The Association between Black Buying Power and Greater Income Equity

Black History Month provides an opportunity to celebrate past efforts to end structural racism and economic disadvantage. The month-long celebration also provides opportunities to examine how demographic groups can benefit from further economic equity. This blog post shows that gains for everyone could be achieved if society pursued greater income equity between Black and white households.

From the 1960s to the early 1990s, the income of the typical Black household relative to that of the typical white household remained between 56% and 61%, meaning that for every dollar the median white household received, the median Black household received 56 cents to 61 cents. During the mid- to late 1990s, the ratio increased, reaching 68% in 2000, according to data from the U.S. Census Bureau’s Current Population Survey.

However, from 2000 to a few years prior to the pandemic, the relative status of Black households fell to 61%. As of 2021, it stood at 65%. We hypothesize that the recent increase is largely due to the strong economy just prior to the pandemic and then income support that had a disproportionate impact on Black households. They started the pandemic with higher jobless rates and were hit harder than white households. From March 2020 to April 2020, the white unemployment rate jumped from 3.9% to 14.1%. Over the same period, the Black unemployment rate moved from 6.8% to 16.6%.

This blog post presents frameworks that communities can use to identify the gap’s causes and develop solutions, but the post’s primary contribution is to show the benefit to not only Black households if the persistent gap in household income were narrowed. The private sector could see greater profits and the government could see greater tax revenue.

To demonstrate the broad-based benefits of racial income equity, we used Black buying power data from the University of Georgia’s Selig Center for Economic Growth and U.S. Census population and household income data to estimate the actual and potential buying power that Black households could possess if there was greater income equity.

Our most recent estimates, using 2020 and 2021 data, indicate that if communities pursued equity in the form of narrowing Black-white differences in household income, Black purchasing power could jump from $976 billion to a potential $1.6 trillion in the U.S.This annual estimate is similar to the estimates of Shelby Buckman, Laura Choi, Mary Daly and Lily Seitelman in their 2021 paper “The Economic Gains from Equity (PDF).” Their estimates for 2019, which focus on earnings and total labor compensation at the individual level, range from $730 billion to $1.28 trillion.

For the states that comprise the Federal Reserve’s Eighth District, pursuing Black-white household income equity would potentially generate $202 billion in additional Black disposable income. It is important to note these estimates are just for one year.

Which sectors of the economy would benefit the greatest amount from this new income? Because households spend the largest portion of their incomes on housing expenses, a big part of these gains likely would go to businesses that construct homes and provide housing goods and services. Businesses in the food, transportation and health care sectors would also likely see large increases in their revenue.

How big are the increases? To answer that question, I compared the change or increase in buying power with each state’s real gross domestic product (GDP). The percentages are shown in the table. At the national level, the estimated gains from pursuing this income equity are 3% of GDP. In the Federal Reserve’s Eighth District (which includes all or part of seven states: Missouri, Illinois, Indiana, Kentucky, Tennessee, Mississippi and Arkansas), equity in median household income is 4% of GDP. The potential gains range from a high of 13% in Mississippi to a low of 2% of GDP in Kentucky. Again, remember these are annual estimates. By not pursuing greater equity, each year businesses and governments miss out on additional profits and tax revenue.This annual estimate is similar to the estimates of Shelby Buckman, Laura Choi, Mary Daly and Lily Seitelman in their 2021 paper “The Economic Gains from Equity (PDF).” Their estimates for 2019, which focus on earnings and total labor compensation at the individual level, range from $730 billion to $1.28 trillion.

Closing Economic Gaps

How does a community close its income gap? The buying power estimates presented in this blog post are based on increasing the ratio of the median income of Black households to white households. The U.S. ratio sat at 62% as of 2021 (because of differing survey methods, the percentage is slightly lower than that derived using Current Population Survey data), meaning the typical Black household’s income is 62% of the typical white household’s income.

There is no single action that closes the racial income gap. The drivers vary by community—educational attainment, types of industry (e.g., manufacturing),Wages are typically higher in the manufacturing industry than in the service industry, for example. good paying jobs, health care, access to transportation and housing, criminal justice systems, safety, and collaborative community programs to address discrimination are but a few. Because of this, communities have an opportunity to look at their own economies and identify the leading contributing factors. The remainder of this blog post presents two potential frameworks that communities might use to identify and prioritize their solutions.

Social Determinants of Health Framework

The World Health Organization created the Commission on Social Determinants of Health in 2005. The commission’s charge was to collect, curate and analyze global information on the social determinants of health and their impact on health inequity. They were asked to develop recommendations that would improve equity.

The commission’s framework“Closing the gap in a generation: health equity through action on the social determinants of health,” the August 2008 final report of the World Health Organization’s Commission on Social Determinants of Health. explains the nonmedical personal and societal conditions and forces that influence health outcomes. It provides a useful model for considering the influence that access to quality education, economic security, and social and community resources have on income equity.

In addition to these access points, other determinants of health are practicing healthy behaviors, having access to good health care, and living in a positive built environment. Businesses could contribute in each of these areas.

Labor Supply, Demand and Institutions Economics Framework

The economics framework of Labor Supply, Labor Demand, and Institutions (SDI) is also useful for identifying the key contributors to racial disparities and responses that foster equity. Labor supply (S) refers to the attributes of individuals. The most common factors here are one’s educational attainment, skills and experience. Labor demand (D) refers to the behaviors and choices of business, such as where to locate and expand and whether to ask job applicants about their contact with the criminal justice system. Institutions (I) refers to public policy, societal norms and practices. Discrimination falls within this category.

In each model, greater participation by businesses in investing in improving their community’s economic equity could:

• Strengthen the community’s ability to respond to unexpected shocks
• Create a stronger and more plentiful workforce
• Lead to greater stability, mobility and innovation 
• Ultimately, improve their bottom line

Governments could receive more tax revenue due to the greater economic activity. And, with less need for financial support, social service nonprofits and the government could better target their limited resources to the neediest individuals and communities.

The Economic Gains from Equity Extend Beyond Race

Economic gains to equity go beyond race. Women, Latinos and Native Americans continue to earn less than their peers. Equity has a class component. Low- to moderate-income white households face major economic challenges. Equity has geographic dimensions. Improving the income of rural communities could help to grow the overall economy.

Because of these additional dimensions, the St. Louis Fed’s Institute for Economic Equity plans to develop buying power estimates for women, Latinos, Native Americans, rural communities and low- to moderate-income white households. These estimates will be developed at the state level and when feasible we will drill down to metropolitan areas, cities and counties.

Interested in “buying power” estimates for your community? Feel free to reach out to us.

Editor’s Note: This post was updated with a few wording changes and additions for clarity.

Notes

1. This annual estimate is similar to the estimates of Shelby Buckman, Laura Choi, Mary Daly and Lily Seitelman in their 2021 paper “The Economic Gains from Equity (PDF).” Their estimates for 2019, which focus on earnings and total labor compensation at the individual level, range from $730 billion to $1.28 trillion. 
2. See Note 1.
3. Wages are typically higher in the manufacturing industry than in the service industry, for example.
4. “Closing the gap in a generation: health equity through action on the social determinants of health,” the August 2008 final report of the World Health Organization’s Commission on Social Determinants of Health.