New businesses are a critical source of employment for both new workers and those who are still struggling in the job market. According to a new Hamilton Project report by Michael Barr, the number of small businesses started by two specific groups—women and minorities—were on the rise prior to the Great Recession of 2007-2009. Yet the report finds that women and minorities still face several constraints to growth, one of the most important being a lack of access to capital.
In his report, Barr, a University of Michigan law professor (and a member of Equitable Growth’s research advisory board), emphasizes the importance of capital for the success and growth of start-up businesses. Barr finds that minority entrepreneurs must rely more on personal capital than external—which is problematic, considering that minorities and women have less access to external capital from outside lenders. Indeed, previous research shows that African Americans, Hispanics, and women all begin businesses with less capital than white men, and the gaps do not decrease over time. For those who want to grow their businesses, hire more workers, and compete with businesses owned by white men, this is often a major constraint.
Wealth inequality is another known factor in the success of white men launching new businesses with more capital. Analysis of the Federal Reserve’s Survey of Consumer Finances found that in 2013, the median wealth of white households was 13 times the median wealth of African American households and 10 times that of Hispanic households. And in 2007, never-married women held only 6 percent of the wealth of never married men. Less wealth means that women and minority entrepreneurs have less collateral for business loans—and therefore cannot invest as much in their businesses.
In fact, a 2005 study found that the disparity between African American and white asset levels accounted for over 15 percent of the difference in business creation rates between the two races. And, while policymakers tout the importance of growing small businesses, they do not address the critical importance of closing this wealth gap as a means to increase entrepreneurship. Addressing wealth inequality, while not a silver bullet, could effectively empower more women and minority entrepreneurs to grow their businesses and help expand the economy.
Barr’s policy recommendations also are worthy of consideration by lawmakers on Capitol Hill who are looking for more immediate solutions. Barr calls for expanding the State Small Business Credit Initiative and making the New Markets Tax Credit permanent—focusing more on expanding access to capital rather than wealth building. As policymakers continue to try to get Americans back to work, they need to focus on the constraints limiting women and minority entrepreneurs from growing their businesses and hiring more workers.