Updated: Nov 3, 2022
A 2020 article by CNBC offered that the racial wealth gap in the United States would be solved through education on financial institutions and processes alongside job training. This was primarily based on the McKinsey report that mentioned that Black Americans expect to earn $1 million less than White Americans. But while education surrounding finances is essential, it does not exactly explain the systemic problems faced by people of colour.
While it is assumed and offered as a solution by several economists and financial analysts, financial literacy and ‘portfolio management tactics’ can change individual behaviour and decision-making, thereby allowing individuals to close the racial wealth gap. Various economic papers also attribute this loss to impatience and loss aversion behaviour, which is statistically more present in individuals at the bottom of the social ladder, such as ethnic minorities or households in lesser economically developed areas of the country, leading to more portfolio imbalances as a result of poor financial literacy.
Literature over time has attributed this wealth gap to the lack of agency or education which ultimately makes individuals believe that access to these opportunities will, over time, reduce this divide. However, this is not seen in practice. Individuals who have access to the same financial institutions and education opportunities and are aware of these portfolio management tactics relating to investments and the like still see a $1 million lesser income than their white American counterparts over a lifetime. This means that financial literacy is not a leading factor of the wealth gap or even the access to opportunities but rather socio-economic circumstances that are inherently institutionalised.
Of the 650 leading investment bankers in the UK, only three are black. While at face value this statistic might not mean much, this represents the very institutionalised racism within the credit system in the country. Mortgage lenders in the UK charge an extra eight percent interest rate on mortgage loans for ethnic minorities compared to white borrowers with similar overall financial situations. Similarly, their mortgage applications are also fourteen percent more likely to be rejected than their white counterparts. In 2015, it was also found that black borrowers pay about 29 basis points more than their comparable white counterparts. This statistic is found to be the worst for financially vulnerable black women in the UK.
While this explains the wealth gap in part, a huge chunk of this is explained by the racial wage gap. A significant amount of this is attributed to bias in hiring. It is interesting to note that several educational institutions encourage students to amend the way they speak in order to sound more ‘white’ which is correlated with being ‘professional’. Similarly, fashion choices such as wearing hair a certain way such as having it cropped for men while wearing wigs for women are encouraged in order to avoid such racial biases.
More subtle biases also exist in the hiring process where the ‘whitening of resumes’ - changing ethnic names to sound more ‘white’ ultimately led to more callbacks for interviews. This bias further explains why black individuals are less likely to be employed in higher-paying jobs which ultimately means that they can barely save up to purchase a home, where again, they are met with exorbitant interest rates on their mortgage loans. Buying a home is again a contributor to wealth accumulation and an overall better financial position due to the tangible nature of property ownership.
Ultimately, wealth accumulation in black communities is affected not only by the lack of asset procurement financial systems such as mortgage loans but also the institutionalised racism due to biases in the hiring system. Financial education serves as a cop-out solution to reduce the wealth gap, especially because the exacerbation of this divide is due to socio-political forces. Building wealth and reducing this divide may therefore need further policy interventions and changes such as but not limited to redistributive policy and the upgradation of internal socio-economic processes.