Chicago Fed Insights

Closing Racial Economic Gaps During Covid-19

September 4, 2020

The severe and prolonged economic consequences of the Covid-19 pandemic have stressed the earnings of tens of millions of households. The pandemic has also widened the racial disparities in health and economic outcomes for Black and Latinx families. And the existing social safety net has not provided sufficient cash and in-kind transfers to support families dealing with the impacts of surging unemployment, waning fiscal relief, and extended remote learning. These shortfalls are likely to affect not just households’ immediate needs, but also, as research suggests, their long-term economic prospects.

Policymakers, philanthropists, nonprofits, and business leaders may wish to contemplate interventions that jointly address the immediate economic distress and lay the groundwork to help close economic gaps for Black and Latinx households, who are at heightened risk of falling even farther behind White households as a result of this public health and economic crisis.

In this blog post, we highlight evidence-based approaches, that is, approaches based on empirical research, to reducing racial disparities in economic opportunity, particularly in light of the Covid-19 pandemic and economic downturn. Focusing on interventions with high private and social net benefits (or returns) leads us to emphasize strategies in three areas: (1) those related to children’s education and health; (2) those providing support for adults that typically have spillovers to children; and (3) those focused on juvenile and criminal justice. We also briefly discuss interventions that have been evaluated and demonstrate low returns and interventions that have yet to be evaluated, including those targeting gaps in homeownership and wealth accumulation.1

Even though the interventions we review are wide-ranging, ones with high documented returns share some common characteristics. First, they tend to have benefits that extend over a number of years. Second, they tend to have benefits that spill over, such as to children or surrounding communities. Third, they tend to provide direct material benefit or reinforce noncognitive capabilities (soft skills), rather than giving beneficiaries additional information or complex incentives. Finally, they have been evaluated empirically for both immediate and long-term impacts.

Children’s education and health

Extensive research in economics, neuroscience, and psychology points to large and durable economic impacts of early childhood programs that narrow achievement gaps in older grades; boost earnings and strengthen labor force attachment later in life; and reduce kids’ exposure to the criminal justice system. The specific features of these programs can vary but they often involve addressing: in utero nutrition and environmental exposure to stress; work/life balance issues of parents/caregivers, as well as their education and training; availability of educational materials; parental habits and behaviors; lead abatement; and access to health care. Still, public investments in young children tend to be lower than for older children, and parents of young kids tend to be at a stage of their career when they are least able to invest in their children using their own income or savings. Today, with the earnings losses and hardships of the pandemic draining private resources, the impact of this funding misalignment is likely to be more serious.

Many studies also underscore the high returns from increasing high school graduation rates, improving college readiness, and boosting college completion rates. Greater per-pupil spending in K-12 education not only increases low-income students’ educational attainment but also leads to higher wages and lower poverty for them when they grow up. High-performance charter schools also may have large effects on narrowing achievement gaps for low-income and minority students.2

At the college level, high-return interventions include: steering low-income students to selective institutions; providing “last dollar” scholarships to bridge the gap between financial aid and the all-in costs of college; high-touch support services, like comprehensive advising, career services, and tutoring; and even low-touch programs, like personalized text messages reminding students to renew financial aid applications. Today’s strained finances and uncertain job markets make student loans more burdensome, and college enrollment may even rise if high unemployment rates persist and typical recessionary patterns take hold—in the absence of job opportunities, more students may choose to continue their education until labor markets improve. Interventions to increase students’ odds of college completion and to lower their risk of being financially burdened by student loan debt are particularly important for first-generation students, older students living independently from their parents, part-time students, and those attending non-selective institutions.3

Support for adults

The private and social returns on interventions targeting adults tend to be substantially smaller than for children, on balance. Among other reasons, the benefits from investing in adults accrue over a shorter horizon. However, there are some notable exceptions, such as: select job training programs, work subsidies to encourage work among low-skilled workers (including add-ons to the earned income tax credit like Paycheck Plus), and interventions with large spillovers to children, such as subsidized moves to low-poverty neighborhoods and health insurance for pregnant women. In these last two cases, the effects on children include higher educational attainment and earnings long after the interventions have taken place. The pandemic’s sharp employment losses among Black and Latinx workers, especially women, mean that income support for adults is a critical component of economic recovery. Subsidies for affordable and high-quality child- and elder-care may also be needed to allow workers to reenter the labor market. Moreover, the geographical concentration of workers without jobs will likely require new interventions to target the segregated neighborhoods that characterize many cities, especially because high-return neighborhood job creation strategies have been difficult to develop.

Juvenile and criminal justice

Disadvantaged youths are at high risk of becoming victims or perpetrators of crime. Two mechanisms typically apply when juvenile and criminal justice interventions have high returns: (1) Teens build human capital and become less likely to be exposed to the criminal justice system, expanding their future job opportunities; and (2) safety and quality of life improve in disadvantaged neighborhoods where violent crimes disproportionately occur. As one example of a high-return intervention, the Becoming a Man (BAM) program prevents automatic escalation into violent crimes through cognitive behavioral therapy group sessions that help youths reevaluate their automatic responses. Another set of interventions creates summer jobs and transitional employment for teens, which in turn lowers their risk of arrest. At a time when Covid-19 has disproportionately challenged low-income neighborhoods and our society is reexamining the appropriate role of police, we need interventions that can reduce teens’ and young adults’ exposure to the juvenile and criminal justice system.

Interventions with less evidence of high returns

Some interventions have been evaluated and demonstrate low returns, while other interventions have yet to be evaluated. Considering the first case, low-return interventions targeting opportunity gaps typically have some or all of the following distinguishing features: (1) the evidence suggests the economic gains are small or not widespread enough; (2) the intervention is not well-targeted; (3) the intervention is very costly or resource-intensive; and (4) unintended consequences undermine the intent of the intervention and may even lead to harm. Many existing interventions related to gaps in homeownership and wealth accumulation (by way of financial literacy programs) have some or all of these features. To narrow racial disparities in these areas, new interventions may be needed to achieve high returns. Economic research suggests there may be more scope for interventions that keep struggling homeowners from losing their homes, such as by providing loan relief during periods of falling or stagnant house prices. Another potential intervention might support new mortgage loan products that help homeowners build equity faster than the amortization schedule of a traditional 30-year fixed-rate mortgage. “Baby bonds,” where the federal government creates savings accounts for newborns, also show promise. However, such new interventions would need to be rigorously evaluated and compared against those that offer more certainty of high returns.

Conclusions

In this post, we reviewed three categories of high-return interventions: those related to children’s health and education, income supports for adults that spill over onto children, and youth crime prevention. All of these interventions affect the human capital of young individuals, who have many years over which the benefits can accrue and may be receptive to behavioral “nudges,” as well as material support. Of the wide inequality in wealth and especially of the wealth gap between racial groups, about half can be accounted for by differences in earnings, the main byproduct of human capital. This motivates researchers to understand better how those earnings accumulate into wealth, such as through homeownership and financial-market participation—and especially how that process varies across people. More work is needed to develop and validate interventions in this area. There are also important tradeoffs to consider in dedicating limited resources to new interventions over proven ones that deserve robust debate across our communities.


Notes

1 There are many possible policy interventions, so we limit our discussion in three ways. First, we only consider interventions that have been sufficiently evaluated, but there may be interventions that have not been evaluated and are still high-return. There may also be new interventions in development. In both cases, greater scrutiny would help broaden our understanding of the high-return interventions that are available. Second, low-return interventions may be worth considering if they help achieve desirable non-economic objectives, but this discussion is outside our scope. Third, the purpose of interventions often is to help people with immediate needs, and such strategies are often worth pursuing without regard to whether they lead to a large or permanent narrowing of opportunity gaps.

2 The evidence on the returns for inputs beyond traditional resource-based ones and community programs that are often bundled with charter schools suggests more muted effects.

3 This speech by Chicago Fed President Evans provides a framework for thinking about the risks of attending and financing college, as well as risk-mitigating policy interventions.


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

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