Category: Banking

A fast-growing literature is exposing the relationship between COVID-19 and income inequality. This article analyzes this relationship by documenting the progression of COVID-19 deaths among groups of counties with different levels of average household income and highlighting the role of uneven vaccination rates. Overall, counties with the highest household income averages experienced lower incidences of COVID-19 deaths and were more likely to have adult residents with completed COVID-19 vaccinations than lower-income counties.

Tax-return data for the year 2018 from the Internal Revenue Service (IRS) measure pre-pandemic average county-level household income. There are five groups of counties (quintiles) sorted by income in all the figures below; each of the quintiles has approximately the same total population. The first quintile contains counties with the lowest household income averages, and the fifth quintile contains counties with the highest household income averages. The dataset covers 99% of the U.S. population and 96% of aggregate COVID-19 deaths. Data on county-level COVID-19 deaths in the United States come from the Centers for Disease Control and Prevention (CDC) and start on Jan. 22, 2020. Because relative income among counties changes slowly, the 2018 income data will closely approximate the income data for 2020. The map below shows the geographical distribution of these quintiles.

Quintiles of Income, 2018

SOURCES: IRS and authors’ calculations.

Changing Patterns of COVID-19 Death Inequality during 2020

The figure below shows that at the beginning of the pandemic, the highest-income counties (Quintile 5) rapidly accumulated the most COVID-19 deaths out of the five groups. By October 2020, however, cumulative deaths in the lowest-income counties (Quintile 1) surpassed those of all other quintiles. This trend continued, and by the end of 2020 (the last data point in the figure), the lowest-income quintile of counties experienced 1.35 times the death rate as the highest-income quintile of counties.

Cumulative COVID-19 Deaths by Quintile of County Income per Household: 2020

SOURCES: USAFacts, IRS and authors’ calculations.

What may be the causes for this discrepancy? It is well documented that age is a large risk factor for COVID-19 mortality. In the lowest-income quintile, approximately 17.2% of the population is 65 years of age or older, compared with 15.2% in the highest-income quintile. Given the COVID-19 mortality rate of this age group, this difference in the share of older population could account for approximately one-quarter of the discrepancy in cumulative deaths between the two quintiles. Thus, there must be something else about the quintiles that is also contributing to the gap in deaths.

Differences between the lowest- and highest-income quintiles in the average size of counties may also be important for understanding these early trends. Counties in the lowest-income quintile tend to be smaller; on average, they have 30% of the population size of counties in the highest-income quintile. Income and prices are higher in large cities, which dominate the fifth quintile. On the other hand, the first quintile is dominated by rural areas, which have lower prices and incomes. (See the earlier U.S. map.)

To connect with the evolution in the rate of COVID-19 deaths in the first figure, recall that large cities were hit hard by the first wave of COVID-19 infections because these areas contain major ports and airports and have the most exposure to pathogens from the rest of the world. These cities responded with strict lockdown and mitigation measures, and the rate of COVID-19 deaths began declining early in the summer of 2020.

In contrast, rural areas were hit hardest by the second and third waves of the virus. More restricted access to health care in poor rural areas, among other reasons, contributed to high rates of COVID-19 deaths toward the end of 2020.

A Gap in Vaccinations

By the end of 2020, the United States began rolling out another mitigation tactic: the COVID-19 vaccine. The figure shows that at the beginning of 2021, COVID-19 vaccination rates were similar among the five groups of counties. Recall that only individuals facing the highest risk of contracting COVID-19 or complications from COVID-19 infection received vaccines during this period. On April 19, 2021, vaccines became available to all adults within the United States. The percentage of fully vaccinated adults within each quintile diverged by the end of April, with the differences growing over time. As of Dec. 1, 2021, the highest-income quintile of counties had approximately 70% of adults fully vaccinated, while the lowest-income quintile of counties sat about 20 percentage points lower, with only half of adults fully vaccinated.

The timing of events suggests that differences in vaccination rates come from individual choices. The U.S. Census Household Pulse Survey may be useful for understanding differences in vaccinations because it collected various demographic statistics information about national vaccine hesitancy. As of October 2021, the national hesitancy rate for people with a high school diploma as their highest level of educational attainment was 14.5%, compared with 6.1% for those with a bachelor’s degree or higher. In turn, the link of income with education is significant; for example, the lowest-income group of counties (the first quintile) had only 49% of adults with at least some college education, whereas the highest-income group had 72%. Thus, these data suggest that differences across income quintiles in education and what those differences imply for vaccine hesitancy may help to explain these recent trends in vaccination rates.

Increasing Inequality in Cumulative COVID-19 Deaths

Finally, the next figure shows cumulative COVID-19 deaths beginning in January 2021. In the figure, each quintile starts the year with zero cumulative deaths. Over the year, the lowest-income counties accumulated the most pandemic-related deaths, while the highest-income counties accumulated the least. Note also that the divergence in trends accelerated in August 2021. By Dec. 31, 2021, the lowest-income group had accumulated 2.5 times the rate of COVID-19 deaths compared with those in the highest-income group of counties. These numbers indicate a much stronger correlation between COVID-19 deaths and income in 2021 than during 2020 (2.5 times vs. 1.35 times, respectively).

Final Remarks

The evidence above suggests that income inequality in COVID-19 deaths has emerged primarily during 2021 and had widened by the end of the year. The recent omicron wave of the pandemic has affected regions more uniformly, although the number of deaths were still significantly higher in the poorer regions. Our most recent data, from Feb. 17, has the ratio of Quintile 1 to Quintile 5 deaths during 2022 at 1.8, which is lower than 2021 but higher than 2020.

Endnotes

1. A recent working paper (PDF) by Kartik Athreya, Ryan Mather, José Mustre-del-Río and Juan M. Sánchez documents a positive correlation between household financial distress and exposure to economic shocks, including the COVID-19 pandemic shock.
2. From this CDC table and 2019 U.S. population estimates, we find that COVID-19 has killed 1.4 in 100 people over age 65 and only 0.08 in 100 in the rest of the population. We use these mortality rates to obtain a back-of-the-envelope estimate of the impact of the age structure of income quintiles in COVID-19 deaths. Given that the first quintile has 17.2% of its population over age 65 and the fifth quintile has 15.2%, the death rates per 100,000 cases in the two areas would be 307.0 and 280.6 in Quintiles 1 and 5, respectively. This simple calculation gives a ratio of 1.09—smaller than the 1.35 we find for 2020 and much smaller than the 2.5 corresponding to 2021.
3. See Rural Health: Preventing Chronic Diseases and Promoting Health in Rural Communities at the CDC website.
4. Federal Reserve Bank of New York Senior Economists Rajashri Chakrabarti and Maxim Pinkovskiy and Senior Research Analyst Ruchi Avtar detail the negative relationship between income and comorbidities in a January 2021 blog post. Comorbidities are known to increase severity and worsen outcomes of the infection.
5. “Adults” in this context refers to those who are 25 years and older.

A version of this opinion piece first appeared in the St. Louis Post-Dispatch on Feb. 21, 2022.

History, more than current choices, best explains the racial wealth gap today.

Take the case of J.B. Stradford, a Black entrepreneur, who—unlike others—survived the Tulsa race massacre of 1921, when white mobs razed one of the wealthiest Black communities in the U.S. But his hotel and other properties did not survive. His great-grandson, John W. Rogers Jr. of Ariel Investments, calculates that Stradford’s investments, then valued at $125,000, would be worth over $100 million today.

Stradford and his descendants did not choose to have their wealth obliterated, of course. Yet a harmful assumption persists today that the Black-white wealth gap largely reflects choices, not history.

The narrative goes something like this: Legal discrimination no longer exists, educational opportunities have expanded significantly, and we’ve elected a Black president and vice president—so, absent any barriers, our economic success largely depends on how hard we work and the financial, educational and other choices we make. In this post-racial America, good choices lead to more wealth and success, while bad choices lead to less.

Professors Darrick Hamilton and William A. Darity Jr. forcefully challenged this assumption a few years ago: “The problem with this language,” they observed, “is the implicit notion that the racial wealth gap is a matter of financial literacy, choice, and agency, as opposed to inheritance and structure.” Darity further warned that, “The ultimate implication of this kind of argument is that there’s something inferior about the group that has worse outcomes.”

Historically Shared Experience Constrains Choices

While individual agency and choices always matter, Darity and Hamilton got us wondering: How much of the racial wealth gap is explained by our choices and how much by inheritance, history and structure?

As expected, our St. Louis Fed colleague and economist William R. Emmons and Lowell R. Ricketts, one of this blog post’s co-authors, found that families who, regardless of race, chose to save for retirement, diversify their investments and own a home, for example, have more wealth than those who did not make those choices. However, they also observed that this ignores the fact that the choices themselves were shaped by factors beyond anyone’s control—that each group’s common or historically shared experience overwhelmingly explains the choices they were afforded to make.

For white Americans, those common experiences were widely shared inclusion in major wealth-building policies such as the 1862 Homestead Act (which granted 160 acres of land, mostly west of the Mississippi River, to families willing to work it); the GI Bill of 1944 (which helped returning soldiers go to college, start a business or buy a home); and robust 20th-century policies to promote homeownership. Black Americans, though, were largely excluded from those policies.

Black wealth further suffered from the overturned 1865 promise to some 4 million freed slaves of “40 acres and a mule,” the white trustees’ neglect and mismanagement and the ultimate demise of the Freedman’s Bank in 1874, and the destruction of Black-owned property in race massacres in cities like Tulsa, Wilmington, Dela., and Rosewood, Fla., to name a few.

The Wealth Gap Persists Despite Progress in Other Areas

Today’s Black-white wealth gap—Black families have about 12 cents of wealth for every dollar held by white families—largely reflects, then, the culmination of all those shared historical experiences of exclusion and destruction. And this gap hasn’t changed much in the last generation, despite educational and other progress. Many have argued that, without meaningful economic redress, these embedded and enduring features of the racial wealth gap cannot be overcome.

But the racial wealth gap also reflects the constrained choices many Black Americans and others still face today compared with those of white Americans: having, as research shows, to borrow more for college and graduate school; diminished opportunities to pursue more lucrative STEM degrees; and fewer options to lean on parents in a financial pinch or to inherit their wealth. In this context, the racial wealth gap has been less about making different choices and more about having different choices to make.

Ways to Narrow the Racial Wealth Gap

If the racial wealth gap, then, has been defined by exclusion, closing it should be defined by inclusion.

Experts have mapped many routes to inclusion, starting with closing racial wage and employment gaps, which is foundational for building wealth. Or through a more inclusive federal tax system that currently encourages homeownership and retirement savings for wealthier families, the majority of whom are white. Inclusive financial wellness efforts in workplaces nationwide command broad support, too, as do expanded opportunities to promote Black-owned enterprises. And calls for automatic inclusion in “baby bonds” and state-based 529 college savings and retirement security plans are growing nationwide as well.

Moreover, these policies would grow the U.S. economy, as the San Francisco Fed and others have found. Economic equity and inclusion really can move all of us forward.

The views of the blog post’s authors are their own, and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

“I fear a year from now we’re not going to have a child care industry to talk about,” without increased support for the industry.
“I believe there’s always a brighter side,” with virtual connections that weren’t available before the pandemic.
—Two Fed Listens participants at a February 2022 event

Professionals in select industries and geographic areas across the Eighth Federal Reserve District met with Federal Reserve Bank of St. Louis leaders in February to discuss the pressing economic issues affecting their businesses. Leaders from small businesses, public school districts, child care, labor unions and workforce development organizations shared their views on how these sectors have been adversely impacted by the COVID-19 pandemic and may continue to be affected after the pandemic is declared over. From these conversations, trends emerged that can help inform policymakers about the future path of the U.S. economy and indirectly help influence monetary policy.

How Does Main Street Influence Monetary Policy?

At this Fed Listens event (and at many other similar listening events conducted across the Federal Reserve System), policymakers learned more about what’s going on at a grassroots level in terms of labor availability, supply chain disruptions and economic equity issues, among other concerns. These roundtables are part of a broader, longstanding effort by the St. Louis Fed throughout the year to systematically listen to how its constituents on Main Street experience the economy in real time and to help inform St. Louis Fed President Jim Bullard’s views about where the economy is heading.

Policymakers on the Federal Open Market Committee (FOMC) use the anecdotal feedback gathered in regular discussions such as these roundtables—along with analyses of incoming data that measure the economy’s performance and forecasts of future economic conditions—to help inform deliberations about monetary policy, including decisions on interest rate policy as well as other measures to stimulate or cool the economy.

Participants Noted the Lack of Labor Availability

One pressing economic concern for participants at this Fed Listens event centered around the availability of a skilled labor supply, with the following issues highlighted:

• In many dual-income earner households, one earner has left the workforce because child care is not stable.
• There is a mismatch between skills required for certain jobs and what’s available in the current labor force.
• Teachers and child care workers are quitting because of available at-home education technology jobs.
• The opioid epidemic has significantly contributed to labor shortages in some areas.

What’s the solution to the lack of available labor? Those answers varied widely. Most participants agreed that the waning pandemic could alleviate some immediate pressure on labor supply but the underlying root causes of labor shortages needed to be addressed.

For one, participants believed that focusing attention on the lack of child care centers in rural markets (so-called “child care deserts”) would allow some workers to return to the labor force. Others noted that wages needed to rise to attract new child care workers, while the cost of child care had to be reduced or subsidized by employers and/or the government so that working families could afford to return to work.

Another solution offered by participants centered on expanding the view of the labor supply to include those traditionally outside it.

“I’m talking about our veteran population, our population coming from recovery, from prisons, disabled citizens,” one participant said. “We’ve got to start figuring out a path to jobs and how do we sustain them there.”

Moreover, there was consensus by participants on the need for more workforce education and training to match the technical jobs of today and tomorrow. One participant noted that a longer-term look at U.S. public school curriculums was required to meet the future demands of the labor market, specifically to address the gap in math skills.

Participants Believed Supply Chain Disruptions Will Continue

Another pressing economic concern voiced by participants centered around supply chains.

There was consensus that the government Paycheck Protection Program (PPP) that offered loans at the outset of the pandemic helped as a stopgap measure for small businesses in shoring up liquidity and maintaining operations. However, those small businesses without a traditional banking relationship had trouble securing PPP loans, further shining a spotlight on the needs of those enterprises (often owned by members of minority groups) that operate outside mainstream banking.

In addition, the conversation highlighted that most participants believed supply chain issues will continue in the intermediate-to-longer term. One participant suggested that the trend of outsourced manufacturing was the underlying problem for supply issues—and that public policy and long-term capital needed to align to compete for and bring manufacturing back to more secure or closer locations.

Economic Equity Issues Were Exacerbated by the Pandemic, Participants Noted

“COVID has laid bare the inequities for Black folks in this country around access to health care,” observed one participant.

There was consensus among participants that the most vulnerable in the pandemic tended to be Black families and other minority groups, although white working-class families have struggled, too. Participants identified specific issues as reinforcing economic inequities, including a lack of access to broadband and education and training, while saying that changing norms brought about by the pandemic may offer some benefits on equity.

The lack of high-speed internet access and of the knowledge of how to use it was a barrier for rural communities and for women of color, noted one participant.

Another participant highlighted as a barrier to economic equity the cost and lack of education, particularly the complex financial education on mortgages, budgeting, finance and banking that small-business owners need to compete. The advanced skills and training required for highly skilled jobs was another factor participants cited.

Despite these concerns, participants pointed out there may be a silver lining of the pandemic—that is, the changing norms it is dictating.

“For once in my lifetime, it seems like people need workers more than workers need companies,” said one participant.

The Fed Listens participants noted that this factor could help influence economic equity issues in the following ways:

• Labor unions, traditionally white and male, are actively looking to build diversity in membership.
• Unions have also empowered workers in hospitality and logistics industries to demand more.
• Education programs are being brought to prisons so that those incarcerated can come out with job skills.
• Alternative training programs are now more acceptable and allow workers to get skilled jobs now and build toward degrees later.
• Virtual education allows for more accessibility for all than ever before. This can create a bigger pipeline of those entering the workforce.

The Long-Term Benefit of the Pandemic?

While deep concerns remain for these sectors adversely affected by the pandemic, participants agreed there is hope that the U.S. economy can benefit from sustainably addressing these concerns. Small business can be a growth engine for the U.S. economy, noted several participants, and with new policies tailored to meet the most pressing needs of the community, a more equitable economy can emerge from the ashes of the COVID-19 pandemic.

The U.S. economy is in the throes of a virulent bout of inflation. In January 2022, the consumer price index (CPI) was up 7.5% from a year earlier, the largest increase in nearly 40 years. This inflation surge was unexpected by most forecasters, financial market participants and monetary policymakers. Now, however, cognizant of the dangers posed by high inflation to the health and stability of the U.S. economy, the Federal Open Market Committee (FOMC) is poised to begin raising its policy rate at the conclusion of the March 15-16 meeting. Given that inflation is far above the FOMC’s 2% target, the number and pace of rate hikes by the FOMC will depend importantly on the actual and expected path of the inflation rate this year. Hearteningly, the broader economy and labor markets are performing well: The consensus of most forecasters is that economic conditions will remain strong in 2022. As always, though, there is uncertainty about the near-term outlook—and perhaps more so now than usual given the large inflation shock and recent geopolitical developments in Eastern Europe.

Inflation is High and the Outlook is Uncertain

In February 2021, the Philadelphia Fed’s Survey of Professional Forecasters (SPF) projected that the headline and “core” (excluding food and energy prices) personal consumption expenditures price indexes (PCEPI)—which are the Fed’s preferred measures of inflation—would increase by 2% and 1.8%, respectively, in 2021 (Q4/Q4). Instead, headline inflation measured 5.5% and the core 4.6%. Inflation forecast errors of this magnitude are rare. Now, a year later, the consensus of the SPF is that both the headline and the core PCEPI will increase by 3.1% in 2022 (Q4/Q4).

Headline PCEPI and CPI Have Been Trending Higher

Some important indicators of current and projected inflation suggest there are a few key reasons why inflation will stay above the FOMC’s 2% inflation target in 2022:

• Rising nonlabor input costs. An important measure of input price inflation faced by firms is the producer price index (PPI) for final demand for goods and services, which increased by nearly 10% in January 2022 from a year earlier. Anecdotal reports from recent Beige Books and the financial press indicate that firms have had little difficulty in passing along higher material input costs that have arisen from supply-chain disruptions or material shortages.
• Rising labor costs. Robust demand for goods and services in 2021 has fueled a strong demand for labor. Firms in many industries continue to report a near-record number of unfilled job openings, and the number of individuals quitting their job was near an all-time high. In response, firms have been aggressively raising wages in an effort to fill job openings and retain existing workers to increase sales. In January 2021, average hourly earnings for private-sector workers were up by 5.7% from a year earlier.
• Rising commodity prices. Following the Russian invasion of Ukraine on Feb. 23, spot crude oil prices briefly surpassed $100 per barrel for the first time since August 2014, and other commodity prices jumped sharply. Some energy analysts expect prices to rise further. Crude oil and commodity prices are often a significant driver of higher inflation over the near term, although their impact must eventually wane because prices will not rise indefinitely.
• Rising inflation expectations. Some measures of inflation expectations over the next one to three years are more than double the 2% inflation target. However, various measures of longer-run inflation expectations (5-10 years) have not risen much, if at all, relative to their pre-pandemic level.

A key element of the Fed’s new monetary policy framework is to keep long-run inflation expectations anchored at 2%; a steady rise in longer-run inflation expectations would be troubling. If inflation remains well above the Fed’s 2% inflation target for the second straight year, this could begin to boost longer-run inflation expectations. Fed policymakers would risk an unwelcome erosion in their credibility if such a development occurred.

The Near-Term Outlook for the Economy and Labor Markets Is Good

The pace of economic activity ended 2021 on a strong note, as real gross domestic product (GDP) increased at a nearly 7% annual rate. However, more than two-thirds of this growth stemmed from a surge in business inventory investment. Still, there was good growth in consumer expenditures and exports. A key question going forward is whether firms’ inventory investment was unplanned or whether they ramped up production in anticipation of faster growth in 2022 with the waning of the omicron wave. Some support for the latter view was seen in the January retail sales report, as the nation’s retailers reported that sales of goods jumped by nearly 4%. Currently, though, most forecasters expect a marked slowing in real GDP growth in the first quarter—but a sizable increase in final sales (GDP less inventory investment)—because firms plan to meet existing demand for goods from the previous quarter’s inventory investment bulge.

Labor market performance also finished 2021 on a strong note and began 2022 on an ever stronger note. Nonfarm payroll employment increased by a 467,000 in January—much stronger than anticipated given the expectation that the omicron wave dented hiring in the services-providing sectors. Although the unemployment rate rose by 0.1 percentage point to 4%, this was mostly because of a sizable increase in the labor force, which is a positive development.

In sum, the most probable outcome for 2022 is 3% to 4% real GDP growth, which would be in excess of the U.S. economy’s longer-run potential rate of growth (something around 2% to 2.25%). This development would likely trigger further declines in the unemployment rate, perhaps ending the year at around 3%. If the pandemic fades into the background, there could be a surge in spending on consumer services, which would buoy growth in other areas. But it might also trigger further increase in services price inflation.

---

Devin Werner, a research associate at the Bank, provided research assistance.

Endnotes

1. The personal consumption expenditures price index (PCEPI) is the FOMC’s preferred measure of inflation. January’s headline PCEPI rose 6.1% from a year ago.

The 2022 Budget Speech will be delivered in an environment with more certainty than what we experienced in 2021. While revenue collection may surprise to the upside, expenditure pressures in the form of additional social support, and state-owned enterprises bailouts do threaten to slow down the fiscal recovery. Our Markets Research Team will review the Budget and its impact on the rand, interest rates and growth.

What does the economic justice message in Martin Luther King Jr.’s March 14, 1966, essay in The Nation have to do with this year’s Black History Month theme of Black Health and Wellness? Based on King’s assertion that “jobs are harder to create than voting rolls,” one might initially conclude, “very little,” but in fact his economic message has strong connections to health and wellness.

This blog first discusses how the pre-pandemic employment instability of Black Americans continues to reflect fragility. Second, the blog discusses how the persistent lack of economic security manifests itself in lower health and wellness outcomes. Third, the blog offers several ideas on how to make jobs more secure and thus improve the health and wellness of all, but especially Black Americans.

“Jobs Are Harder to Create Than Voting Rolls”

King cited the following 1960s points to support his claim about the difficulty of creating jobs with security for Black workers.

• Often undercut by layoffs, Black people were hit hardest, especially during tough economic times.
• Black workers were the first fired and the last hired: Declining unemployment rates for the overall population often masked slow gains for Black workers.
• Discrimination made it difficult to achieve job progression and career development, which in turn made it hard to gain seniority.
• Black workers lacked full-time and full-year employment, making income more volatile.
• Black Americans needed employment that feeds, clothes, educates and stabilizes a family.
• Even at low levels of unemployment, Black workers often lacked quality jobs.

Based on these points, King concluded that Black Americans faced an intense level of employment instability, and it reflected the fragility of Black “ambitions and economic foundations.”

King is describing a lack of job security. That lack lessens health and wellness. His measures listed above are both key labor market indicators and important social determinants of health. These show the environments in which people are raised, and the broader set of structures that frame how people live.

King’s Findings in 1966 Are Still Relevant Today

Although economic gains were made during the 1960s and 1970s, it is discouraging how the experiences of Black people in 1966 remain relevant today. Starting in the 1980s, the absolute and relative economic position of Black Americans hit a wall. In the past five recessions, Black jobless rates started higher than white jobless rates and often grew faster.  (See FRED graph below.) Today, Black men’s earnings relative to white men’s are at their 1979 level, and if the disproportionate incarceration of Blacks is accounted for, their status slips to that of 1950.

Regardless of which labor market measure is used, persistent and large racial differences in income, employment, unemployment, earnings and occupation can be seen and remain today. Health analysts call these labor market outcomes “social determinants of health,” and their slight improvement helps to explain why racial disparities in health and wellness outcomes such as obesity, diabetes, hypertension and heart disease have narrowed, yet large gaps remain. For example, according to a 2016 Harvard School of Public Health article, the death rate of asthmatic Black children is 500% higher than the death rate of asthmatic white children. Black adults who have cancer have a lower likelihood of surviving prostate, breast and lung cancer than white adults.

Wealth Is Also an Important Social Determinant of Health

One determinant that King did not talk about was wealth. It is also considered an important social determinant of health, and the Black-white wealth gap has shown little improvement since the 1950s and 1960s and continues today. The typical Black family had about 12 cents per $1 of wealth of the typical white family in 2019. (See graph below.) Even wealthier Black families (in the 82nd percentile) fell short of white medians (the 50th percentile). These wealth differences translate into different health and wellness outcomes.

We Need a New Way Forward for Addressing Racial Inequities

Evidence shows that broad-based economic growth alone may not be effective for narrowing racial economic inequality. Improvement in the relative earnings of young (16 to 24 years of age) Black workers seems to have stalled. Many start their careers with wages lower than their white counterparts.  Large and persistent racial wage gaps exist even among Black and white adults who hold a bachelor’s degree and higher, and occupational segregation between Black and white Americans persists.

Given these setbacks, it may be helpful to shift conversations about proposed solutions from an equality narrative to an equity narrative. The latter focuses on having the resources needed to succeed, as opposed to equal amounts of resources for everyone. Given the nature of today’s economic insecurity, many Black Americans and low-income individuals can benefit from additional resources to overcome the significant challenges that impede their success.

We may also be wise to utilize “structural” concepts of equity instead of “static” equity, that is, approaches and mindsets that not only address current inequity but also acknowledge past inequities, those built on the nation’s historical policies and practices. “Redlining,” which systematically excluded Black Americans from access to homes, credit and insurance, is a perfect example. These deeply-rooted causes of contemporary economic insecurity hinder efforts to achieve equitable outcomes today.

The pandemic increased awareness of opportunities to broaden infrastructure investments beyond bridges, roads and broadband to also include human priorities such as social capital, mental health and access to quality child care. Collectively, these too are social determinants of health, and they are often prerequisites for economic security, health and wellness. They can also be beneficial for the economy in that they raise worker productivity, a key ingredient of economic growth.

The familiar inequities caused by the pandemic highlight the opportunity for new thinking about how to foster an economy where all workers can have the skills to provide lifelong economic security, the flexibility to provide care for their families, opportunities to grow and develop in their work—and where they can be healthy.

Notes and References

1. The source is the author’s calculations using data from the U.S. Bureau of Labor Statistics and the NBER Business Cycle Dating Committee.
2. The source is the author’s analysis using BLS data, an analysis that was presented by the author in a Jan. 13, 2022, speech for the Bureau of Labor Statistics, “Honoring the Life and Work of Martin Luther King Jr.”
3. “Impact of Race/Ethnicity and Social Determinants of Health on Diabetes Outcomes,” published in the April 2016 issue of the American Journal of Medical Sciences and accessed on the National Institutes of Health website.
4. The source is the author’s “Honoring the Life and Work of Martin Luther King Jr.” speech to the U.S. Bureau of Labor Statistics.
5. The source is the author’s calculations using BLS data.

On 23 February, finance minister Enoch Godongwana will deliver his budget speech. He will set out what our financial goals are as a country and how Government plans to get there. But what about your personal goals?

 

While our finance ministry works to come up with a national budget plan, are you working on your personal budget plan?

We are launching our first TikTok hashtag challenge on the 21^st of February 2022. We will be asking the TikTok community/audience what their plans would be if they were the minister of their own finances. What 3 things would you do if you were taking control of your money and declaring yourself a minister of your own wallet?

 

We’d love to know the answer, so get busy on those videos, which you can post with the hashtag #MinisterOfMyWallet.

You might be wondering what we’d suggest when it comes to taking control of your finances. As is always the case with money, there is no easy fix, no get-rich-quick scheme and no way around the hard work that financial planning involves. Taking control of your money involves setting goals, planning meticulously and budgeting carefully.

 

 

 

 

We may not have any simple solutions, but we do have a few tips as well as some tools that can help you become the minister of your finances.

Five tips for basic budgeting

• Gather all the information

Budgeting starts with determining how much money goes into your account each month after tax has been deducted, as well as how much goes out.  

 

Once you have completed step one, you can work out how much money you are left with to spend each month.

 

• Work out what fixed expenses you can cut back on

Examples of your fixed expenses are your rent/bond, insurance, car payments and any debit orders you have set up. Some of these will be absolute necessities, but there may be services you can do without, for example, switching to a cheaper cellphone contract, cancelling insurance on an item you don’t really need or downgrading your internet package.

 

• Work out what flexible expenses you can cut back on

Your flexible expenses are things such as food, entertainment and clothing. Some of these are things that you need, but you also have a choice regarding how much you spend on these items. Work out what you can realistically cut back on each month.

 

Write down everything in as much detail as possible in a spreadsheet or using a budgeting tool. The more records you keep, the more you will be empowered through knowing exactly what’s going on with your finances, what progress you have made and how you can improve.

 

Two tools to help you on your journey towards financial control

 

The WhatMatters app is a tool that helps you plan for your financial future and develop healthier financial habits.

It includes a Create and Build module that prompts you to think about how you and your family are generating income, a Save and Invest module that encourages you to put money away so you can reach your goals, a Live and Enjoy module that helps you live within your means, a Share and Legacy module that helps you understand the importance of managing intergenerational wealth and a Plan and Protect module that helps you and your family prepare for the unexpected.

 

Download the WhatMatters app now for free.

WhatMatters on Google Play

WhatMatters on the App Store

 

The award-winning My360 app gives you a full view of your finances by allowing you to monitor detailed information on your assets and liabilities from one versatile dashboard. You can keep track of everything you own as well as your savings and investments, allowing you to plan for your financial goals. While My360 is powered by Standard Bank, you can use it no matter whom you bank with.  

Download the My360 app now for free.

My360 on Google Play

My 360 on the App Store

 

Both the Great Recession (2007-09) and the COVID-19 recession were large economic crises, but they affected U.S. labor markets quite differently. The Great Recession originated in financial markets, eventually creating negative and highly persistent outcomes such as lower employment and hours worked for almost all types of households in the labor market. On the other hand, the COVID-19 recession occurred due to a global pandemic, which led to partial shutdowns in the economy. Unlike the Great Recession, this recent economic crisis was relatively short-lived, and its negative effects have been disproportionately larger for low-income and less-educated people.

In this article, we contrast the effects of the two crises on U.S. labor markets. Specifically, we focus on the labor market outcomes of dual-earner couples, which are married couples in which both spouses are in the labor force, i.e., either employed or actively searching for a job. Understanding the outcomes for such couples is relevant because, as shown in the next two figures, at the onset of each of these two recessions, the percentage of couples in which both spouses were employed (i.e., dual-employed couples) was around 95% of couples in which both spouses are in the labor force (i.e., dual-earner couples). In the event of a job separation, these households can rely on a single spouse’s earnings, which gives them a safety net relative to single-earner households, in which only one spouse is in the labor force. Nonetheless, a significant decline in the earnings of individuals in these households can reduce their quality of life and aggregate U.S. spending.

To document labor market outcomes for such couples, we used monthly data from the Current Population Survey. We also analyzed outcomes across dual-earner couples with different education levels: college degree, some college, high school (HS) diploma and no diploma, based on the education level of the spouse with more years of schooling. We report quarterly averages to avoid noise in monthly movements.

Employment

The first figure plots the share of dual-employed couples among all dual-earner couples over the Great Recession period.

We highlight two important results. First, the percentage of dual-employed couples among dual-earner couples declined between the second quarter of 2008 and the first quarter of 2010 from 94% to 86%. Importantly, this percentage persistently remained lower than its pre-Great Recession level.

Second, while low-education dual-earner couples faced more negative employment effects, even dual-earner couples with the highest education suffered notable and persistent employment losses during the Great Recession. For instance, between the last quarter of 2007 and first quarter of 2010, the share of dual-earner couples in which both members were employed decreased 5 percentage points for the highest education group (i.e., those with a college degree) and decreased 16 percentage points for the lowest education group (i.e., those with no diploma). In summary, the Great Recession persistently reduced the share of dual-employed couples among all education levels.

The next figure plots the same series during the COVID-19 pandemic.

We highlight two main differences between the episodes. First, the recovery from the COVID-19 recession was much quicker: most rates roughly returned to pre-pandemic levels around six quarters after the recession ended in April 2020, while rates remained diminished even 12 quarters after the Great Recession began in December 2007.

Second, the employment gap between low- and high-education couples increased more significantly in the COVID-19 pandemic. The share of dual-employed couples among dual-earner couples for the highest education group declined 10 percentage points between the fourth quarter of 2019 and the second quarter of 2020, while that of the lowest education group fell 24 percentage points over the same period.

Tracking Hours to Gauge Impact

Tracking the average combined weekly hours worked in these households gives us more insight into the effects of economic downturns among job keepers, i.e., the employed. As we previously mentioned, one advantage of dual-earner couples is that one’s spouse may be able to make up for lost earnings by working additional hours. At least one of the spouses remains employed in most dual-earner couples, even during recessions. Conversely, even if one or both spouses remain employed during an economic downturn, it is possible that those who remain employed are working reduced hours because of adverse economic conditions.

The next figures plot the average hours worked across dual-earner couples during the Great Recession period (the top) and the COVID-19 recession period (the bottom). The former persistently reduced the average hours worked among dual-earner couples, while the COVID-19 crisis produced especially large but transitory effects for the lowest education group.

Specifically, during and immediately after the Great Recession, the average hours worked (black line) decreased by six hours between third quarter of 2008 and third quarter of 2009, moving from 74 hours to 68 hours. By the fourth quarter of 2010, it had recovered only slightly to an average of 70 hours. These negative effects manifested across dual-earner couples with different education levels. Furthermore, the average hours worked remained lower than the pre-Great Recession level even 12 quarters after the start of the Great Recession across all education groups, implying that the negative effects of the Great Recession on hours worked were also highly persistent across different groups.

During the COVID-19 recession, dual-earner couples were working 67 hours in the second quarter of 2020 as opposed to the 75 hours they were working in the preceding quarter. However, this sharp decline in hours was followed by a fast “Nike swoosh” recovery, with hours worked largely returning to pre-pandemic levels by the fourth quarter of 2021. Furthermore, the average hours worked declined more sharply for those in lower education groups. While the average hours worked for couples in the highest education group declined by six hours only (from 76 to 70 hours) from the fourth quarter of 2019 to the second quarter of 2020, they declined by 19 hours for couples in the lowest education group.

Potential Reasons for the Differences between the Recessions

What explains the different behavior of employment and hours worked of married couples in the aggregate and across education groups during these two economic downturns? The COVID-19 pandemic and the resulting economic shutdown mostly affected jobs in the service sector that typically pay lower salaries and hire less-educated individuals, while other sectors were less affected given the possibility of working from home.

For this reason, the negative effects of the COVID-19 recession on employment and hours were especially large for less-educated workers. However, after the economy largely reopened, the rise in demand for services led to a quick rebound in employment and hours worked for these workers. Thus, the negative effects of the COVID-19 recession on the labor market have been short-lived.

On the other hand, the Great Recession caused large disruptions to employers’ balance sheets and consequently affected vacancy creation and hiring persistently across the economy. As a result, the Great Recession caused persistently negative effects on labor markets across different types of workers.

Conclusion

The Great Recession and COVID-19 recession reduced employment and average hours worked of dual-earner couples. The former downturn was characterized by a slow and steady decrease in employment and hours worked with largely persistent effects across different education levels. In the COVID-19 period, however, dual-earner couples experienced a sharp decline in their employment and hours worked at the onset of the pandemic, but both measures rebounded quickly. In addition, the negative effects from both recessions were disproportionately larger for couples with low levels of education—especially in the COVID-19 recession, during which existing gaps in employment and hours worked deepened to a much greater extent than they did in the Great Recession.

Endnotes

1. We removed households from the sample in which at least one spouse is self-employed or in the armed forces.
2. In unreported results, we also measured the percentage of households with at least one spouse employed and found that this measure never dropped below 97% in either economic downturn.

The latest US inflation print may have increased doubts that South Africa can escape most of the inflationary pressures observed in the US. For one, it seems as if the FRA market believes South Africa will not be able to escape these pressures. The FRA market is currently pricing in 250 bps of hikes over the next two years, which, in our view, is consistent with inflation expectations closer to 6% by the end of next year. These inflationary pressures may arrive for South Africa, but our estimates suggest the US is unlikely to be the major source of such inflationary pressures.

When it comes to investing in the stock market, it can be intimidating to navigate all the options and terminology. In this article, we’ll take a closer look at investment portfolios, which are simply a collection of assets such as stocks, bonds, mutual funds, index funds and exchange-traded funds (ETFs). We’ll cover the basics and define the most common terms and investment practices. Keep reading to learn how to build an investment portfolio that meets your needs, risk tolerance, and future goals.

Diversifying Your Investments: Why It Matters

You’ve probably heard about the importance of diversifying your portfolio. This means spreading out your risk by owning a variety of asset classes. For example, your portfolio could have a mix of stocks, bonds, mutual funds, and ETFs. You can also diversify within each asset class by choosing a mix of small and large companies from different industries.

Generally, having a diversified investment portfolio is a reasonable approach to the steady long-term growth of your finances. Next, let’s look at each asset class so you understand your investment options and how each one could contribute to your overall strategy.

What is a stock?

Stocks represent a certain fraction of ownership in a publicly traded company. When you purchase stock in a company, you get to share in the profits, proportionate to the number of shares you own. This payout is called a dividend.

Stocks are primarily bought and sold on the stock exchange. Historically, stocks tend to outperform other types of investments in the long run. However, stocks can also be the most risky type of asset class. To minimize your risk, you can invest in stocks through an index fund, which are inherently diversified, or partner with a professional investment management team. The riskiest strategy you can take is to try to trade stocks by yourself with no prior professional experience. Investing should be a long-term wealth building strategy, not a way to “get rich quick” or “beat the market.”

What is a Bond?

Bonds represent a unit of corporate debt and are also tradable assets. They are typically known for being a less risky investment because they pay a fixed interest rate. The price of bonds is inversely related to interest rates. When rates fall, bond prices rise and vice-versa.

 

Mutual Funds

Mutual funds can be a great option for the everyday investor because they are already diversified. When you invest in a mutual fund, you are investing in an assortment of different securities such as stocks and bonds. This diversification is what makes mutual funds a less risky option than buying individual stocks. You can choose between actively managed mutual funds and passively managed funds, also known as index funds.

Index Funds

Index Funds, also known as Exchange-traded funds (ETFs) are similar to Mutual Funds. The key difference is that index funds and ETFs are not actively managed. Rather, they represent a large group of stocks and you can choose from the various ETFs to find one that matches your investing goals.

For example, you could likely find an ETF that covers a group of tech company stocks or financial company stocks. There are many ETFs that suit different needs and interests, so those are just a few examples.

Why would someone want to go with a passively managed ETF over a Mutual Fund? The main difference is that the cost of management fees tends to be lower for ETFs on average when compared to Mutual Funds.

CDs, Savings Accounts, and Money Market Accounts

As part of your investment portfolio strategy, you should keep some of your money in a more liquid account. Also known as the “immediate bucket,” this is where you keep the next year or two of cash to live off of in retirement. Check out our personal savings account options such as CDs, savings accounts, and Money Market. Any of them would be a safe place to keep your cash bucket while still earning some interest.

 

Consider Your Risk Tolerance

Now that you have a better understanding of the different types of assets available to help you build your investment portfolio, let’s look at your tolerance for risk. This is an important factor you can use to guide your investment decisions.

Conservative, Moderate, or Aggressive

When assessing your risk tolerance, consider the amount of market risk (stock volatility, market swings, economic and political events, or regulatory and interest rate changes) you can tolerate.

Age, investment goals, income, and comfort level all factor into your risk tolerance. For example, younger investors are encouraged to be more aggressive because they still have a lot of time ahead of them to recover from setbacks. On the other hand, investors who are nearing retirement tend to be more conservative. A moderate risk tolerance means you sit in the middle between conservative and aggressive.

General rules of thumb for each risk tolerance include:

• Aggressive: About 80% stocks and 20% bonds.
• Moderate: About half and half between stocks and bonds.
• Conservative: About 20% in stocks and 80% in bonds.

Our Wealth Management Advisors can help you build your investment portfolio!

Union Bank’s investment management services offer a comprehensive set of investment options and provide you with the personal attention necessary to develop a customized portfolio that simplifies your life and maximizes your future financial potential. There are many new and established investment management companies to choose from. How do you know which firm to trust with the future of your most valuable assets? Union Bank’s long history in the community is the reason our Vermont and New Hampshire clients put their trust in us. Choose the investment advisors that are recognized by the people who live in your community. Contact our team today to discuss your financial hopes and goals!

*Unlike traditional bank deposits, non-deposit investments are not insured by the FDIC; are not deposits or other obligations of Union Bank and are not guaranteed by Union Bank; and are subject to investment risks, including possible loss of the principal invested.

Monthly jobs reports show that the level of U.S. employment is gradually recovering. However, the labor force participation rate—the proportion of the working-age population (16 and older) that is employed or looking for a job—remains the lowest since the 1970s. In December 2021, it was 61.9% (down from 63.4% in February 2020) and has remained at similar levels for almost a year and a half.

The recent trend in workers leaving their jobs or the workforce altogether has been dubbed the “Great Resignation.” According to the Job Openings and Labor Turnover Survey of the Bureau of Labor Statistics (BLS), the quit rate—the fraction of employed workers who left their jobs voluntarily—reached an all-time high of 3% in November 2021. Moreover, 6.3 million workers left the labor force in December; this figure was similar, if not slightly higher, throughout 2021.

Trends like these have policymakers wondering where all the workers have gone. In this article, we dive into the data to explain what those who are out of the labor force are doing.

Activities of Those Not in the Labor Force

Our data are aggregated from the monthly individual survey responses of the Current Population Survey (CPS), which is one of the underlying sources of data in the BLS monthly job reports. When respondents are not in the labor force, they are asked to report their primary nonwork activity:

• Retired
• Unable to work
• In school
• Taking care of house/family
• Disabled
• Ill
• Other

The three figures below show the share (six-month moving average) of the non-labor force population that falls into each of the seven activities. The most common activities are retirement, schooling and housework/family care. The overall trends in these three most common activities are quite different, however. The share of retired individuals has been steadily increasing, a consequence of the overall aging population of the U.S., while the proportion in school has been declining. The proportion taking care of home or family had also been declining but then experienced an uptick during the pandemic and now remains well above where it would have been had it kept declining at the same rate.

We now explore further what changes have occurred in the “retirement” and “taking care of house/family” categories. These activities are frequently cited as reasons people have not gone back to work during the pandemic.

Retirement

Has the pandemic spurred more retirement than in previous years? An obvious first place to look is the share of the population that reports being retired. The next figure shows how this has evolved over the last several years. As also pointed out by Miguel Faria-e-Castro’s 2021 Economic Synopses essay, there has been an acceleration in retirements during the pandemic. He estimates that, had the proportion of retired individuals continued to increase at the same pre-pandemic rate, there would be about 2.4 million fewer retirements than there are now.

Do these extra retirements differ from previous retirements? One possibility is that the pandemic induced people to retire at earlier ages, which means that we should see a change in the age composition of new retirees.

The next figure plots the share of new retirees (those who left the labor force to retire in a given month) who are younger than 65. Over the past decade, the fraction of “young” retirees had been on the decline but saw a modest reversal in 2021 back to 2015-16 levels, from 44.5% to 46.7%. This suggests that age may have been a small factor more recently, although pinpointing which retirements would have not occurred in the absence of the pandemic would require a more careful analysis.

Taking Care of House/Family

Next, we turn to home and child care considerations. Early in the pandemic, many people, especially women, were forced to leave their jobs when schools and day care centers were shut down. To what extent did the pandemic produce a persistent shift in the balance between work and child care? The next figure plots the proportion of the population that reports being out of the labor force because of home care/family care. It was on a downward trend until 2020, after which it spiked and has remained high.

Gender Differences in Home Care/Family Care

To further quantify the shift from work to home care/family care, we looked at people leaving the labor force in a given month and then calculated the share of those leaving to “take care of house/family.” The next figure plots this percentage for both men and women.

The different levels of the two series highlight the different tendencies of men and women to enter into home care/family care: Conditional on exiting the labor force, 37% of women go to home care/family care, versus around 16% for men. It turns out that for both genders, this tendency increased during 2020; that is, both genders became more likely to be occupied with home care/family care concerns during the pandemic. Since early 2021, this tendency has been declining again.

As it stood in December 2021, 21.5% of female nonparticipants reported being out for home care and family care reasons, versus only 5.1% of men. These are little changed from the pre-pandemic numbers of 20.8% and 4.2%, respectively, suggesting some limited lingering effects for both genders.

To conclude, our analysis of the out-of-labor-force activities in the CPS reveals that shifts toward retirement and home care/family care have driven the shortfall in labor force participation. This squares well with anecdotal evidence. Our findings also suggest that the shifts are not limited to a certain age range for retirement or a certain gender for home care/family care.

References

 

Endnotes

1. The “not in labor force” survey category is split into “retired,” “unable to work” and “other.” The people who report “other” are asked a follow-up question with more options. These encompass the latter six options: “in school,” “taking care of house/family,” “disabled,” “ill,” “other” or “not in universe.”
2. Age 16 and older.

The second cohort of matriculants who were beneficiaries of the Foundation’s High School Scholarship Programme which was formed in partnership with the Allan Gray Orbis Foundation has achieved successful passes in the 2021 IEB and NSC exams. The scholars achieved a 92% bachelor’s pass rate and obtained a total of 19 distinctions.

 

The 2021 matric class of 8 females and 4 males, received full scholarships for their educational expenses for 5 years from 2017 to 2021. These scholars were part of the Foundation’s High School Scholarship Programme which is aimed at providing learners from underprivileged communities exceptional high school educational opportunities from some of the country’s top achieving partner schools, such as St Stithians College, St Albans College, Curro Serengeti and King Edward VII, amongst others.

 

With these outstanding results, the matriculation graduates have been granted admission to further their studies at the University of Cape Town, Rhodes University, the University of Pretoria, and the Swiss Hotel School in Gauteng. This has opened doors for them to obtain tertiary qualifications and to become contributing members in their chosen professional fields and communities.

 

 

 

 

“We are extremely proud and overwhelmed to see this group of scholars excel academically despite the challenges they have faced. Their resilience and tenacity have reaped rewards and enabled them to access opportunities for their future. The Foundation is delighted to have been part of their schooling journey,” says Zanele Twala – CEO, of Standard Bank Tutuwa Community Foundation.

 

The Foundation was formed in 2016 with the objective of uplifting communities in South Africa through economic development and alleviation of poverty. In partnerships with government, private sector funders and academia, the Foundation supports young people to access high-quality education from their earliest years in ECD to schooling and post-schooling to enable them to develop into qualified, skilled professionals with full participation in the country’s economic growth.

 

Through its scholarship programme, the Foundation is delivering access to quality high school education to selected youth, and unlocking their entrepreneurial and leadership talents. . The Foundation has extended the reach of the Allan Gray Orbis Foundation High School Scholarship Programme, aimed at identifying and nurturing academic and entrepreneurial talent in deserving youth, such as Oratile Kekane and Lerato Mongaula.  The former Foundation beneficiaries will be pursuing Bachelor of Commerce degrees at the University of Cape Town and Rhodes University respectively. An aspiring lawyer, Nomvuzo Nkwanyana, will be heading to the University of Pretoria to commence a Bachelor of Law degree. Alicia Khumalo who is vocal about her passion to enhance the lives of South Africans has opted to study Social Sciences at Rhodes University.  Lindelwe Shabangu, who has a flair for hospitality, has chosen to study for a Bachelor of Hospitality degree as the Swiss Hotel School in Gauteng.

 

Speaking with joy, Twala says, “We wish all the matric graduates well in the journeys ahead. We are confident that they will succeed in their chosen fields and become leaders, pioneers and change-makers.”

Pandemic-related closures of schools and child care centers have reignited discussions among economists and policymakers about the caregiving economy and its outsized importance on the labor market participation of parents and caregivers. In 2019, about 1 in 10 full-time workers had a child under the age of 5 who required caregiving—either because their spouse also worked full-time, or because there was no spouse at home.

While many young children spend time in multiple child care settings—with grandparents, older siblings or other relatives—about half spend at least some time in a licensed child care facility. Indeed, we have seen this during the pandemic: As parents pulled their children out of child care for fear of COVID-19 exposure, shuttered businesses allowed parents to stay home and child care centers closed across the country, parents disproportionately left the labor force.

The Child Care Sector: An Overview

Despite its downstream significance on parents’ participation in the labor market, the child care industry’s immediate imprint on the U.S. economy is small. In 2019, the gross output from child day care services was $63.8 billion—0.3% of gross domestic product (GDP) that year. It employed 920,000 people, 0.6% of all workers. These fractions have shrunk in the wake of the pandemic, as service sector jobs with a high degree of in-person contact have been disproportionately impacted by the pandemic.

Worker Wages and Consumer Costs

Despite—or, perhaps, because of—the importance of labor in the child care industry, child care workers earn significantly less than the average worker. In 2019, the average child care center worker wage was $13.72 per hour—while the average wage across all occupations was $25.72 per hour. This discrepancy may be due in part to differences in worker training and requirements; the share of child care workers with a college degree is relatively lower than that for all workers (27% versus 36%, respectively). There is also likely significant pressure to keep wages low and care affordable since the industry is labor-intensive.

For those readers paying for child care, these low wages might come as a surprise, given how expensive child care is from the customer’s perspective. Using wage data and some basic assumptions about the industry, one can see how a low-wage sector can produce a high-cost service. Our estimates indicate that the average cost of child care, using 2019 wage data, was approximately $9,000 per year. (Appendix tables summarize this cost calculation.) While staff wages are the primary driver of overall costs, child-to-teacher ratios—which increase with child age—are the key driver of cost differences between age groups; we estimate that the cost of providing care for an infant is twice that of providing care for a preschool-age child.

Economic Decision Facing Working Parents

Based on our calculation, child care costs about 14% of median household income. The relatively high cost of child care (or the lack of affordable child care) is often cited as a factor keeping parents (or grandparents) out of the labor force; a couple may decide it is more affordable for one member to stay home and provide child care. Such a decision can affect the stay-at-home parent’s lifetime earnings beyond the immediate forfeited income, since individuals out of the labor force for long periods can find it difficult to maintain and build the job skills necessary to reenter the labor force and receive salaries equivalent to what they would have been, had they not left.

Because women tend to assume these caregiving responsibilities, this decision is one factor contributing to the gender pay gap.

A Closer Look at the Eighth District

Economic data on the child care industry in the Eighth District states reflect many of the national dynamics resulting from the pandemic. The industry experienced steep employment losses during the initial months of the pandemic, followed by an ongoing, incomplete recovery. Most District states fared slightly better than the national average during the initial shutdown—with the notable exception of Kentucky, which saw employment of child care workers drop by over half. Child care employment in the District has recovered faster than the national average, with Arkansas and Mississippi more than fully recovered, but other states still face considerable shortfalls.

Wages in the District’s child care sector vary considerably across states; given the relatively low wages for these workers, it is likely that differences in state minimum wages are influencing and will continue to influence the rate of growth and these differentials. In many District states, child care workers earn about half the average wage for all occupations. While these numbers may appear close at first glance, Kentucky has a much smaller gap (58.2%), almost 10 percentage points higher than Mississippi (48.5%).

Child Care Industry Outlook

Data from the Bureau of Labor Statistics also show that the cost of child care has been rising much faster than overall prices. Since 2000, the consumer price index (CPI) has increased at an average annual rate of 2.3%, whereas the CPI for day care and preschool has increased an at average annual rate of 3.9%. Surprisingly, hourly earnings growth of child care workers has increased at about the same rate as that for other nonsupervisory employees—around 2.9%. Because the price of child care has increased faster than wages, it’s likely other demand-side factors may be leading faster price growth for child care services. For example, more households with two people working full-time and higher-educated and higher-income families are now more likely to have children. Compounding these historical pressures, the COVID-19 pandemic has led to sudden wage growth for child care workers and centers looking to rebuild lost capacity and retain workers. As of October 2021, average hourly earnings for child care workers had risen to $16.44, up 10.4% from one year ago—on top of already above-average wage growth of 4.3% between September 2019 and September 2020, and much stronger than the 5.8% wage growth for all nonsupervisory employees over the same period.

Lasting Impact from the Pandemic?

These pandemic effects on the sector might linger for some time. As the labor market recovers and parents seek ways to get back to work, a decline in child care capacity, combined with higher wages, could continue to push up the cost of care in the short run. Expanded federal aid to families may ease the burden of child care costs, but more income for families with children could just increase demand—and thus, to some extent, prices—until supply catches up.

Expanded parental leave policies by the private sector and some states could reduce the demand for infant care, the most expensive type of care for centers to provide. Remote work could also provide some flexibility to parents seeking more-informal or mixed child care arrangements, but working from home while also providing child care is far from an ideal long-term solution for many households. Expanded universal pre-K programs are also being considered to ease the financial burden on families. On one hand, expanded pre-K enrollment in child care centers could offset some high-cost infant care; on the other hand, competition from elementary schools could reduce pre-K enrollment at child care centers and increase the cost of providing care to infants and toddlers.

While much remains uncertain about the future of the child care industry, policy suggestions like these are important to consider as the industry—unassuming and important as it is—continues to change with the pandemic and population demographics.

Appendix

Endnotes

1. While not discussed in this essay, the caregiving economy would also include elder care at nursing homes or in-home care, which has a similar economic structure and faces similar challenges as the child care industry.
2. Sources: Census Bureau, IPUMS, authors’ calculations. This includes 9.7 million parents whose spouses work full-time (7.6% of full-time workers) and 2.3 million full-time single parents (1.8% of full-time workers).
3. Source: Center for American Progress. The center, analyzing U.S. census data, found that 47% of children under 5 spend time in licensed child care and 24% spend time in unlicensed nonrelative care.
4. See, for example, the On the Economy blog posts “COVID-19 and the Great Recession: Market Hours and Home Production across American Households” and “Family Needs Affect U.S. Labor Participation of Prime-Age Workers.”
5. Gross output includes both final and intermediate sales; since intermediate sales are excluded from total GDP, this comparison can be considered an “upper bound” estimate of size in GDP terms.
6. Median wages—sometimes preferred as a measure of typical workers because they are less affected by extremely high-wage outliers—show a similar story: The median child care wage was $12.80, whereas the median wage across all industries was $19.14.
7. As a comparison, the U.S. Department of Education reports that salaries and employee benefits at public elementary and secondary schools in 2017-18 accounted for 56% and 24% of expenditures, respectively.
8. This estimate is similar to other estimates; for example, a 2009 BLS report found that families with both parents working spent $6,864 on child care in 2009, which is $8,940 in 2019 after adjusting for child care inflation. The nonprofit ChildCare Aware of America calculated families spent $9,200 to $9,600 per child on child care in 2019. See “Picking Up the Pieces: Building a Better Child Care System Post COVID-19,” ChildCare Aware of America.
9. For more information, see “Gender Wage Gap May Be Much Smaller Than Most Think,” St. Louis Fed.
10. Because of data limitations here and elsewhere, we analyze statewide data despite the Eighth Federal Reserve District containing only a portion of several states.
11. For instance, see Jessica H. Brown’s 2019 working paper (PDF). This is a particular concern if elementary schools begin to offer preschool care but not infant or toddler care; existing day care providers frequently use the former to subsidize the latter, since the infant care is more labor-intensive (and, thus, costly). If day care centers are excluded from universal pre-K or have to compete with elementary schools for preschoolers, they would likely have to raise prices on infant or toddler care as a consequence. Here, policy specifics matter significantly. If most existing child care centers are allowed to receive universal pre-K funds or the programs are designed to complement existing child care providers, the substitution or competition effect may be small enough to not counteract a general increase in demand from families. However, looser inclusion requirements for universal pre-K to include nonlicensed child care providers could run into other issues.

Entrepreneurship helps lift individuals and communities out of poverty and improve the overall economy. New businesses often create jobs and improve productivity, and they can facilitate social mobility by increasing an entrepreneur’s wealth.

However, entrepreneurship is not found equally across racial groups; Black individuals are much less likely to be entrepreneurs than their white counterparts. Part of the explanation is that for centuries, Black Americans were prevented from becoming business owners through violence as well as racist regulations and unofficial rules. In this article, we focus on economic mechanisms that explain the racial gap in entrepreneurship.

The Entrepreneurship Gap Defined

Our data consist of Black and white individuals from the Panel Study of Income Dynamics (PSID), which collects information on demographic characteristics, income, employment and wealth. We defined entrepreneurs as those in the survey who reported being exclusively self-employed. We restricted our analysis to people between ages 25 and 58 to exclude those who were still pursuing their education and those who retired early. We present the analysis separately for men and women.

While 15% of white men in our sample were self-employed, only 6% of Black men in the same age range were, which represents a 150% difference. This gap is not uniform over the life cycle, however. The figure below displays the proportion of white and Black men who declared themselves in the PSID to be exclusively self-employed.

While white men were consistently more likely to be self-employed at all ages, the racial gap widened with age. At age 25, white men were about 3.3 percentage points more likely to be self-employed than Black men; by age 58, this gap had widened to 12.1 percentage points, with 18.9% and 6.8% of white and Black men, respectively, being self-employed.

A similar trend is seen for women, in which 2.7% of Black women in our sample were self-employed, compared with 6.2% of white women, which represents a 130% difference. The second figure below shows the proportion of white and Black women who identified themselves in the PSID as being self-employed.

Overall, women in the PSID were less likely to be self-employed at all ages than their male counterparts. At age 25, white women were only 0.6 percentage points more likely to be entrepreneurs than Black women of the same age. However, the female entrepreneurship gap widened quickly and considerably—by the time they were 35, white women were 4.2 percentage points more likely to be self-employed. At the end of their working-age years, 7.2% of white women were entrepreneurs compared with 3.0% of Black women.

Possible Causes of the Entrepreneurship Gap

The racial gap in entrepreneurship stems from many structural and individual barriers—differences in wealth, educational disparities, borrowing constraints and discrimination in many forms. We focused on economic mechanisms, since those are the ones we can measure in our data and that are often fixable with targeted policy responses.

Our sample reflects a well-documented fact: Black people possess lower wealth than white individuals at all stages of the lifecycle. For instance, 30% of Black households between the ages of 25 and 58 had zero or negative wealth compared with 13.8% for whites. Lower wealth makes starting a business more difficult and hurts a Black entrepreneur’s ability to obtain financing.

However, not all financing challenges stem from differences in wealth or creditworthiness. The 2021 Small Business Credit Survey shows that even among firms with good credit scores, Black-owned firms were half as likely as white-owned firms to secure the financing they sought. These financial barriers make it more difficult for Black individuals to start and scale up their businesses, compromising the profitability of their enterprises and raising the rate at which they close.

Individual characteristics, education and labor market experience also play a role in entrepreneurship. For decades, literature on labor economics has shown that education and job experience raise individual earnings. The same holds for self-employment income, suggesting that human capital is likely to influence the profitability of business ideas. In our sample, only 14% of Black individuals ages 25 to 58 years had a college education or higher, compared with 34% of white individuals, which further widened the gap in terms of job opportunities. Moreover, close to one-fifth of Black men were unemployed between the ages of 25 and 58, hindering their ability to accumulate skills and job experience. This gap in education and employment experience can lead to fewer Black entrepreneurs and higher closure rates of Black-owned businesses.

Policy Analysis: How to Help Close the Gap

Recent research by economists Barton H. Hamilton, Andrés Hincapié, Prasanthi Ramakrishnan and Siddhartha Sanghi present two key results regarding racial differences in self-employment in a sample of adult men.^, Using a dynamic model of entrepreneurship, they show that the return on each dollar invested for Black entrepreneurs was lower, and that while borrowing constraints appeared to be similar for Black- and white-owned businesses, Black businesses were particularly constrained due to lower wealth. Focusing on these results, the authors explored several potential avenues to help close the Black entrepreneurship gap.

What would the level of Black entrepreneurship be if these entrepreneurs had the same return on each dollar invested in their businesses as whites? The authors found that equalizing business returns would close 97% of the gap between Black and white men, in terms of self-employment rates. Of course, closing the gap in business return on investment is not simple. Movements such as #ShopBlack, as well as National Black Business Month, encourage demand for Black-owned businesses. Mentoring has often been shown to be a key factor in helping develop a business and ensuring its profitability.

In the past few years, business accelerators have provided new entrepreneurs with mentoring from seasoned CEOs and have helped in securing funding. Initiatives like the Black Business Accelerator by Amazon might help in providing these services to Black entrepreneurs. Preventing discrimination in the loan market and building better relationships between the Black community and banks also would help ease the barriers for Black entrepreneurs.

As mentioned earlier, the gaps in human capital suggested by gaps in education and labor market experience can constitute a barrier for Black entrepreneurship. What would be the impact on labor market choices if Black men had the same level of human capital as white men? The authors found a net decline in unemployment caused by a rise in paid employment of 9 percentage points, with no rise in self-employment. This increase in paid employment revealed that, given low returns in the self-employment sector, highly educated and highly experienced Black would-be entrepreneurs are better off by staying in paid employment. Higher participation in paid employment could lead to higher rates of self-employment in the long term, provided some of the human capital and wealth can be used in future businesses or transferred to future generations.

Exploring the various economic mechanisms behind the Black-white entrepreneurship gap is a first step in providing a roadmap for policymakers interested in closing it. Removing the barriers for Black entrepreneurs, while potentially difficult to implement, would encourage Black entrepreneurs and could have far-reaching consequences on inequality, social mobility, job creation and economic output. More work is needed on the gender gap in self-employment to better understand barriers related to female labor force participation, some of which is being undertaken by the same authors.

Endnotes

1. See Fritsch (2008).
2. See Quadrini (1999) and Cagetti and DeNardi (2006).
3. See Albright et al. (2020).
4. Expanding the age range to 18 to 60 years did not change the gap: 14.4% of white men were self-employed compared with 5.7% of Black men, resulting in a 150% difference.
5. We used PSID data for the years 1968 to 2015 (yearly from 1968 to 1997 and biennially after).
6. See Page 28 of the Small Business Credit Survey, 2021 Report on Firms Owned by People of Color.
7. See Green (2021).
8. See Katz and Murphy (1992) and Mincer (1974).
9. See Hincapié (2020).
10. Incorporating women, in addition to men, and their labor supply decisions would imply that both fertility and marriage decisions will need to be modeled rigorously (Killingsworth and Heckman, 1986).
11. See Hamilton et al. (2021).
12. See Blake-Beard et al. (2006) for an analysis of race and mentoring.
13. See Hincapié (2020).

References

• Albright, Alex; Cook, Jeremy A.; Feigenbaum, James A.; Kincaid, Laura; Long, Jason; and Nunn, Nathan. “After the Burning: The Economic Effects of the 1921 Tulsa Race Massacre,” National Bureau of Economic Research, Working paper No. 28985, 2021.
  Audretsch, D. B. “The Dynamic Role of Small Firms: Evidence from the U.S.” Small Business Economics, 2002, Vol. 18, pp. 13-40.
• Blake-Beard, S.; Murrell, A. J.; and Thomas, D. A. “Unfinished Business: The Impact of Race on Understanding Mentoring Relationships.” Harvard Business School, Working Paper, No. 06-060, 2006.
• Cagetti, M.; and De Nardi, M. “Entrepreneurship, Frictions, and Wealth.” Journal of Political Economy, 2006, Vol. 114, No. 5, pp. 835-70.
• Fairlie, R.W. “Racial Inequality in Business Ownership and Income.” Oxford Review of Economic Policy, 2018, Vol. 34, No. 4, pp. 597-614.
• Fritsch, M. “How Does New Business Formation Affect Regional Development? Introduction to the Special Issue.” Small Business Economics, 2008. Vol. 30, pp. 1-14.
• Green, D. “Why Black-Owned Businesses Are Struggling to Stay Afloat.” CNBC, 2021.
• Halek, M.; and Eisenhauer, J. G. “Demography of Risk Aversion.” Journal of Risk and Insurance, 2001, Vol. 68, No. 1, pp. 1-24.
• Hamilton B.H.; Hincapié, A.; Ramakrishnan, P.; and Sanghi, S., “Entrepreneurship in Black and White,” Working Paper, 2021.
• Hincapié, A. “Entrepreneurship Over the Life Cycle: Where Are the Young Entrepreneurs?” International Economic Review, 2020, Vol. 61, No. 2, pp. 617-81.
• Hvide, H. K.; and Panos, G. A. “Risk Tolerance and Entrepreneurship.” IZA Discussion Paper No. 7206, 2013.
• Katz, L.F.; and Murphy, K.M. “Changes in Relative Wages, 1963–1987: Supply and Demand Factors.” The Quarterly Journal of Economics, 1992, Vol. 107, No. 1, pp. 35-78.
• Killingsworth, Mark R.; and Heckman, James J. “Female Labor Supply: A Survey.” Handbook of Labor Economics, 1986, Vol. pp. 103-204.
• Mincer, J. Schooling, Experience, and Earnings (Human Behavior and Social Institutions), National Bureau of Economic Research, 1974.
• Quadrini, V. “The Importance of Entrepreneurship for Wealth Concentration and Mobility.” Review of Income and Wealth, 1999, Vol. 45, No. 1, pp. 1-19.

As we come out of Dezemba and take off the rose-coloured glasses, we see January with much needed clarity. The new year can signify a fresh start, new opportunities and promises for many, but we also know that it can be an anxiety- and uncertainty-prone time that often also results in increased mental health challenges under financial pressure. Many factors can contribute to this, e.g. looming matric results that have, in the past, caused anxiety amongst teenagers who may not have supportive families and access to adequate mental health facilities. 

​

There is a lot to be grateful for still, so risk optimism!

 

 

​

To realise a joy-filled 2022, free of financial, mental and health worries, we have to make changes, and this may require us to change ourselves because how we get into sticky and undesirable situations is not how we are going to get out of them, but where do we even start, and how can we also extend help to others? Through information. The answer lies in knowing exactly where you are.   

​

Take stock:

​

How often do you ask yourself how you are really doing? There is no better time than at the beginning of a new year to pat yourself on the back for how far you have come and reflect on how you can influence and manifest a greater and more fulfilling next phase.

​

• First up, know your money post Dezemba​

It is Standard Bank’s hope that the #FinanceFitSA tips over the summer period have assisted you in remaining Januworry free. Start by accurately assessing your financial status; this exercise alone can be daunting as you confront your financial habits, but it is an important step that must be undertaken with kindness towards self. It will alleviate anxiety too, so ask yourself simple questions such as:

​

• Did I stick to my budget in December? ​
• If not, what is the difference? ​
• With the balance in my bank account right now, will I realistically afford the remaining monthly expenses?​
• If you are a parent, what financial commitment is needed towards back-to-school needs?​
• Second, and just as fundamental, ‘are the kids alright?’​

As you know, the bundles of joy in your life can come with their own bundles of expenses. How are you doing? There’s stationery, orientation caps etc. It’s a lot, but you have planned well, and it’s time to reap the rewards of your savings. ​

 

Often parents get bogged down with survival mode and taking care of ‘basics’ that we may forget that we are raising real humans. The new year can be filled with all kinds of pressures for growing children. While adults make logical decisions to move house, move cities, change schools etc, we may forget that experience allows us to adjust to change with ease; it can feel like the whole world has been turned upside down by a simple change for a teenager. Making new friends, changing uniform and even new hair rules are a big deal for them. 

​

Check in with your children, talk them through your decisions and make an effort to create excitement around change. It is important that they feel considered and safe. Here are suggested questions and discussion points when communicating change to your children:

​

• Communicate early. ​
• Emphasise their importance. ‘We’ve/I’ve thought about how this will impact you…’​
• How do you feel about this?​
• What do you think? ​
• How can I help you adjust to the change? ​

 

More than 700k South African children wrote their final matric exams in December. With the much-anticipated results, it is the job of the parents and support structures to support the matriculants regardless of results. Creating an environment conducive to happy children builds a healthier future nation. Importantly, we need to keep assessing our readiness for them to start their post basic-education career. Standard Bank has student financial aid tools to assist you in this regard.

​

• Third, and lastly, how is your health and the health of your family?​

Did you overdo it in December? Don’t be too hard on yourself; exercise remains a way for us to see how very cable our bodies are to do extraordinary things. Be thankful for a healthy body and do better. 

​

Start with facts, whether it is getting on that scale or using your favourite pair of jeans to assess where you are. It is true that many people neglect their new year’s resolutions by March or even earlier, but it is equally true and proven to work for a lot more people. We encourage you to use this fresh start to write down new fitness goals for yourself, and you can do it with family and/or friends. Accountability buddies in habit building go a long way. 

​

January can indeed be all a medley of experiences and feelings, and awareness of your financial, mental and physical wellness can be catalytic to an amazing 2022.

​

#ItCanBe​

Today, the provision of banking services is more competitive than ever, and financial technology (fintech) has turbocharged this trend. Fintech refers to the software and applications that facilitate financial transactions on computers, tablets and smartphones.

Fintech is used by traditional financial institutions—commercial banks, thrifts and credit unions—to provide some services. But these institutions face stiff competition by nonbank fintech firms. Some fintech companies specialize in one product or service or target a very narrow customer base, while others offer a wide array of products to a range of customers. Several have sought to become more like banks, either obtaining bank or bank-like charters.

Traditional financial institutions are not standing still. Technological innovations like online and mobile banking have become mainstream, and some banks are increasing their digital footprint by launching online branches or internet divisions. The various models fintech firms and traditional financial institutions are using to pair up or directly compete with each other are described below.

Fintech Ascendent

Whether teaming up with existing financial institutions or going it alone, fintech firms are rapidly gaining market share in several areas formerly dominated by financial institutions alone, such as payments and consumer loans. In 2013, fintech companies accounted for 5% of the personal loan market, according to Transunion. By 2018, fintech firms had eclipsed banks with a 38% share of a growing market. Banks’ share of personal loans fell from 40% to 28% over the same period, while credit unions’ share declined 10 percentage points to 21%.

Most fintech firms are not—and do not seek to be—full-service financial institutions. They do not meet the definition of a bank—an institution that both takes deposits and makes loans—and they do not have a banking charter, or license. Fintech firms typically market their narrow range of products to specific market segments such as students, small-business owners and freelancers. Some specifically seek to serve the under- and unbanked, who may not want or need a bank to meet some objective, such as savings, person-to-person payments and small-dollar loans. These firms frequently partner with traditional financial institutions using a variety of models that provide benefits for both providers. Chime, Dave and MoneyLion are among the industry’s leaders in transactions volume and number of users.

Other fintech firms have modeled themselves more like banks, with some seeking bank or bank-like charters to offer a suite of financial services. This trend has prompted some concern about unequal regulation and any resulting competitive advantages nonbank firms might gain. This is especially true of very large and dominant companies like Walmart, which filed a trademark application in March 2021 for a venture called “Hazel” that the company says could offer services such as credit card issuance, financial portfolio analysis and consulting, credit and debit card transaction processing, mobile payments and virtual currency transaction processing services. Walgreens has also made plans to get into banking by partnering with fintech firm InComm Payments. These retail giants are of particular concern to traditional bankers because of their strong brand recognition, widespread locations and heavy foot traffic.

Fintech firms that opt to obtain a banking license are called challenger banks; they are chartered, regulated financial institutions with brick-and-mortar locations and fintech-based services. Because challenger banks have bank charters, they can offer customers traditional banking services such as credit cards and mortgages, as well as those available through apps.

Other advantages of a bank charter include access to the Federal Reserve’s discount window and direct access to its payments system. But with those benefits comes more stringent oversight by federal or state banking supervisors and consolidated supervision by the Federal Reserve if the new bank is part of a bank holding company. One of the best-known challenger banks is Varo, which obtained a national bank charter in the summer of 2020.

Alternative Charters

A few fintech companies have sought and obtained industrial loan company (ILC) charters. ILCs are state-chartered financial institutions that have typically specialized in financing the products of a corporate partner, like an auto company. In exchange for their charters and access to the federal safety net—including federal deposit insurance, the Federal Reserve discount window and the payments system—ILCs must comply with federal safety and soundness and consumer protection laws that apply generally to institutions insured by the Federal Deposit Insurance Corp. (FDIC).

ILC parent companies that are nonfinancial in nature are not supervised by the Federal Reserve. This feature, among others, has made ILCs controversial, and the FDIC imposed a moratorium on new deposit insurance applications between 2006 and 2008, when Walmart and Home Depot both sought them. Another three-year moratorium was imposed in the Dodd-Frank Act of 2010.

In the past several years, a number of fintech firms have expressed interest in obtaining ILC charters, and the FDIC has approved deposit insurance applications for Square, a payments service provider, and Nelnet, an originator and servicer of student and other consumer loans. Several applications remain in the pipeline.

Another potential way for fintech companies to offer banking services without partnering with a bank or obtaining a banking charter is the special-purpose bank charter. In 2018 and again in 2020, the Office of the Comptroller of the Currency (OCC) announced fintech firms could apply for special-purpose national bank charters; the charter proposed in 2018 was geared toward lenders, while the 2020 version was targeted to payment companies. The authority of the OCC to issue these charters has been challenged, and cases are winding their way through the court system. The Federal Reserve is evaluating guidelines that would permit special-purpose chartered institutions to open accounts and access payment services at the Fed.

Banks Respond

The technological developments that spawned fintech, such as big data and artificial intelligence, have also greatly benefited traditional financial institutions, regardless of whether they have a contractual relationship with a fintech firm. Innovation has launched new products, spurred efficiency and lowered costs for everyone.

One such development is the so-called “cyber branch.” Cyber branches, unlike their brick-and-mortar counterparts, do not have physical locations; all transactions are conducted online or over the phone. And while they are small in number now, their ranks are bound to grow as banks look to cut costs and reach new customers in a more competitive financial services landscape.

Although the number of brick-and-mortar branches peaked near 99,400 in 2009, the number of cyber branches has more or less risen steadily since the late 1990s. According to the FDIC, branches classified as “full service, cyber offices” increased from nine in 1997 to 190 in 2020. They now account for more than 4% of total deposits, while only accounting for 0.2% of the nation’s 85,000 total bank branches. On average, cyber branches are larger than their physical counterparts.

In 2020, the average cyber branch had $3.5 billion in deposits compared with $176 million for noncyber branches. Banks with the largest cyber branches are household names: Charles Schwab, Ally Bank, USAA Federal Savings Bank and E-Trade. But most cyber branches are relatively small, with median deposits of $11 million in 2020.

Some banks have used their cyber branches to launch separately branded online banking (SBOB) divisions. These divisions or subsidiaries have different names—and web addresses—than their head offices. They not only permit banks to expand their customer bases beyond the physical locations of their head offices and branches but also can serve as forums to audition or highlight particular deposit, loan or investment products and services or draw in different types of customers.

Approximately 40 U.S. banks of all sizes had operating SBOB divisions as of June 2019. The average asset size of their parent banks was $56 billion, but nearly a dozen had assets of less than $1 billion. Some offer a full suite of banking products, while others specialize in products such as vacation home loans or health spending accounts. Several cater to specific types of customers such as physicians or universities.

One of the more colorful examples of an SBOB is Redneck Bank, the digital division of Oklahoma’s All America Bank. Redneck’s website announces that not only is it a real bank, but it’s a bank “where bankin’s funner!” Since its 2008 launch, Redneck has offered high-yielding basic bank accounts along with humor and has garnered depositors across the country. The community bank’s owners moved forward with the low-cost concept, knowing they could shutter the Redneck brand if it flopped without damaging the parent bank’s reputation. That same calculus is no doubt behind the decisions of other bankers who have gone the SBOB route.

Where the Digital Future Is Heading

The growth of fintech means consumers and businesses with ready access to the internet have more choices than ever for deciding where, when and with whom they will bank. For many customers, especially younger ones, activities associated with banking—deposits, loans, payments and investments—will likely be split among many different types of bank and nonbank firms. Some may never enter a bank lobby or speak to a banker.

Banks of all sizes are teaming up with fintech partners or experimenting with bigger digital footprints to reduce costs and compete in the digital banking space. But there is no evidence that the brick-and-mortar bank branch is going away anytime soon. Although pandemic-related branch closures prompted many bank customers to use online and mobile banking services for the first time, many if not most turned to their local bank branches by phone or in person when they reopened. And banks are still opening new branches even as others are closed. How much and how fast consumers adapt to the financial technology revolution will determine what the banking industry looks like decades from now.

Endnotes

1. Venmo and PayPal are two well-known fintech firms that use fintech to facilitate person-to-person payments. LendingTree, a leading provider of home loans, is another example of a fintech firm. See this brief primer on fintech.
2. These data are taken from Neil Wiggins and Dasha Basnakian’s 2020 article, “A Survey of Separately Branded Online-Only Banks and Their Role in the Banking System.” The authors used Consolidated Reports of Condition and Income (call reports) data to create a subset of banks that reported non-parent bank URLs (websites) associated with the parent bank. That list was then pared down, removing URLs of brokerage sites, social media sites and retained URLs from mergers.