The market segregation of black entrepreneurship

By Matt Johnson

In my previous economics article Can city councils do better than the $15 minimum wage policy?, I referenced black entrepreneurship and business as an alternative policy solution to the $15 minimum wage. Considering the current state of black entrepreneurship and business, I thought it would be a solution all political flags could get behind, especially since not one person was able to provide me with an example of where an increase in the minimum-wage improved the lot of black Americans.

My alternative solution seemed to go unnoticed to many of the readers of the article. Moreover, many of the readers and commentors couldn’t seem to get away from the notion of the minimum-wage, nor did they seem to understand that the minimum-wage doesn’t address black unemployment or black entrepreneurship.

BOB-charts-3

I put forth what I thought was a reasonable solution to improving the lot of those who have been disenfranchised for far too long. In that argument, I listed a few of the past policies that had contributed to the current discrepancies in the economic system. I also stated that less than 1 percent of the founders of venture capitalists are black entrepreneurs. And I noted that black business owners are more likely to hire black employees, which makes sense considering cities are still fairly segregated even in the 21st century. But none of this seemed to resonate with some of the readers. So perhaps this data will resonate.

According to an article written by Kate Davidson in The Wall Street Journal, between the years of 2007 and 2012, black business ownership increased while white business ownership decreased. However, most of the black businesses that opened were sole proprietorships. A sole proprietorship is a business with no employees, i.e., self-employed. And as black firms increased by more than 2 million and white firms decreased by a million over the five-year span,

…the value of the average white-owned business—measured in sales, receipts or revenue—went up much faster, and is now three times the value of the average minority-owned business. Businesses owned by African-Americans were worth an average $224,530 in 2012, compared with $656,364 for the average white-owned business.

So although black businesses were being added to the market place, they were still lagging behind in net-worth. In fact, the difference between worth and what a business provided to the market in revenues and employment really depended on if it was a black business or a white business.

According to Black Demographics, it is estimated that black businesses create 1 million jobs per year, which would account for about “4 percent of the working-age population.” In contrast, it is estimated that white businesses create 55.9 million jobs per year. This would account for about 44 percent of the employed, white working population.

10-0802-race-of-founders-of-VC-backed-companies1That data also illustrates the vast difference in revenues between black and white businesses. For black businesses, it is estimated they generate revenues just short of $188 billion annually. In stark contrast, white businesses are believed to generate almost $13 trillion annually.

To put this into perspective, $188 billion would provide “every working-age” black American with $7,000 annually; whereas, $12.9 trillion would provide “every working-age” white American with $102,000 annually. If these figures are correct, three things should happen next.

First, you should pick your jaw off the ground. Second, ask yourself if the $15 minimum-wage is really the right solution. Seriously, is there any possible way that a minimum-wage policy could rectify this obvious economic disparity? And third, why are black entrepreneurs opening sole proprietorships and not LLC’s, C corporations, or S corporations, while hiring a greater number of people? Does this have something to do with capital?

While you ponder these questions, I will leave you with this Milton Friedman quote,

The only cases in which the masses escaped from…poverty…are where they have had capitalism and largely free trade…The record of history is absolutely crystal clear, there is no alternative way so far discovered of improving the lot of ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise…

 

Matt Johnson is an economics and science writer for The Systems Scientist. You can connect with him directly in the comments section, follow him on Twitter or on Facebook

You can also follow The Systems Scientist on Twitter or Facebook as well. 

Photo credit: John H. White

 

 

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