Racial Equity Could Produce Widespread Economic Gains

January 12, 2023

KEY TAKEAWAYS

Research by Shelby Buckman, Laura Choi, Mary Daly and Lily Seitelman explores how the U.S. economy could grow if labor market outcomes were more equitably distributed by race and ethnicity. The authors examined disparities along five dimensions: employment, hours worked, educational attainment, educational utilization (i.e., the extent to which people are in jobs that fully use their education) and earnings. The findings suggest that economic equity leads to widespread prosperity—to the tune of $25.6 trillion in gross domestic product gains over a 30-year period. Systemic disparities that prevent people from reaching their full economic potential hamper the economy overall. Eliminating these barriers, then, has the potential to better employ people’s talents and abilities to promote widespread economic gains.

Read the paper “The Economic Gains from Equity” (PDF).

The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

How much would the U.S. economy gain if race and ethnicity no longer predicted economic outcomes? Before answering this question, we should highlight some of the widespread and persistent economic gaps between different races and ethnicities that have been thoroughly documented. For example, Black adults typically have an unemployment rate roughly double that of white adults. Hispanic adults ages 25 and older are the least likely racial or ethnic group to have completed high school, and only 15% had at least a bachelor’s degree (less than half the rate for white adults) in 2016. Furthermore, white families tend to have much higher income and wealth than Black families and Hispanic families.

These gaps present a problem because they indicate that people’s talents and abilities are not being fully developed and utilized in the economy. This inefficiency means that the U.S. economy is not able to reach its full potential. Many of these gaps, particularly for Black Americans, are a result of a history of disinvestment and discriminatory policies. Yet, closing gaps in labor market outcomes is not a zero-sum game. The analysis in the paper suggests that the U.S. economy could expand considerably by eliminating racial and ethnic disparities in labor market outcomes.This research was originally published in the fall 2021 edition of the Brookings Papers on Economic Activity. Growing the economic pie by reducing disparities could mean more people have jobs, attain higher levels of education and earn higher wages.

Racial Gaps in Earnings, Employment and Educational Attainment

So, what do recent gaps look like? Annual earnings for Black and Hispanic adults in 2019 were 30% lower than earnings for white adults, on average. In other words, for each dollar that a white person received for his or her work, a Black or Hispanic person received 70 cents. There is also a notable gender gap: Women working full time earn 80 cents for every dollar of median earnings (PDF) that a man working full time makes. Gaps along other dimensions also contribute to the earnings gaps.

Although the paper focused specifically on closing racial and ethnic gaps, there is extensive literature on the significance of the gaps at the intersection of race and gender (which points to opportunities for future research). For example, regarding employment: Employment rates for Black men are 11 percentage points lower than for white men, on average. White women have higher employment rates than women of other races and ethnicities, yet women across the different race and ethnic groups have lower employment rates than same-race men.

Differences in educational attainment shrink (but do not eliminate) racial earnings and employment gaps. For example, in 2019 the employment gap between white men and Black men with a bachelor’s degree was about 5 percentage points, compared with over 11 percentage points for Black men with a high school degree or less. Even when accounting for differences in educational attainment, gaps in employment and earnings persist.As the paper shows, differences in educational attainment across groups are large. In 2019, 43.4% of white men had a bachelor’s degree, compared with 30.4% of Black men and 18.4% of Hispanic men. For women, the percentages were 50.5%, 35.9% and 26.3%, respectively.

Many Black and Hispanic adults who earn bachelor’s degrees work in jobs that do not necessarily require those credentials. Research has found that racial and ethnic minorities are not always in occupations consistent with their degrees—known as educational utilization—resulting in an underutilization of human resources. In 2019, the utilization gap between white workers and both Black and Hispanic workers stood at over 8 percentage points for both men and women. This lack of career-to-skill optimization is a drag on the economy.

Finally, differentiated amounts of hours worked, other observable factors (such as industry and occupation) or other unobservable ones (such as discrimination or other barriers) could account for the gaps.

Potential Gains to GDP from Closing the Gaps

The paper conducted a counterfactual exercise to understand the potential increase to gross domestic product (GDP)—a measure of widespread economic output—from equalizing labor market outcomes across race and ethnicity. This exercise used data from the Current Population Survey from 1990 through 2019 and focused on adults ages 25 to 64. The annual earnings, employment rates, educational attainment and utilization, and hours worked of all groups were set to match those of the white population (the majority group that has historically faced the fewest systemic barriers in the labor market).Levels for non-Hispanic whites were considered a floor. If actual values of minority groups surpassed that of whites, their levels were not brought down to the value of whites. The table below shows that bringing the average earnings of minorities to at least the level of the white average, while accounting for age and gender, would add notably to GDP—about $0.73 trillion in additional labor input in 2019. Notably, this is a conservative estimate. When labor earnings are scaled to match total labor compensation, the gain to the GDP was $1.28 trillion in 2019.

GDP Gains and Percentage Contribution from Eliminating Racial and Ethnic Gaps in the Labor Market in 2019
Employment Rate Hours Worked Educational Attainment Education Utilization Residual Earnings
Labor earnings contribution—level gains in trillions of 2019 dollars 0.15 0.06 0.19 0.04 0.29
Percent contribution to GDP gains 20.0% 8.3% 26.3% 5.6% 39.8%
SOURCE: Reproduced from table 4 in Buckman et al. (2021).

Digging deeper, employment rates and educational attainment made the largest contributions to GDP gains among the analyzed variables. The table below shows the percentage contributions to the group-specific GDP gains of each of the key drivers—employment rate, hours worked, education attainment, education utilization and residual earnings gaps (all that cannot be explained by employment rate, hours worked, and educational attainment and utilization)—for two race/ethnicity groups in 2019 by gender.White men and white women are not listed in this table because they are the comparison groups. The gaps were closed relative to white men and white women.

Percentage Contribution to Group-Specific 2019 GDP Gains by Race and Gender
Employment Rate Hours Worked Educational Attainment Education Utilization Residual Earnings
Black male 26.0 7.8 11.4 4.2 50.7
Black female 11.5 0.0 35.2 6.6 46.8
Hispanic male 2.1 8.3 41.5 7.6 40.5
Hispanic female 26.4 4.8 40.7 6.0 22.0
SOURCE: Reproduced from table 6 in Buckman et al. (2021).

The Intersection of Race, Ethnicity and Gender

Differences across groups highlight the importance of each of these contributing factors, suggesting possible paths to reduce earnings gaps. For example, employment gaps and hours gaps play a larger role for Black men than for Black women. Also, gaps in educational attainment, adjusting for employment and hours, are significantly more important for Black women than for Black men. For both groups, closing residual earnings gaps explains about half of the total computed GDP gains.The average residual earnings gaps are not explained by differences in employment, hours, education attainment and education utilization. This difference could be due to observable factors (like industry and occupation) or less observable factors (like discrimination).

When looking at the Hispanic population, employment gaps play a much larger role for Hispanic women than for Hispanic men. In contrast, residual earnings gaps play a larger role for Hispanic men compared with Hispanic women. For both Hispanic men and women, closing educational attainment gaps accounts for the largest share of computed GDP gains in 2019.

The results of this disaggregation by race/ethnicity and gender highlight an important point: Significant differences in experiences by race and ethnicity and by gender make it vital to be as detailed as the data will permit.Results for Asian, Pacific Islander, American Indian and all remaining non-Hispanic, nonwhite, non-Black individuals are available in the paper. Building a complete picture of the gaps across these more narrowly defined groups is an important step for shaping our understanding of what may be needed to resolve them.

The results of this analysis highlight some potential benefits of creating an economy in which people of all races and ethnicities can participate fully, access the same opportunities and maximize the utility of their skills and credentials. Eliminating labor market gaps between racial and ethnic groups could have an important impact on GDP. Over the 30-year period from 1990 to 2019, the counterfactual exercise pointed to $25.6 trillion in GDP gains from additional labor earnings. Further, the gains increased over that time frame. Given that racial and ethnic minority groups are expected to greatly increase their population shares in the next few decades, and assuming inequality remains the same, the potential gains from equity will likely continue to grow. This work shows that reducing inequities could contribute to widespread economic growth.

To learn more about potential GDP gains at the state level if gender and racial gaps in labor market outcomes were to close, see the data visualization at Fed Communities.

Notes

  1. This research was originally published in the fall 2021 edition of the Brookings Papers on Economic Activity.
  2. As the paper shows, differences in educational attainment across groups are large. In 2019, 43.4% of white men had a bachelor’s degree, compared with 30.4% of Black men and 18.4% of Hispanic men. For women, the percentages were 50.5%, 35.9% and 26.3%, respectively.
  3. Levels for non-Hispanic whites were considered a floor. If actual values of minority groups surpassed that of whites, their levels were not brought down to the value of whites.
  4. White men and white women are not listed in this table because they are the comparison groups. The gaps were closed relative to white men and white women.
  5. The average residual earnings gaps are not explained by differences in employment, hours, education attainment and education utilization. This difference could be due to observable factors (like industry and occupation) or less observable factors (like discrimination).
  6. Results for Asian, Pacific Islander, American Indian and all remaining non-Hispanic, nonwhite, non-Black individuals are available in the paper.
About the Authors
Laura Choi

Laura Choi is the senior vice president of public engagement at the Federal Reserve Bank of San Francisco.

Laura Choi

Laura Choi is the senior vice president of public engagement at the Federal Reserve Bank of San Francisco.

Violeta Gutkowski

Violeta Gutkowski is a lead analyst for the St. Louis Fed's Institute for Economic Equity. Read about Violeta's work.

Violeta Gutkowski

Violeta Gutkowski is a lead analyst for the St. Louis Fed's Institute for Economic Equity. Read about Violeta's work.

Ana Hernández Kent
Ana Hernández Kent

Ana Hernández Kent is a senior researcher with the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. Her research interests include economic disparities and the role of systemic biases and historical factors in wealth outcomes. Read more about Ana’s research.

Ana Hernández Kent
Ana Hernández Kent

Ana Hernández Kent is a senior researcher with the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. Her research interests include economic disparities and the role of systemic biases and historical factors in wealth outcomes. Read more about Ana’s research.

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Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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