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Repairing the frayed social fabric in the United States is one of the most pressing issues of our time. It’s not a new problem. But if we do not address the underlying issues preventing us from achieving equitable growth and inclusion, the economic and social divisions that drove the civil unrest following the murder of George Floyd in May 2020 will only become worse. The new administration has an opportunity to make a forceful case for racial equity by explaining the challenges, highlighting the areas of opportunity, and taking bold action to embed racial equity into our national fabric. Only by actively renewing the social contract, starting with a race-conscious approach at the foundation, can we begin to stifle the impact of rising inequality and damaging social disparities and help the nation heal.
About this series
The US presidential transition is always a time for the country to reflect and reset. The 2021 transition is much more than that; given the once-in-a-century pandemic, it is a watershed moment. The Biden Administration has placed particular emphasis on four areas to secure the nation’s health and economic wellbeing. At McKinsey, these four issues—saving lives during the COVID-19 crisis, rebuilding the US economy, advancing racial equity, and mitigating climate change—are areas we have researched and published on extensively, in some cases for many years. They’re the kinds of issues—big, complex, economic and social—that our firm is committed to address, working alongside global leaders. In this series of memos, we offer our perspectives on these four opportunities, and how public- and private-sector leaders could organize to drive change on them. We hope that America’s leaders, innovators, and changemakers can find in these memos useful ideas to help take forward the vast, vital, and urgent work in which we are all engaged.
Liz Hilton Segel
Managing partner, North America
Global leader, Social, Healthcare and Public Entities Practices
In this memo, we hope to contribute ideas for consideration by leaders, innovators, and changemakers in every sphere—public, private, and social. Our ideas concern inclusive growth for all races and the impact in particular of higher Black participation in different roles in the economy. We attempt to point out where efforts to advance racial equity through the economy face challenges and might benefit from national leadership. And we offer tactical considerations for leaders across the country to take action.
The economic case for racial equity and inclusive growth
What is inclusive growth?
In a forthcoming article, we posit that inclusive growth is about embedding equity into the economic-growth process and advancing racial equity through the economy in particular. When asked what “inclusive growth” means, a McKinsey-convened panel of more than 50 US economic-development experts agreed on this definition: “growth that broadly benefits all members of society.” Notably, four-fifths ranked “income inequality [or] share of total income” in their top three choices for metrics to assess inclusive growth; just 28 percent named “absolute average income.” More than 60 percent of respondents stated that inclusive growth should aim to “improve economic outcomes for all people, equally” or that “groups [should] share benefits equally”; about a third said that the goal of inclusive growth is “primarily improving economic outcomes for the least well-off.”
As the nation seeks an exit from the COVID-19 pandemic and a return to economic health, leaders in every industry are intently focused on understanding and improving performance drivers. Racial equity and inclusive growth (see sidebar “What is inclusive growth?”) is one of those drivers; establishing a just society and improving socioeconomic systems could lift the economic wellbeing of companies, sectors, and the public at large. There is a strong case for why. We have previously estimatedthat closing the Black–white and Hispanic–white racial wealth gaps would boost consumption and investment within the US economy by an additional $2 trillion to $3 trillion. That’s equivalent to 8 percent to 12 percent of US GDP. Advancing racial equity and achieving inclusive growthwould mean new opportunities for participation in the economy and an additional $6,000–$8,500 in annual income per capita. Businesses, families, and communities across the country would benefit.
Simply putting racial equity on the federal agenda, as the new administration has done, is an enormous first step 1—similar in significance to moves made by previous administrations and the private sector on the freedom to marry regardless of gender or sexual orientation. 2 Leaders everywhere could further elevate racial equity as a societal and institutional priority through the following actions:
- Crafting and clearly articulating an agenda that highlights the case for advancing racial equity in every part of the economy and its benefits for all of us
- Laying out a cohesive call to action—along with principles, clear goals, and metrics for advancing racial equity—to inspire and set the course for the public, private, and social sectors
Advancing racial equity and achieving inclusive growth would mean new opportunities for participation in the economy and an additional $6,000–$8,500 in annual income per capita.
Four dimensions of opportunity
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Even with a clear case for racial equity and a national call to action, advancing racial equity across the economy will remain a significant challenge. Better tools are needed to help ensure that public and private efforts deploy resources effectively and yield tangible results. Nationally, we need to understand where the challenges lie and the nature of the most critical barriers. Public- and private-sector leaders could help in the following ways:
- Supporting specific research, for example, at executive-branch agencies (such as the Department of Labor), to create new targeted data and insights
- Encouraging the adoption of national metrics and standards to determine the development impact of federal, state, and local policies and regulations
- Embedding racial-equity considerations into funding decisions, and tying further funding to evidence-based results (a goal that the new administration has embraced) 3
Our research found racial inequities across four economic dimensions: family wealth, family income, family savings and consumption, and the community context. In each, social systems affect the ways individuals and families of color enact their economic roles as entrepreneurs, workers, consumers, savers, and residents. Challenges in these dimensions lead to lost economic value, not only for those groups, but also for the economy as a whole. America’s leaders can begin structuring solutions that remove the barriers blocking economic gains across these roles and areas of opportunity. We consider each of these four dimensions in more detail below.
Improving family-wealth creation, especially for business owners and entrepreneurs
Black families struggle to add assets to their family balance sheet, especially a stake in a business. Black business owners face challenges at all five stages of the entrepreneurial journey: ideation, starting up, sustaining growth, scaling, and exiting. For example, 50 percent of Black-owned businesses are concentrated within five sectors, though they represent only 20 percent of total corporate revenue. And the average starting capital for Black-owned businesses is $35,000, relative to $107,000 for white-owned businesses.
Better ecosystems—the networks of people and capital in which businesses operate—can reduce these structural obstacles to building Black-owned business and, in our estimate, add $290 billion in business equity. Nationally, leaders could support the creation of more supportive ecosystems for Black- and brown-owned businesses by focusing on four key areas: policies that produce equitable outcomes (such as more inclusive procurement practices); equitable access to capital (from banks, investors, foundations, and public programs); new business capabilities and knowledge sharing (for example, from the private and social sectors to minority-owned small and medium-size businesses); and greater opportunities for mentorship and sponsorship (such as conscious development and sponsorship of more Black leaders within organizations).
America’s leaders could help in two other ways, starting with funding. Family-wealth creationwould benefit from new funding vehicles (such as impact-investing funds, like the newly formed Lafayette Square, which invests in creating housing, jobs, and financial inclusion). Increased funding for technical assistance would also benefit minority-owned businesses.
As President Biden has already laid out as part of his plan, the public and private sectors could increase total procurement from minority-owned businesses. The benefits are proven. 4 The Biden administration has the opportunity to go even further by helping private-sector organizations increase supplier diversity (for example, by creating information-based tools for companies).
The Black/white labor-force disparity persists despite a decade-long economic expansion—and the pandemic has reversed recent progress in narrowing the gap.
Helping workers increase family income
Black workers are poorly positioned in the US economy due to gaps in human-capital development. Without concerted counter-efforts, shifts now underway in the economy could heighten disparities that already harm Black workers. For example, research shows that automation could widen the racial wealth gap. While a majority of the general population is employed in directive roles, a majority of Black workers are in support roles—food preparer, administrative support worker, factory worker—that are precisely the roles most susceptible to automation. 5
In 2019, we published researchon the “economic intersectionality” of race, gender, age, education, and geography as it relates to the future of work for Black workers. In one analysis from forthcoming research by the newly founded McKinsey Institute for Black Economic Mobility in partnership with the McKinsey Global Institute, we further examine Black workers’ economic position on three measures: labor-force participation, representation in occupations, and pay gaps within specific occupations (interactive). The labor-force disparity persists despite a decade-long economic expansion—and the pandemic has reversed recent progress in narrowing the gap. Gaps in representation in 20 well-paid occupations are similarly stubborn. And the difference in wages paid to Black and other workers in the same occupations presents a further challenge.
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In our analysis, if these gaps were closed, Black workers would receive more than $200 billion more in aggregate compensation annually, almost 30 percent more than their total income in 2018. But this value is concentrated: just 20 occupations and fewer than 4 percent of all jobs account for more than 60 percent of the aggregate wage gap. Many of these are higher-paying occupations, and achieving parity in them will require sustained effort.
Closing the gaps won’t be easy, but a few high-potential actions are available. One is to help people get to where the jobs are and to foster more areas where good jobs are being generated: ten American growth hubs hold the highest potential for Black workers (Exhibit 1). Younger workers may find more opportunities in large cities, such as Atlanta, Dallas, and Houston, or in high-growth hubs, such as Charlotte, where the Black population has grown by 64 percent since 2000. Public- and private-sector institutions can pursue a variety of programs to pave the way. Charlotte recently approved more than $200 million in bonds to improve transportation and affordable housing to support the city’s growth and stability.
Private-sector employers leave value on the table by not including and progressing Black talent through their pipelines. Since 2014, our Diversity wins reportshave demonstrated that organizations with top-quartile diversity in their leadership teams are 36 percent more likely to outperform their peers in earnings before interest and taxes. We see this correlation manifest in other ways: it ultimately affects access to talent (40 percent of millennials won’t accept jobs in companies that are not inclusive), innovation and decision making, and as environmental, social, and governance issues become more prominent, in a company’s license to operate.
Despite this compelling evidence, diversity in the talent pipeline remains underdeveloped. People of color represent less than 15 percent of the C-suite and are poorly represented as early in the career path as the vice-president stage. A clear CEO mandate, strong metrics, and targeted programs across people processes are required to move beyond early-pipeline representation to the true opportunity for family-wealth creation, found in the salaries of leadership roles.
Producing more family savings through better products for savers and consumers
Saving is a challenge for Black families for a large part due to a lack of options for financial consumers and gaps in our financial system. Exclusionary policies and strategies, from limited access to federal mortgage lending to geographic barriers and a dearth of bank branches in Black neighborhoods, have hindered the economic wellbeing of Black Americans. The result is financial exclusion for Black Americansin every part of the financial system. Nearly half of Black households in 2017 were unbanked or underbanked. Without the ability to affordably save, invest, and insure themselves against risks, many Black families struggle to translate their income into wealth.
Financial inclusion will not be achieved unless the private, public, and social sectors commit to coordinated efforts. But the rewards will be enormous. Consider the private sector: our research shows that financial institutions could realize approximately $2 billion in incremental annual revenueif Black Americans had the same access to financial products as white Americans. If Black Americans reached full wealth parity with white Americans, financial-services companies could realize up to $60 billion in additional revenue from Black customers each year.
Leaders at banks and other financial institutions can start simply by rooting out the geographic, process, and economic barriers at their institutions that make it more difficult for Black families to gain full access to financial products and services. The public sector could monitor and enforce equity in policies related to financial inclusion—for example, ensuring real estate agents do not discriminate against Black families who wish to move into majority-white neighborhoods. Government could also identify and support initiatives where research points to better inclusion in the financial system, such as student-loan reform, postal banking to provide better access to the financial system, and incentives for innovations and R&D designed to improve goods, services, and experiences for people of color. Finally, the social sector can help identify and pilot innovative solutions, such as the Reboot Representation tech coalition, which, once proven, could be brought to scale.
Place-based transformations could focus on improving local fair-housing policies and public-health infrastructure, increasing broadband access to minority populations, and combating food insecurity.
Providing better community context for residents
Community institutions shape outcomes for Black residents, and the failure to close systemic gaps in community institutions will further damage economic mobility. The gaps were laid bare during the COVID-19 crisis, which has disproportionately affected both the health and the economic wellbeing of Black Americans, Hispanic and Latino populations, and Asian Americans. Compared to white Americans, the estimated age-adjusted COVID-19 mortality rate is 3.8 times greater for Black Americans and 2.5 times greater for Hispanic and Latino populations. That is aggravated further by the fact that Black Americans are three times and individuals from the Hispanic and Latino communities are two times more likely to report loss of health insuranceduring the pandemic compared with white respondents. From an economic standpoint, the share of minority-owned businessesand minority employmentis highest in the industries most directly impacted by COVID-19.
To make a start on rebalancing these inequities, the new administration could consider more support for place-based transformations across the country. A US-focused development bank could help serve as the backbone to support these transformations in underinvested neighborhoods across the country. Other countries have had success with this structure. 6 A few critical areas on which such place-based transformations could focus are improving local fair-housing policies to increase housing security, improving public-health infrastructure, increasing broadband access to minority populations, and combating food insecurity through increasing support of school food programs in underinvested neighborhoods.
Time for bold action
The police killing of George Floyd in May 2020 spurred many organizations to take action. Nearly a third of Fortune 1000 companies made public statements on racial equity; 22 percent made external commitments, including more than $66 billion for racial-equity initiatives. At McKinsey, we published ten actionsby which we committed to the fight. And we launched the Institute for Black Economic Mobility, to offer in-depth research, a forum for debate, and practical assets and capabilities to create real-world impact.
Collaboration at scale: Improving the homebuyer’s journey
Historical forces have created a vicious cycle of persistent and systemic differences in opportunity. There is no “silver bullet” that can undo these root-cause barriers simultaneously. Instead, the full constellation of stakeholders involved in these efforts, including the federal government, must align on a shared set of key priorities for sustained impact and implement parallel strategies that counteract the most common challengesin the journeys where they occur.
For example, increasing homeownership in neighborhoods of opportunity should be a key priority for racial equity. Even before the pandemic further exacerbated racial inequities, only 42 percent of Black households owned a home compared with 73 percent of white households. Removing the systemic barriers embedded within the homebuying journey will likely be a key priority for federal agencies like the Department of Housing and Urban Development (HUD) and many other stakeholders—such as the National Low Income Housing Coalition, the National Governors Association, the Council for Affordable and Rural Housing, and EAH Housing—as they tackle this issue nationally and in place-based efforts.
At first glance, several barriers faced by Black homebuyers seem to require distinct solutions. In our view, these challenges are better seen as compounding; each challenge bears on the others and thus requires interconnected solutions. Beginning with the racial wealth gap itself, we know that Black Americans are less likely to have the financial capital to afford the down payment for a new home. However, even if this challenge is overcome, racial segmentation in the credit market and the legacy of poor experiences for consumers make it more difficult for Black borrowers to apply for and obtain a mortgage. And even those who manageto save a down payment and receive credit face discriminatory real estate practices that prevent them from selecting homes where they want to live.
These challenges, viewed independently, fall into the remit of many federal agencies. However, Black Americans’ homeownership gap is the culmination of the entire series of micro challenges. To truly advance racial equity, a stronger interagency process could help breakdown silos between agencies and solve the homebuying journey for Black Americans as a whole. Increasing the ability of federal agencies to address the distinct challenges within their purview while simultaneously working together and with other stakeholders to address interconnected barriers could better enable progress.
For example, HUD can continue to develop solutions to single barriers by increasing its mortgage-insurance program for people of color and funding for first-time homebuyer programs—programs that have proven their effectiveness. 1 But it could also coordinate with the Department of Justice to engage more fully in the prosecution of housing-discrimination violations, and with the Consumer Financial Protection Bureau to improve experiences for mortgage applicants. HUD can also collaborate with the nongovernmental organizations driving this work in key states and localities. By serving as both a force for change and as a coordinator of action, HUD could serve as the backbone to address barriers for Black homebuyers across the entire homeownership journey.
In the Institute’s inaugural report, It’s time for a new approach to racial equity, we highlighted the reasons why no one sector can solve this challenge on its own and the elements needed for a coordinated national coalition focused on racial equity to succeed and produce the highest possible returns for society. Only in that way can we ensure long-term accountability, such that the best interventions for challenges are identified and implemented, regardless of stakeholder.
The federal government likely will be the main actor in a national coalition. To fully embed racial equity in the national fabric, the new administration could take the following steps (Exhibit 2):
- Produce a national report on advancing racial equity across the economy, providing transparency on goals and initiatives, areas for research and collaboration, metrics for success, and progress to date
- Increase investment in interagency or “whole of government” initiatives to root out systemic barriers and create holistic cross-cutting solutions for key outcomes for increasing equity (for an example, see sidebar “Collaboration at scale: Improving the homebuyer’s journey”)
- Create a national task force and a policy framework for collaboration and coordination across the public, private, and social sectors to ensure national accountability
The challenges listed in this memo stem from longstanding systemic issues that will not be solved overnight or solved fully by the new administration and its supporters and partners in the private sector. What we can do is work together to create a national framework that can lock racial equity into the national agenda; reinforce long-term accountability for government, business, and society; and find ways to increase coordination and maximum impact from all the ideas now coming to the fore.
FACT SHEET: President Biden Signs Executive Order to Strengthen Racial Equity and Support for Underserved Communities Across the Federal Government. On his first day in office, President Biden signed Executive Order 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.What is the EO 13985 equity action plan? ›
The Equity Action Plan shall include actions to advance equity, including under Executive Order 13985, Executive Order 13988 of January 20, 2021 (Preventing and Combating Discrimination on the Basis of Gender Identity or Sexual Orientation), Executive Order 14008, and Executive Order 14020.When was Executive Order 13985 signed? ›
|Executive Order number||13985|
|Signed by||Joe Biden on January 20, 2021|
|Federal Register details|
|Federal Register document number||2021-01753|
Montgomery Planning's Equity Agenda for Planning is an ongoing commitment to systemically dismantle the institutional and structural racism that exists in and has long influenced planning and zoning processes and to prevent that influence in the future.What does Executive Order 14076 do? ›
Wade, 410 U.S. 113 (1973), I signed Executive Order 14076 (Protecting Access to Reproductive Healthcare Services). As that order recognized, eliminating the right recognized in Roe has had and will continue to have devastating implications for women's health and public health more broadly.What does Executive Order #12856 apply to? ›
The order requires Federal agencies to report in a public manner toxic chemicals entering any wastestream from their facilities, including any releases to the environment, and to improve local emergency planning, response, and accident notification.What is the executive order for further advancing racial equity? ›
On January 20, 2021, President Biden signed Executive Order 13985 on “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government,” calling for a comprehensive approach for the Federal Government to transform itself—for fairness and equity to become not just ideals, but principles ...What is the U.S. equity Action Plan? ›
The Equity Action Plan highlights work that the U.S. Department of Transportation (DOT) will undertake across four focus areas – wealth creation, power of community, interventions, and expanding access – to expand access and opportunity to all communities while focusing on underserved, overburdened, and disadvantaged ...Who signed Executive Order 12898? ›
Executive Order (E.O.) 12898 - Federal Actions to Address Environmental Justice in Minority Populations and Low-Income Populations - was issued by President William J. Clinton in 1994.What are the 4 principles of equity? ›
The four principles of social justice
A definition must consider four principles: access, equity, participation, and human rights.
Brand Equity is made up of seven key elements: awareness, reputation, differentiation, energy, relevance, loyalty and flexibility.What are 5 goals for equity? ›
- Goal 1: Comparably high academic achievement and other student outcomes. ...
- Goal 2: Equitable access and inclusion. ...
- Goal 3: Equitable treatment. ...
- Goal 4: Equitable opportunity to learn. ...
- Goal 5: Equitable resources. ...
- Goal 6: Accountability.
AUTHORITY. Executive Order 13228 Establishing the Office of Homeland Security and the Homeland Security Council enumerates the mission and functions of the Office of Homeland Security.What is executive order 13533? ›
Executive Order 13533—Providing an Order of Succession Within the Department of Defense. By the authority vested in me as President by the Constitution and the laws of the United States of America, including the Federal Vacancies Reform Act of 1998, as amended, 5 U.S.C.What is executive order 12939? ›
To enhance community confidence in law enforcement practices and allow for the identification and correction of any internal deficiencies that could cause injury to the public or law enforcement, President Donald J. Trump signed an Executive Order called Safe Policing for Safe Communities (EO 12939) on June 16, 2020.What is a good example of equity? ›
Equity refers to the specific things each person needs to succeed. As an example, a person might ask to work from home a few days a week because of a medical condition. Providing the option to work remotely allows them to fulfill their full potential at their job.What is a great example for equity? ›
For example, if someone owns a house worth $400,000 and owes $300,000 on the mortgage, that means the owner has $100,000 in equity. For example, if a company's total book value of assets amount to $1,000,000 and total liabilities are $300,000 the shareholders' equity would be $700,000.
Equity represents the guarantee of fair treatment, access, opportunity, and advancement while at the same time striving to identify and eliminate barriers that have prevented the full participation of some groups.What is the equity action plan for Social Security? ›
The EO requires all Federal agencies “to pursue a comprehensive approach to advancing equity for all including people of color and other people who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.”What is the purpose of an equality action plan? ›
Your equality action plan should:
Set out the actions you currently take to promote equality and diversity in your programme or collections.
An equity incentive program offers an employee shares of the company they work for. Shares can be awarded through stock options, stocks, warrants, or bonds. Stock options are the most common and recognizable form of employee equity.Is it good to invest in U.S. equity? ›
Diversification. Investing in the US markets helps you diversify your portfolio as the market offers extensive avenues to invest in top sectors of Technology, Finance, Automobile and Gold. Investing a part of your assets in such markets also makes you independent of the Indian stock markets and the Indian economy.