By Fernando A. Lozano | Inland Empire Economic Partnership
This week the Federal Reserve released their estimates of wealth held by American households. These estimates show persistent wealth gaps between White non-Latino households and Latino households.
On average, the median wealth of non-Latino households is four times larger than that of Latinos. The median wealth for a White non-Hispanic household is $285,000, while the median wealth for a Latino household is $61,600.
We can decompose this gap into housing, business ownership, and stock accumulation. Wealth in housing explains almost half of the gap, business ownership results in one-third of the gap, and stocks generate one-sixth of the gap. For policy-makers who acknowledge the importance of wealth accumulation, the immediate question to ask is “what factors in the labor market drive the gap?” Once they’ve been determined, the next step has to be to find policies that would allow Latino households to accrue more wealth.
Demographic differences partly explain this gap. For example, one possible explanation is that non-Latino households are older and have more labor market experience, and hence are able to accumulate more wealth. Another is that differences in education accrue to differences in wealth. However, demographic composition only partly explains this gap. The appropriate evaluation would compare similarly educated workers during the same moment of their work-life cycle. That is, follow a cohort of workers and their total income, from when they join the labor force during their 20s, to the moment they retire in their 60s.
Thirty years ago, when workers in their 20s joined the labor force, Latino workers born in the United States earned, on average, 14 percentage points less than their non-Latino counterparts. Nowadays, as these workers enter the last decade in the labor force, the earnings gap has increased to 20 percentage points. The increase in the earnings gap over a worker’s work-life is the same for all age cohorts and for all education levels, not only for those born in the ’70s or with little formal education. The question to answer is to search for the causes that explain the 50% relative decrease in the earnings of Latino workers during their work-life.
Total income, as reported by the U.S. Census Bureau, includes income from all sources. In addition to labor income, it also contains income from assets such as stocks and bonds and income from business ownership and other entrepreneurial activities. Obviously, total income is an important measure of someone’s well-being and an outcome that economists like to focus on, since higher income is associated with better health outcomes, higher levels of happiness, better educational outcomes for children, and fewer behavioral problems. Most importantly, income eventually becomes accumulated as wealth over time. This suggests that policymakers must be aware, and alert of, the within-cohort work-life increasing income gap for Latinos in the United States.
One reason why this gap is increasing is that Latinos are less likely to own a business. Although Latinos make up 19% of the nation’s population, the Census’s Annual Business Survey reports that Latinos only own 6.5% of all businesses in the nation. Latino entrepreneurship is over-represented in sectors such as transportation and construction. Just as in wealth, there is a substantial ethnic gap in business ownership: Non-Latino Americans are twice as likely to own a business as Latino entrepreneurs.
This gets us to the policy options for reducing the wealth gap.
Federal programs, such as the Small Business Administration’s Business Development, which opens a pipeline for minority-owned businesses to accumulate training and technical assistance, have done little to attenuate these gaps. Incentivizing homeownership by Latinos is also insufficient. Instead, I propose that it is time to think seriously about the possibility of “Baby Bonds.”
Baby Bonds would provide every child born in America with a monetary amount at birth that will accumulate interest tax-free throughout the first 18 years of the child’s life. For example, a baby bond with an initial worth of $3,000 and invested 18 years ago in an S&P 500 indexed fund would today be worth $15,000. These bonds can be means tested: children born into wealthier families would receive a smaller amount, and children born into less affluent families would get a larger amount. Families would also be able to contribute to these accounts. When the child reaches age 18, the accrued money can be used in any wealth-accumulating enterprise: buying a home, opening a business, or going to college.
Between 2020 and 2022, 980,000 Latino children were born in the United States. The socioeconomic outcomes of these children are imperative to our future well-being. Baby Bonds, and the agency that comes with accumulated wealth, is a viable policy to assure our continued asset building and well-being.
The Inland Empire Economic Partnership’s mission is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its membership includes organizations in the private and public sector.
