08/02/2021 | News release | Distributed by Public on 08/02/2021 09:13

What Would Detroit’s Business Ownership Look Like with Racial Parity?

Throughout 2020, as the Covid-19 pandemic unfolded, small business closures across the United States dominated the headlines. In particular, many news stories highlighted the hardships faced by Black-owned and other minority-owned businesses. Moreover, the pandemic helped shed greater light on the fraught history that the U.S. has had with such small businesses.

In this blog post, we replicate for the city of Detroit an analysis published by the Brookings Institution on the state of Black-owned businesses for the U.S. as a whole.¹ For that Brookings piece, its authors, Andre M. Perry and Carl Romer, conduct an exercise in which the U.S. business ownership landscape has perfect racial parity. By doing so, they attempt to represent what the economy would look like if there were a proportional number of Black-owned businesses to the Black population in the United States. Their exercise is based on the results of the U.S. Census Bureau's 2018 Annual Business Survey (ABS), which reflects business responses in 2017. Respondents to the ABS are owners of nonfarm employer businesses (nonemployer establishments are excluded) that filled out tax forms 941, 944, or 1120, and have at least $1,000 in receipts in 2017. In the Brookings essay, the authors describe the existing disparities in the number of firms, revenue, and job creation between Black-owned and non-Black-owned employer businesses (see table 1). They then use the percentage of the U.S. population that is Black to calculate what the Black-owned business landscape would look like if there were proportional representation in business ownership (see table 3). They make similar calculations for revenue, payrolls, and jobs generated by Black-owned employer businesses.

Through their exercise, Perry and Romer (2020) find the following: With racial parity and a static total number of businesses, there should be 930,222 Black-owned businesses in the U.S.-an increase of over 800,000 from the actual number of 124,004 in 2017. Moreover, even with the actual number of Black-owned firms held steady, the total revenue of Black-owned businesses would increase to $804 billion if the average revenue of Black-owned businesses were equal to that of non-Black-owned businesses-up from the actual $128 billion in revenue generated in 2017. According to Perry and Romer (2020), their

In what follows, we present similar tabulations for the city of Detroit. This exercise may yield a different picture given the racial makeup of the city.

Table 1. Black-owned and non-Black-owned employer businesses in the U.S.

Note: We used the same data from U.S. Census Bureau to re-create Perry and Romer's (2020) calculations for this table; we calculated additional statistics beyond those reported in their Brookings essay.
Sources: Authors' calculations based on data from the U.S. Census Bureau, 2018 Annual Business Survey and 2019 American Community Survey.

Table 2. Black-owned and non-Black-owned employer businesses in the city of Detroit

Sources: Authors' calculations based on data from the U.S. Census Bureau, 2018 Annual Business Survey and 2019 American Community Survey.

Table 3. Black-owned employer businesses in the U.S.: Actual versus with parity

Notes: These calculations differ modestly from the Perry and Romer (2020) calculations for Brookings because we are using the American Community Survey (ACS) value of 14.2% as the Black population share in the U.S. in order to be consistent with our usage of the ACS value of 79.0% as the Black population share in the city of Detroit. Both of these ACS numbers can be found in table DP05 of the 2019 ACS, available online.
Sources: Authors' calculations based on data from the U.S. Census Bureau, 2018 Annual Business Survey and 2019 American Community Survey.

Table 4. Black-owned employer businesses in the city of Detroit: Actual versus with parity

Notes: We use 79.0% as the Black population share in the city of Detroit, as reported by the U.S. Census Bureau in its 2019 American Community Survey (ACS). This number can be found in table DP05 of the 2019 ACS, available online.
Sources: Authors' calculations based on data from the U.S. Census Bureau, 2018 Annual Business Survey and 2019 American Community Survey.

What makes Detroit different from the U.S. as a whole?

The exercise conducted for the Brookings essay is useful for gaining a better understanding of the racial disparities of the broader U.S. economy. But that work won't be able to tell us what a place like Detroit would look like with racial parity among its employer businesses. As one U.S. Census brief shows, Detroit is the city with the largest percentage of Black residents in the nation, so its results from the Perry and Romer (2020) exercise will generally look quite different than those for the nation as a whole.

According to the U.S. Census Bureau's population estimates (which we accessed back in November 2020), 79% of the city of Detroit's population in 2017 was Black. Using the same method as Perry and Romer (2020), we describe the existing disparities between Black-owned and non-Black-owned employer businesses in Detroit (see table 2), and then calculate what business ownership would look like if there were proportional representation of Black business owners to the Black population in Detroit, holding the total number of businesses steady (see table 4). According to the ABS data, there were a total of 6,869 employer firms in the city of Detroit, of which 10%, or 716, were Black-owned. If there were a proportional percentage of Black-owned employer firms to the Black population in the city, with the total number of businesses kept static, there would be a total of 5,427 Black-owned employer firms (or 4,711 additional Black-owned employer firms). The ratio of Black-owned employer businesses to the total population for Detroit is 0.13-which is lower than this ratio for the entirety of the U.S. (0.15). So, despite Detroit's history of innovation and its recent economic renaissance after exiting bankruptcy in late 2014, the Motor City is still lagging behind the nation by this metric.

This issue of racial disparity also extends to revenue and job creation, as seen in table 2. The average revenue of Black-owned employer businesses in the city of Detroit is $1,381,707, while for non-Black-owned employer businesses the average revenue is $17,783,531. In Detroit, the average number of jobs per Black-owned employer business is ten, while that number per non-Black-owned employer business is 37. Not only do Black-owned employer businesses have fewer employees than their non-Black-owned counterparts, but those employees earn vastly different pay. The average pay per employee is $29,584 for Black-owned employer businesses in Detroit and $60,787 for non-Black-owned employer businesses. Even in a city with a substantial Black population, these disparities in the economy persist.

Microbusinesses and nonemployer firms

The Annual Business Survey only tracks businesses with employees and at least $1,000 in receipts for the year, which misses the very smallest businesses. As reported in a Politico Magazine article, Ed Egnatios, a program officer at the W. K. Kellogg Foundation, estimates there are around 50,000 minority-owned small businesses in Detroit, when owner-operated and home-based businesses are included.² In her Brookings essay published in July 2020, Pamela Lewis, the director of the New Economy Initiative, states: 'The share of businesses owned by Black residents [in Detroit] is eight times higher than the national average. Ninety percent of these Black-owned businesses are microbusinesses that have between one and three employees.' This means that there are many more businesses (particularly Black-owned ones) than are being captured by the ABS statistics. In general, the smaller the businesses are, the fewer connections to traditional forms of capital and support they have. According to a recent Small Business Credit Survey (SBCS) report by the 12 Federal Reserve Banks, 65% of small businesses with between one and four employees were in weak financial position in September 2020, compared with just 32% of businesses with 50 or more employees. Microbusinesses³ and nonemployer firms are smaller in terms of capacity and have higher failure rates and less access to capital than larger employer firms. There is a prevalence of Black-owned small businesses and microbusinesses in Detroit; so relative to their non-Black counterparts in the city, Black business owners, on the whole, have a greater risk of having to deal with financial stress and even failure during crises such as the Covid-19 health and economic disaster.

In addition to the burdens that Black small business and microbusiness owners face every day, the pandemic brought to light some of the ways that economic aid is not matching their financial needs. The Paycheck Protection Program (PPP), which stopped taking applications on May 31, 2021, was a loan program from the U.S. Small Business Administration (SBA) that was intended to help small businesses keep employees on their payrolls during the Covid-19 crisis. Tax forms, bank statements, and other forms of official documentation were required to apply for and receive a PPP loan. According to a report by New York Fed economists, businesses that received loans typically had 'a prior banking relationship.' They found that small businesses without these ties, specifically Black-owned businesses, did not have the same access to PPP funds and that Black-owned businesses were more likely to be discouraged from applying for funds. A paper published in the Journal of Public Economics finds similar outcomes: Small businesses were less likely to be aware of PPP measures and, therefore, less likely to apply. Later rounds of the SBA's PPP loans had better rates of reaching minority-owned businesses, as noted in a February 2021 SBA press release; but the initial inequality is still something that must be considered when thinking about ways to make capital more accessible to Black-owned and other minority-owned enterprises.

Issues with scaling up

The foremost question we have about small Black-owned businesses in Detroit is this: What are the barriers to scaling up? This question arises from reports from our contacts and others (such as Egnatios and Lewis mentioned earlier) that many very small Black-owned business are operating in Detroit, though very few of them are large enough to be captured by the ABS. This is why the Detroit Branch of the Chicago Fed will soon be conducting the 2021 Detroit Business Experiences and Credit Survey (DBECS) and reporting its results. This survey will gather data on the financing needs of Detroit businesses at different stages of development, which will help us better understand the barriers they face in accessing capital.

According to the SBCS report by the 12 Federal Reserve Banks cited before, 30% of small Black-owned firms across the U.S. were concerned about the availability of credit during the Covid-19 economic crisis above all else, compared with just 12% of small White-owned firms. Many of the barriers to accessing capital-such as a limited credit history and the lack of financial records and traditional banking relationships-existed for Black business owners in Detroit and elsewhere before the pandemic; it is vital that these constraints be addressed as Detroit continues to recover from the pandemic.

Generally speaking, Black-owned businesses in Detroit are smaller in terms of revenue and the number of employees compared with non-Black-owned ones. Given Detroit's concentration of Black-owned microbusinesses, new policies and structures must be implemented to support Black microbusiness owners in establishing traditional banking relationships or other types of relationships that meet their financing needs. In order to encourage economic recovery for Detroit, we must figure out what barriers to growth Black-owned businesses face and how to improve access to financing that will promote growth.

Notes

¹ Andre M. Perry and Carl Romer, 2020, 'To expand the economy, invest in Black businesses,' Brookings, essay, December 31, available online.

² The W. K. Kellogg Foundation and JPMorgan Chase support a fund called the Entrepreneurs of Color (EOC) Fund, administered by the Detroit Development Fund. Funds like this are, in normal times, used to assist minority-owned small businesses start up and get financing.

³ Microbusinesses are generally defined as businesses with fewer than ten employees. They are considered a subset of small businesses.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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