How to Solve the Crisis in Black Unemployment

Adding 1.1 million new minority entrepreneurs would add 9 million sorely needed jobs to the U.S. economy.

The African American unemployment rate has been twice the white unemployment rate since the 1960s. This relationship – which has persisted in good economic times and bad – means that blacks never experience a period of low unemployment, much less a time when they can claim to have full employment. For example, in April, the white unemployment rate was 4.3 percent, but the black rate was 8.8 percent. By further comparison, the white unemployment rate peaked at 9.2 percent in October 2009 in the immediate wake of the Great Recession.

For about a decade, I have examined many policies to address this disparity, and recently I stumbled upon a surprising one—entrepreneurship.

My analysis of minority entrepreneurship finds that we need to add 1.1 million more businesses owned by people of color to the economy in order to make the racial composition of American business owners match that of the overall American labor force. But if we can achieve this, these new businesses would add about nine million jobs to the American economy—enough jobs to achieve full employment for all racial groups. These jobs would close the black-white unemployment-rate gap and the gaps for Hispanics and American Indians as well.

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It won’t be easy, however, to supercharge the rate of entrepreneurship for people of color. Reaching the mark of 1.1 million new minority-owned businesses would mean that we need about six times more firms with paid employees owned by black men than we have now, four times more firms owned by Hispanic men, three times more for African American women, and three times more for Latinas.

The challenge is not that people of color aren’t interested in entrepreneurship – it might be surprising to discover how strong their interest in entrepreneurship is. A recent Gallup survey found that nonwhite elementary school students are more interested in someday starting their own business than are white students. My analysis, released by the Center for Global Policy Solutions, also finds evidence of a strong interest in entrepreneurship among owners of the smallest businesses—businesses without employees. The challenge, rather, is overcoming the many barriers faced by minority entrepreneurs who want to grow.

For example, while most businesses across all racial groups lack employees – including 3 in 4 businesses owned by white men – an even larger share of businesses owned by people of color are sole proprietorships. 89 percent of businesses owned by Latino men and 94 percent of business owned by African American men have no employees. People of color are starting businesses at a good rate, but they are having difficulties growing their businesses to the point where they are large enough for them to hire.

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One major obstacle for Latino and African American entrepreneurs seeking to grow a successful business is access to capital—wealth. Latinos and African Americans have less than a dime of wealth for every dollar of wealth held by whites. Three quarters of businesses rely on personal or family wealth for startup capital.

A long history of harmful public and private policies have suppressed wealth creation among people of color. African Americans have been disadvantaged because of slavery, Jim Crow, segregation, redlining, and their exclusion from the G.I. bill and homeownership incentives that helped to build white wealth after World War II. In the 19th and early 20th centuries, Mexican Americans in the Southwest and West were blocked from building wealth by prejudice, violence by the Ku Klux Klan and other groups, segregation, and separate and unequal schooling. More recently, Latino and black communities have been targeted for high-priced subprime loans, which have stripped wealth from homeowners faced with defaults and foreclosure.

Eliminating these obstacles to wealth creation will go a long way toward helping more entrepreneurs of color get their businesses off the ground. But we also need new policies that will encourage investment in minority-owned businesses.

For example, we need to find ways to get venture capitalists to break out of their old patterns. The venture capitalist David Teten argues that his peers “use demographics as a quick and easy filter [for deciding investment choices]. They often tend to stay in the same pool they’ve always looked at and can easily match.” Only one percent of venture capitalists are black, and fewer than than one percent are Hispanic. Because of these factors, many good ideas by Latino and African American entrepreneurs are dead on arrival.

One promising solution might be a tax credit structured to incentivize venture capital investments in minority businesses. This tax credit would help to make venture investing more responsive to the needs of a diverse America. Another idea, which would benefit minority businesses too small to be of interest to venture capital but large enough to provide a decent income to their owners and employees, is a tax credit for low- and moderate-income new entrepreneurs, proposed by the nonprofit CFED. This small tax credit could be enough to help a low-wealth new entrepreneur get her business off the ground.

Entrepreneurship will not be a silver bullet for the problem of high black joblessness. It is hard for businesses to succeed in communities with high levels of joblessness and low levels of wealth. But while we cannot strengthen black businesses without increasing the purchasing power of black workers, we also cannot improve the economic conditions for black workers without stronger black businesses. It’s a chicken-and-egg problem. But this only means that we have to work to improve conditions for black business owners and for black workers at the same time.

But if the nation can create 1.1 million new minority-owned firms, the benefits will redound not only to workers and entrepreneurs of color, but to the communities they live in and the nation as a whole. We cannot afford any longer to forgo the innovation, energy and opportunities that these new businesses could bring to the country.

Algernon Austin

Algernon Austin is a Senior Research Fellow at the Center for Global Policy Solutions.