Research from the recent US Financial Diaries project has directed a much-needed spotlight on the economic challenges that low- and middle-income families face across the United States. Shocks that began in investment markets post-recession have reverberated for nearly a decade, leading to income volatility and significant declines in wealth. These challenges remain a barrier to many families’ ability to weather unanticipated financial storms and achieve greater economic security.
At the W.K. Kellogg Foundation, we simply cannot disconnect this economic reality from other, equally important issues, including the persistent wealth gap affecting families of color and related, structural impediments to equality.
The Pew Research Center analysis of data from the Federal Reserve’s Survey of Consumer Finances found that the 2007 housing and financial markets crash reduced the net worth of almost all American families. Yet it hit African American families hardest, triggering the widest wealth gap between white and black households since 1989. The wealth of African American households was more concentrated in home ownership (59 percent) compared to white households (44 percent), which included more stock market investments. During the recession, home values went down and foreclosure rates went up, resulting in black households losing more wealth than white households. In 2013, for example, the wealth of white households was 13 times the median wealth of black households and more than 10 times the wealth of Hispanic households.
Perpetuating these disparities are housing segregation and wage stagnation for lower-skilled workers, and an inequitable educational system that fails to help the current and next generation of workers of color acquire the essential skills they need for higher-skilled employment. The Pew Research Center, for example, shows median incomes for people of color fell 9 percent from 2010 to 2013, compared with a decrease of 1 percent for white households.
As we seek to align programs and policies that support economic stability for all families, we have much to gain by focusing our efforts on improving access to and the function of traditional financial systems, along with higher-skilled, higher-paying employment opportunities for low-income communities of color. Research from the Altarum Institute makes the business case for racial equity. If we can close income and employability gaps between white workers and workers of color—which are at the heart of building both short- and long-term wealth—we would see a $2 trillion increase to the US economy each year and GDP growth of $5 trillion by 2030.
A brighter and more equitable future for all lies in smart public policy and programs that:
- Encourage short and long-term savings
- Promote debt reduction
- Increase access to credit through low- and no-cost banking products
- Support higher incomes for low- and middle-income workers
- Increase housing mobility and neighborhood integration
Supporting Asset Development
The majority of low- and middle-income households do not have sufficient savings to cover potential emergencies, and many do not have savings accounts. Families of color are more likely to experience unsteady workflows and dips in income, and with little to no savings, families frequently become victims to predatory lenders whose high fees and penalties further deplete income and wealth. The physical absence of competitive banks and other financial institutions in communities of color, combined with demand from borrowers with poor credit histories, leads to unaffordable debt, requiring families to take on more debt with higher interest rates.
Our foundation believes that community-led solutions that address important wealth-building barriers faced by families of color can lead to sustainable change. Here’s a look at some of the strategies and institutions we support that specialize in helping families develop assets and increase housing mobility.
Increasing access to banks and low-cost financial institutions. Communities of color are historically among the most under-banked. Neighborhood Trust Financial Partners is a community financial institution supporting asset development for workers of color through an innovative channel: the employer. Neighborhood Trust’s financial counselors partner with human resource departments to connect employees to tools that help them eliminate debt, improve credit scores, and gain access to low- or no-cost financial services. Participating employers find value in offering these services, as studies show that worker performance and attendance improve with the alleviation of financial distress.
Micro-lending to entrepreneurs. According to the Small Business Administration, 99.7 percent of US employers are small businesses (less than 500 employees). Of those, firms with less than 50 employees contributed the most to job growth in 2014, and some 39 percent of new jobs came from the smallest businesses. We know expanding business ownership opportunities can boost earnings and create long-term wealth. Research from the Association for Enterprise Opportunity found that micro-lending to entrepreneurs of color helped them build economic self-sufficiency and generate wealth: The net worth of African American and Hispanic business owners, for example, is more than 10 times higher than for those who do not own businesses. Citing Aspen Institute’s FIELD initiative, the number of borrowers who rose above the poverty line increased five years after their initial intake with a micro-lender, and median hourly wages were 52 percent higher than minimum wage for micro-entrepreneurs.
California’s largest nonprofit micro-lender, Opportunity Fund, offers microfinance products and services to residents of underserved communities who don’t qualify for traditional bank loans. This access to affordable capital helps entrepreneurs improve their economic stability and translates to a 20 percent increase in take-home income.
Increasing housing and economic mobility. While the findings are forthcoming, we are supporting research at Stanford University to explore how public housing policies can improve neighborhoods and intergenerational mobility. Additionally, Compass Capital is working on an initiative to help families transition out of public housing by securing a portion of their income in escrow, allowing them to build savings to move into an apartment or home. Seeking solutions to improve housing voucher design could encourage families to move to better neighborhoods, offering their children a chance at increased economic success in their future.
Propelling Families Forward Through Inclusivity
Building an inclusive, equitable economy is the key to recovering from the long-term impacts of the Great Recession and the historic wealth gap communities of color face. This will require multi-sectoral efforts like the employer-led 100,000 Opportunities Initiative, where dozens of businesses are growing pathways to economic opportunity for youth who face barriers to jobs and education. We must make a focused and enduring commitment to support a connected set of solutions that will boost income, savings, and wealth accumulation for low- and middle-income families of color today.
When families of color are able to succeed, we all succeed. Our country’s future is riding on us—and waiting for us—to build an economy that works for everyone.