Entrepreneurship is a great way to build communities and expand the economy. Because it creates new jobs as well as additional wealth avenues, entrepreneurs are a great way to help build communities.
However, there is a racial gap in U.S. entrepreneurship. According to a January 2022 Regional Economics article explained black entrepreneurs face barriers that are not available to white entrepreneurs. St. Louis Fed Associate Economicsist Siddhartha Singhha, Maggie Isaacson, St. Louis Fed Research Associate Maggie Isaacson, and three coauthors, Barton H. Hamilton and Andres Hincapie, wrote the article.
The authors stated that Black individuals are less likely than whites to become entrepreneurs. “Particularly because Black Americans have been prevented from owning businesses for centuries by violence, as well as unofficial and racist rules and regulations.”
Age increases the gap in racial entrepreneurship
The Panel study of Income Dynamics on Black and White individuals was used to define entrepreneurs. The analysis was limited to people between 25-58 years of age, excluding those who are still students or retired.
The authors discovered that 15% of white men are self-employed, while only 6% of Black men of the same age were. This is a 150% difference. The gap changes over time, as shown in the first figure.
The gap between black and white women entrepreneurs was similar. The authors discovered that only 2.7% of Black women were self-employed, while 6.2% of white women had this status. This is a difference of 130%. The second graph shows the percentage of Black women who identify as self-employed.
The authors concluded that “Overall, women living in the PSID were less likely than their male counterparts to be self-employed at any age.” “At 25 years old, white women were only 0.6% more likely than Black women to become entrepreneurs than Black women the same age. The gap in female entrepreneurship widened rapidly and significantly. By 35 years of age, white women were 4.2 percentage point more likely to be self employed.
What is causing the Entrepreneurship Gap?
Black entrepreneurs are faced with many individual and structural challenges that can lead to the entrepreneurship gap. The authors discussed the economic factors, which could be measured using the data.
Similar findings were found about the U.S. wealth gap. For instance, 33% of Black households aged 25-58 had no or negative wealth to compare with 13.8% for white households. Black entrepreneurs are more likely to have difficulty financing their business ventures and starting one.
Credit problems are also a problem for black entrepreneurs. The 2021 Small Business Credit Survey (PDF) revealed that Black-owned businesses were twice as likely to get financing than white-owned companies.
They wrote that financial obstacles make it harder for Black people to start and scale their businesses. This can lead to decreased profitability and higher closing rates.
Examining ways to bridge the gap
Recent research by Barton H. Hamilton and Andres Hincapie as well as Prasanthi Ramakrishnan, Prasanthi Rajakrishnan, and Siddhartha Singha showed that Black entrepreneurs had a lower return per dollar than white entrepreneurs. According to the Regional Economics article, Black businesses are more restricted in borrowing due to their less wealth.
The authors outline several strategies that can be used to help close the gap in entrepreneurship. These included increasing the return on investment for Black business, mentoring Black entrepreneurs, and preventing discrimination during the lending process. They also suggested ways to strengthen relationships between Black communities and banks.
The authors concluded that “removing barriers to Black entrepreneurs would be a great way to encourage them and have wide-reaching effects on inequality, social mobility and job creation.”