & Company

4. The long, long arm of the law

According to the National Association for the Advancement of Colored People (NAACP), 2.7% of the adult population of the US is under some form of correctional supervision.

But African Americans are incarcerated at more than five-times the rate of white Americans and make up 34% of the total population in correctional custody.

Even discounting earnings lost during imprisonment, incarceration can reduce an individual’s annual income by as much as 40%, McKinsey says.

There are other financial burdens to take into account too. Interactions with the criminal justice system can involve fines, bail bonds, and other costs which are levied disproportionately on black citizens. If your economic standing is already limited, paying a $500 fine is a huge challenge, let alone finding several thousand dollars for bail.

Non-white families’ median wealth lags far behind that of their white neighbours.

Non-white families’ median wealth lags far behind that of their white neighbours.
Image: McKinsey & Company

5. From the wealth gap to GDP growth

Looking at historical data, McKinsey estimates that closing the racial wealth gap in the US could add anywhere between $1 trillion and $1.5 trillion to the country’s economy – between 4% to 6% of GDP forecasts for 2028.

That’s the result of a “dampening effect”, the report’s authors say, on economic participation – consumption, savings and investments, tax receipts, and increased productivity.

An optimistic scenario sees McKinsey assume white Americans’ wealth will grow 0.8% per year, and 3% for black Americans between now and 2028. That’s based on data from 1989-2016 wealth-growth rates. Under those circumstances, the wealth gap will have narrowed but will still favour white Americans who will have 7.7 times more wealth. That represents a loss of around $1 trillion to US GDP.

A more pessimistic view takes its lead from the 1992-2007 trend, assuming that from now until 2028 black wealth will decline by 3.4% and white wealth will increase by the same amount. That would lead to a wealth gap equivalent to 22.7 times between white and black America, or $1.5 trillion in lost GDP.