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The economic argument for racial equity

Published: Saturday, Nov. 16 2013 8:30 a.m. MST

Research is revealing how racial diversity and reducing racial inequities is good for business and American economic growth.

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Reducing racial inequities has long been viewed as a moral issue. But it’s also an issue of cold hard cash.

A growing body of research is revealing how diversity is good for business and American economic growth. A recent report called “The Business Case for Racial Equity” put out by the W.K. Kellogg Foundation, a large nonprofit organization, found that if barriers such as access to housing, health care and employment opportunities for minorities were broken down, America’s economy would benefit by trillions of dollars. And as America becomes more racially diverse, these issues have increased importance.

“It’s clear that in striving for racial equity a clear case can be made on the doing the right thing,” said Ani Turner, the author of the WKKF study. “But what we’re saying that many people may not realize is that there’s a very strong economic argument that moving toward greater racial equity will benefit not only minorities and the economically disadvantaged, but the economy as a whole.”

Economic potential

Minorities in America have worse economic outcomes than their white counterparts, and that is holding our economy back, according to the WKKF study. That's partly because of a huge earnings gap between minorities and whites — the average per person earnings for people of color is currently 30 percent below those of whites.

The study found that if the average incomes of minorities were raised to the average incomes of whites, total U.S. earnings would increase by 12 percent, representing nearly $1 trillion in today’s dollars. And if the earnings gap was closed by increased productivity, GDP would increase by $1.9 trillion. Other benefits would include $180 billion in additional corporate profits, $290 billion in additional federal tax revenues, and a potential reduction in the federal deficit of $350 billion.

Turner said the report pulled together data from a number of sources to show businesses that it’s in their best financial interest to be invested in eliminating racial disparities not only because it will create a healthier, more productive workforce, but also because it will increase the purchasing power of minority populations to buy more goods and services.

Other research has also shown that increasing racial equity is good for the bottom lines. In a 2009 study, Cedric Herring, a professor of sociology at the University of Illinois Chicago, found that greater racial diversity in an organization is associated with increased sales revenue, more customers, greater market share and greater relative profits.

These results “are consistent with arguments that a diverse workforce is good for business, offering a direct return on investment and promising greater corporate profits and earnings," Herring said.

One of the possible reasons organizations see these benefits is that diversity brings new perspectives and innovative thinking. “It’s almost cliche at this point to talk about ‘thinking outside the box,’ but when you bring a diverse workforce together, you’re bringing in already built-in ‘outside the box’ ways of thinking," Herring said.

Changing demographics

There is urgency to remedying the racial inequities as minorities become a growing part of the American population. A 2008 report from the Pew Research Center projected that by 2050, America’s racial makeup will “look quite different” than it does today.

In 2005, whites made up 67 percent of the population, but Pew projects that by 2050, they will no longer be a majority, making up only 47 percent of the population. While the percentage of African-Americans will remain about the same, Hispanics will rise from 14 percent in 2005 to 29 percent and Asians will increase from 5 percent to 9 percent of the population in 2050.

And if businesses want to succeed in the changing American landscape, they are going to need to take diversity into account, said Herring. “If a business says we’re only serving these kinds of customers and those kinds of customers are disappearing, the business is going to be in trouble in long run,” he said. “Businesses will need to diversify to communicate with changing customer base.”

These demographic shifts are already occurring among America’s children. According to the U.S. Census Bureau, children will be a “majority minority” in just five years. And today’s minority children face more barriers to economic opportunity than their white counterparts. A recent report from the Foundation for Child Development found that Hispanic children of immigrant parents and black children of U.S.-born parents were most at risk of growing up in poverty, at highest risk for child mortality and least likely to have very good or excellent health.

Minority children are also less likely to get a good education or go to college, which could hurt their ability to get jobs in a market that moves increasingly toward high-skill workers. A report called “All-In Nation” from the Center for American Progress, a liberal think tank, found that in 2010, while 68 percent of the white population had a post-secondary education, only 62 percent of Hispanics and 48 percent of African-Americans had the same. If the economic recovery continues, the researchers estimate that over the next 10 years there will be 55 million job openings, and two-thirds of those openings will require some education beyond high school. But we will not have enough workers to fill those jobs, falling short by 5 million workers.

“The costs of inaction are very high and getting higher and higher as we move toward a majority minority,” Turner said. “As the population becomes mostly minorities, if they still lagging behind as a group, it will have a significant impact on economic growth and America’s GDP.”

Areas of inequity

The WKKF study examined a few areas where minorities still face a number of barriers to achieving economic parity with whites, including housing, health care, education and the criminal justice system. In each of these identifiable areas, the negative outcomes of minorities impact their ability to add value to the American business landscape and economy as a whole.

For example, the report relied on Census data that showed that in 2012, 74 percent of white families owned homes while only 44 percent of African-American families, 46 percent of Hispanic families and 57 percent of Asian-American families owned their homes, creating a disparity in the ability of these families to grow wealth through homeownership.

In addition, the segregated nature of housing leads minority kids to worse educational outcomes, resulting in the oft-discussed “achievement gap” between minorities and whites. A 2009 study from consulting company McKinsey & Company found that closing the achievement gap would have increased GDP by 2 percent to 4 percent in 2008. Similarly, in the realm of health care, a study from Urban Institute, a policy think tank, found that the differences in preventable disease rates among African-Americans, Hispanics, and whites cost the health care system $24 billion annually and is projected to double to $50 billion by 2050.

Turner said that many of these negative outcomes are the result of historical and structural reasons. “We’re not labeling the racial earnings gap as a result of racism,” she said. “But we are saying that this is lost economic potential. That if disparities in health, education and employment opportunities can make people who have these barriers more productive, then that will translate to overall more productivity and GDP output.”

The WKKF report said that solutions to the housing segregation issue could include mobility programs that offer vouchers for tenants of public housing to move to higher income areas and zoning techniques that set aside space for low or moderate-income housing in new developments. They also suggested investment in early childhood education and improved education and training of medical professionals to follow evidence-based guidelines for all patients as ways to improve the opportunities and outcomes for minorities in education and health care.

Turner acknowledged that completely eliminating the racial earnings gap is unlikely but that people need to realize the lost potential of completely ignoring it. “There is a sound economic basis for making those changes,” she said. “And there is a cost to inaction — not just a human cost, an actual dollar cost.”

Email: dmerling@deseretnews.com

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