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Explaining the Black-White Wage Gap


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.