Explaining the Black-White Wage Gap

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As of 2010, black men in America earned 74.5 percent of a typical white man’s wage; black women earned 69.6 percent. A new paper from Harvard’s Roland Fryer (certified genius), Princeton’s Devah Pager and Jorg L. Spenkuch of the University of Chicago examines some of the factors driving the black-white wage gap.

Using data from unemployed workers in New Jersey who sought employment for up to 12 weeks, the authors show that racial discrimination accounts for one-third of the wage difference. They also estimate that blacks have a 7 percent lower reservation wage than their white counterparts at a comparable job that demands a comparable skill level. Fryer and his colleagues control for skill level by measuring the job applicants’ wage at their previous job against the wage they were seeking.

Here’s the abstract:

The extent to which discrimination can explain racial wage gaps is one of the most divisive subjects in the social sciences. Using a newly available data set, this paper develops a simple empirical test which, under plausible conditions, provides a lower bound on the extent of discrimination in the labor market. Taken at face value, our estimates imply that differential treatment accounts for at least one third of the black-white wage gap. We argue that the patterns in our data are consistent with a search-matching model in which employers statistically discriminate on the basis of race when hiring unemployed workers, but learn about their marginal product over time. However, we cannot rule out other forms of discrimination.

The differences in wages between blacks and whites is between 25 and 30 percent, and the need to explain this remains a vexing debate in social science today. Throughout their research, the authors verified a story arc in which employers discriminate against blacks in terms of initial wage, but then slowly raise wages as they learn more about the individual employee.

To conclude our analysis, we explore the extent to which discrimination based on animus or differences in pre-market skills can account for our set of facts: (1) blacks incur larger losses than whites with job separations; (2) blacks have lower reservation wages; and (3) blacks garner higher returns to tenure in a firm.

The study shows that although the black-white wage gap widens by .9 percentage points per year of potential labor market experience, it decreases by 12 percentage points per year of tenure with a given employer. Meaning, blacks have much more of an incentive to stay at a firm rather than look for new employment since “the market provides less insurance than it does for equally skilled whites.”

The authors conclude:

This suggests that alleviating racial inequality may take a combination of policies to both eliminate barriers to investing in pre-market skills and anti-discrimination enforcement so that minorities are appropriately rewarded for those skills.

Which is an interesting thought, considering the recent cookie protests sweeping the media.

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  1. Matt says:

    As an HR professional, I can see how this could take decades to remedy itself. Consider the following situation. A black candidate applies for a job where the salary range is $30-35K and the average salary for the existing team is $34K (all white, long tenure). If that candidate is currently making $25K, very few companies are going to offer $34K. That candidate is likely to see a $28-$30K offer. Why offer a person a 36% raise when you know you can hire them with a healthy 10-15% raise). On the surface, it looks discriminatory. However, it’s more of a function of the previous salary. Historical salary gaps (racial, gender) take a while to level off in part because of this phenomenon.

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    • Michael says:

      As someone who has had various jobs in the same field at vastly different wages, I hate the “what was your previous salary” question. I feel that should be as verboten as “What is your religion?” or other irrelevant questions. If I take a low salary at a job because I get other intangible benefits there (like believing in their mission, etc), it shouldn’t put me permanently on a lower pay scale for my whole career. Similarly, if I happen to score a very high paying job, it shouldn’t price me out of future jobs.

      I should be paid commensurate with the job I am taking. My previous salary is as irrelevant as is my race, gender, religion, etc.

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      • Mike says:

        I’m not a fan of this question either but someone’s current salary is usually (but certainly not always) a good indication of what they’re worth.

        If you’re underpaid (or overpaid for that matter), you can try to focus the discussion to what your are looking for or what you’re worth. It takes some talent to do that.

        I’m seeing a similar situation in college applications. They ask quite a few questions about your parents/siblings …

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      • Mark S says:

        Agreed – I like the approach my current employer takes. They phrase it “what are your wage/salary expectations”. Thus, clearly leaving it open to the interviewee to explain why, for instance, they feel the pay raise they receive should be more or less substantial, or indeed if they would be willing to take a pay cut to get the job.

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      • Michael says:

        To be honest, I would much rather the employer just say, “We are willing to pay someone with your skillset $x to do this particular job.” Any questions as to what I want, or what I need, or what I used to make exist solely to allow the employer to minimize what they are going to pay me. Its obviously in their best interest to know what I am willing to accept for pay. I have not figured out how (or don’t have the courage) to ask, “How much are you willing to pay for this position?” in response to the question. (or “My wage expectation is the highest that you are willing to pay for this position.”)

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      • Luke says:

        Yeah, that question is almost unheard of in my industry (I’m a Linux sysadmin) – I mean, sometimes I will bring it up during pre negotiations as in “I’m making $X now, if you can’t beat that by Y%, we’re wasting time” but that’s mostly because I’m poor at negotiation, so when I do work for other people, I, ah, keep my eyes open, and jump when someone makes me an offer Y% better than I’m getting now. (Y, in this case, is usually but not always 20) but nobody straight out asks.

        Personally, I think the employer that gives more money to employees that are better at negotiating is going to end up with, well, employees that are better at negotiating. For hiring sales and other positions where negotiation is key, this isn’t a bad thing, but if you are hiring technical people? it probably means you aren’t getting the best people the amount of money you are willing to spend can buy.

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    • David says:

      That’s a great story Matt but it only makes sense because you made the new candidate black. You are creating a situation that demonstrates how lower offers are not discriminatory except it’s not realistic. I could easily say “We had a job opening at my company for a senior marketing manager. One candidate (white) had 5 years experience and the other one was an eight year old black child. We gave the job to the white candidate but it wasn’t racial. You see, the other kid didn’t have much experience.”

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      • Simon Farnsworth says:

        I think you are misunderstanding the point of the story.

        If blacks typically (regardless of reason) take lower paid jobs than their white equivalents, a company that is not discriminatory, applying a policy of “to get the person we want, we will offer them a 25% pay rise on their current pay” is likely to pay blacks less.

        The implication is that in an environment mixing non-discriminatory hiring with a small degree of anti-black hiring, blacks will end up on lower pay.

        As a thought experiment, imagine three companies, A, B, and C. A and C are non-discriminatory. B (for whatever reason) won’t hire blacks.

        A black man and a white man both start out at A, on $18,000. They receive $1,000 rises after their first year. B then hires the white man away, giving him a rise to $25,000; his black counterpart gets another $1,000 rise.

        When C then hires both men with a 20% rise, the black man is on $24,000, while his white counterpart is on $30,000; C was not being discriminatory in trying to hire the best men for a reasonable pay rise, but has ended up contributing to the pay gap by not taking account of B’s discrimination.

        Now remember that historic discrimination affects this market; if B no longer discriminates, both men will continue to get similar %age rises throughout their careers, but the black man will consistently be paid less, as a result of B’s historic discrimination. The market won’t truly level out as a result of simple non-discrimination until all employed black men got their jobs after discrimination against blacks ended.

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    • Enter your name... says:

      They would actually never level off based on what you’re saying.

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    • Larry says:

      Out of pure curiosity

      Why hire them if they are not at the same capability level of the other team members? And if they are at the same skill level, why pay them less?

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    • Christian Goncalves says:

      Your argument is a distinction without difference. You are still perpetuating the racist practices of three centuries. i.e. Black and brown people are worth less than there white counterparts.

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  2. jonathan says:

    The fascinating thing to me is we are highly willing to see things in others that we deny in ourselves. This is an example.

    Consider Israel. If you read about Israeli Arabs – meaning Arab citizens of Israel – it’s most often in the context of discrimination: they receive fewer services, have higher unemployment, etc. But on essentially all measures Israeli Arabs do better versus Israeli Jews than African-Americans do versus white Americans. The wage gap is smaller – and that’s not excluding the Bedouin, who make very little and who aren’t part of either society or accounting for larger Arab households. Every measure, from infant mortality on up. (I’m using UN figures, btw. You can look them up.)

    We can also easily see racism in the worse off condition of Turks in Germany or Algerians in France.

    The point is this: a big chunk of the African-American gap is racism. We deny it because we don’t want to see it.

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    • Bryan S says:

      “The point is this: a big chunk of the African-American gap is racism. We deny it because we don’t want to see it.”

      Does 1/3 not count as a big chunk?

      “Taken at face value, our estimates imply that differential treatment accounts for at least one third of the black-white wage gap.”

      I’m having a hard time seeing the denial…

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    • QCIC says:

      I don’t think you want to soft-pedal the influence of nepotism, social networks, and general “socio-economic status” on wages. These things often “display” like racism, and are related, but are different phenomena.

      I have a good friend who was hired into upper management-trainee status at a financial firm right out of college. Was there anything particularly special about him? No. But he went to a $10,000/year frat that some of the upper management went to in their day, and his father was golf buddies with some of them. I have no doubt he most likely got higher wage than if they had hired some random person who wasn’t socially connected to them.

      I also always worry about blaming things on straight “racism” because in cases where concrete steps have been taken to eliminate racism (federal civil service hiring) the result has been a drastic decrease in the quality of the employees. The government changed the civil service recruitment process because it was “discriminatory”, and now you have a much more diverse civil service branch. Unfortunately it is filled with poor employees, and those poor employees are frequently minorities (For the record I have seen a civil servant who I knew to be horrible at his job tell a joke about how it didn’t matter that he was bad at his job because he was black. This was in front of like 10 people!).

      I have worked in depth as a contractor with 3 federal agencies and I would place very large bets about the competence new random federal employees if given no more information than their race. When you work with several dozen people over many years you detect a real pattern.

      Maybe it is all random chance, but that seems unlikely. What seems more likely is that race or sex is used as a reason to hire less qualified applicants. Sure there are probably great minority candidates out there somewhere, but they are not the ones applying to the job, and the ones who do are sometimes not up to snuff but hired anyway.

      I think a large stumbling block to ongoing progress with racism is that most of the remaining “racism” in some sense justified based on the socio-economic situation in the country. I mean this in the sense that the generalizations people make are accurate. Black median family income is 60% generic median family income, of course my bike is more likely to be stolen in a black neighborhood than a white one. Obviously this is a vicious cycle.

      I don’t know how to fix it, maybe affirmative action is the right way, but working with it on a daily basis is like watching sausage get made.

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      • some guy says:

        I would refer you (and others) to Pettigrew, “Shaping the Organizational Context for Black American Inclusion” for a psycho-social account of modern racism (although some of the prescriptions are IMO a bit untenable).

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    • James says:

      I wonder how much of this purported racism is actually culturalism? That is, the people making hiring decisions may not care all that much about skin color, but they do care about common values. (Some of which might actually be relevant to job performance.)

      Might test this by looking at inverse discrimination of Asian & Indian job seekers in the tech field…

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      • BSK says:

        “Common values” is just coded language for racism.

        I’ve worked in hiring. When looking at black candidates, people immediately wonder they are a “good fit” or whether they will mesh with the “culture of the organization”. These questions NEVER come up about whites. Regardless of the cultural backgrounds presented by the candidates. The presumption is that blacks are outside of the dominant culture. That is racism. Regardless of how you describe it.

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      • QCIC says:

        I was on a hiring committee LAST WEEK for two positions. In both cases all the candidates were white except one.

        In both cases we discussed at length whether the one of the candidates would “fit with the culture of the organization”. In both cases that candidate was NOT the minority.

        So don’t say it “NEVER” comes up. That is simply untrue.

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      • James says:

        ““Common values” is just coded language for racism.”

        Not really, and certainly not entirely. I’d be pretty reluctant to hire white people that had lots of obvious tattoos & piercings, for instance.

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      • BSK says:

        Perhaps I indulged in a bit of hyperbole, but white folks “culture” is only brought up if there is an obvious flag, such as piercings or tattoos. It comes up nearly all the time for black candidates.

        A white person is assumed to be a part of the culture until they give reason to think otherwise. A black person is assumed not to be.

        You also have to look at how “culture” is defined, which is often predicated upon superficial characteristics that are themselves racially coded (such as the acceptability of well-maintained longer hair on a white guy but lack of acceptability of well-maintained dreads or twists on a black guy).

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  3. Mike says:

    Wouldn’t some smart people figure out there’s an inequality?

    They would start businesses and staff them qualified but underpaid minorities (think MoneyBall). Give them equity stakes in the business.

    This would be similar to what smart people do at big companies. They get fed up with not being appreciated and/or under-compensated. They either start their own companies or move to small companies where their efforts might be better rewarded.

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  4. Shane says:

    I think the Freakonomics Blog also shared a story from The Economist showing that international companies were taking advantage of sexual discrimination in South Korea to get high quality, low cost female workers there.

    So is there an opportunity for non-discriminating companies here too: to hire low cost but high quality black workers who are otherwise being discriminated against by employers?

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    • BSK says:

      And that resolves the issue how? If you pay them low wages, you are only contributing to the problem.

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      • BikerDad says:

        The South Korean women have choices. Local company that is going to pay them low wages because of sex discrimination, or multi-national company that is going to pay them 10-25% more than the local company (perhaps even more, I don’t know.) The local company now, if it wants to have that high quality woman working for ‘em, is going to have to meet the multi-national’s rate, or provide some other incentive for the women. And thus competition enters…

        Remember a core component of economics: it’s about tradeoffs and alternatives. The South Korean woman has basically five alternatives available to her. Work for the local company. Work for the multinational. Work for herself. Not participate in the labor market. Go overseas. Each additional alternative works to weaken the impact of sex discrimination.

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      • BSK says:

        So now you are just exploiting racism? Presuming the white and black candidates are otherwise entirely equally capable of performing the job, pay the black guy what you would have paid the white guy. Exploiting market inefficiencies is one thing; exploiting racist practices is another.

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    • james says:

      You are 100% correct.

      In other words ‘the market has spoken’.

      The Jews flooding into America in the first part of last century were blocked from a lot of companies and colleges, so they did their own thing and were successful.

      Arguably the same for many Asians.

      All of these individuals are ‘priced by the market’ in terms of what they are likely worth – whether it is fair or not is a separate issue. Of course on many, many occaisions, the market is wrong (i.e. great Black employee, bad Jewish employee), but on the whole, ‘the market’ respresents the collective wisdom of everyone involved.

      If ‘the market’ is valuing Black people less than others, it’s because all of use – including YOU – are doing that, in albeit a nuanced and subconscious way.

      That there does not exist an industry or community full of Black people who are thriving is likely evidence that the pricing is correct.

      Say what you will about capitalism (and I’m no fan of it), and often the market is quite wrong for systematic reasons – in fact, it is very, very wise, more wise than any individual. We can try to explain away this or that, but the economic facts remain the same regardless of what we think.

      I want the Black community to be more successful than they are, but 80% of the problems they face are of their own creation. Until we recognize this and start acting on this premise, there will be no improvement.

      As the article states, ‘racism’ is basically 30% of the problem. The rest, well, is up to them. I wish them well.

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  5. David says:

    A good response to the direct salary question is to answer with the percent you expect to capture of the value you create. Admittedly this is tougher in jobs without direct link to sales. For example if you know expectation is $500k in net income then respond that you expect to capture 30%.

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  6. Steve Sailer says:

    So, you could evidently make a killing by starting a company that hires only black people, since they are, according to a certified genius, undervalued by the market. Hey, it worked for Berry Gordy in 1959!

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  7. Bill McCullam says:

    If you could break out the data, it would be interesting to compare differences between races based on white vs. black employers.

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  8. Dan says:

    Charles Murray shed some light on this issue in his best seller on the Wealth of Nations. If you look at the different nations of the world that are homogeneous, there are vast and seemingly intractable differences in economic performance, and discrimination cannot be the cause because most of these countries are essential homogeneous in their different ways. That said, the variety of nations and people are a beautiful thing. I speak as someone in a mixed-race marriage.

    Moderators, you can avoid this issue if you wish, but it is not honest to bring up this topic and censor one of the most central issues. I would have avoided this issue because it is impossible to have an intellectually honest discussion without dealing with unpleasant things.

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