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Economics Strategy Jan 8, 2014

Sta­tis­tics That Hurt

Racial dis­crim­i­na­tion still affects minor­i­ty wages

Businessperson being chased by racial discrimination statistics

Based on the research of

Roland G. Fryer Jr.

Devah Pager

Jörg L. Spenkuch

When con­fronting the touchy top­ic of racial dis­crim­i­na­tion, satir­i­cal TV com­men­ta­tor Stephen Col­bert often dodges the issue by quip­ping that he doesn’t see race.” 

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It’s an inten­tion­al­ly ridicu­lous point of view, but for the last two decades, most eco­nom­ic expla­na­tions of the raw wage gaps between white and black employ­ees — observed at upwards of 30%— seem to be couched in sim­i­lar terms.

We know that racial dis­crim­i­na­tion was incred­i­bly impor­tant fifty years ago, but the cur­rent view among labor econ­o­mists is that it doesn’t mat­ter much any­more,” says Jörg Spenkuch, an assis­tant pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences at the Kel­logg School of Man­age­ment. The pre­vail­ing wis­dom is that the skills that peo­ple bring to the mar­ket are more impor­tant for explain­ing this wage gap. But what I find fas­ci­nat­ing about dis­crim­i­na­tion is that when you look at the real world, there’s lots of anec­do­tal evi­dence that dis­crim­i­na­tion still real­ly matters.”

Recent research coau­thored with Roland G. Fry­er, Jr. of Har­vard Uni­ver­si­ty and Devah Pager of Prince­ton Uni­ver­si­ty sets out to chal­lenge the con­ven­tion­al wis­dom that racial bias has a neg­li­gi­ble effect on wage gaps between blacks and whites. Spenkuch says that his own anec­do­tal obser­va­tions inspired the research. 

I’m orig­i­nal­ly from Ger­many, and there, racial dis­crim­i­na­tion is essen­tial­ly a non­is­sue because almost every­one is white,” he says. But when I came to the Unit­ed States, it just jumped into my face. It’s very strik­ing, and not just in job mar­kets — there are racial dif­fer­ences in health, in life expectan­cy, in edu­ca­tion. No mat­ter where you look, race is a real­ly impor­tant pre­dic­tor of how well peo­ple do in life.” 

Indeed, Spenkuch and his coau­thors find that black job seek­ers are offered — and accept — less com­pen­sa­tion than white job seek­ers. In fact, racial dis­crim­i­na­tion among employ­ers could account for at least a third of the raw wage gap between black and white workers.

By law, employ­ers are not allowed to do that. But the data show that it’s happening.”

A New Lens on Racial Bias

The researchers began by con­sid­er­ing the lim­i­ta­tions of pre­vi­ous eco­nom­ic approach­es to explain­ing — or explain­ing away — racial wage dis­par­i­ties. The so-called Min­cer­ian approach,” Spenkuch explains, uses sta­tis­ti­cal regres­sion meth­ods to assign an impact to var­i­ous observed vari­ables affect­ing wages, includ­ing race. This approach cru­cial­ly relies on high-qual­i­ty data in which there is no vari­able you could pos­si­bly think of that is cor­re­lat­ed with race and also affects wages — which is of course nev­er true,” he says. Anoth­er approach uses struc­tur­al mod­els of the labor mar­ket, which can gen­er­ate results that are high­ly depen­dent on ini­tial assump­tions used to con­struct the mod­el — and if those assump­tions are implau­si­ble, the results are suspect.

Spenkuch and his coau­thors attempt­ed to com­bine the strengths of these two approach­es while avoid­ing their shortcomings. 

The strength of the struc­tur­al approach is that there’s a mod­el of how peo­ple make deci­sions,” he says, and the strength of the first approach is that we can con­trol simul­ta­ne­ous­ly for a lot of dif­fer­ent vari­ables.” The researchers also obtained access to a nov­el and unique­ly rich set of data which observed the job-seek­ing activ­i­ty of approx­i­mate­ly 5200 recent­ly unem­ployed black and white work­ers in New Jer­sey over twelve weeks in 2009 — basi­cal­ly yes­ter­day’ in eco­nom­ic terms,” Spenkuch says. 

Cru­cial­ly, this data also includ­ed wage offers — and not just the offers that appli­cants accept­ed, but also ones that they reject­ed. Spenkuch’s empir­i­cal test” became a mat­ter of find­ing pairs of job-seek­ers — iden­ti­cal in every aspect except race, includ­ing the wages they received at their last job — and com­par­ing the set of offers they each received while search­ing for a new job. (The researchers’ mod­el also includ­ed two ini­tial assump­tions: that whites and blacks draw job offers from a sim­i­lar set of pos­si­ble open­ings, and that blacks are not sys­tem­at­i­cal­ly over­paid” in their pre­vi­ous posi­tions com­pared to whites — in oth­er words, that strong affir­ma­tive-action poli­cies do not arti­fi­cial­ly prop up black work­ers’ wages in spite of low­er productivity.)

See­ing Is Believing

The find­ings were strik­ing. First, black job seek­ers were offered sig­nif­i­cant­ly less com­pen­sa­tion than whites by poten­tial new employ­ers. Sec­ond, blacks were much more like­ly to accept these low­er offers than their white coun­ter­parts. This is exact­ly what you would expect if blacks know that they’re being racial­ly dis­crim­i­nat­ed against,” Spenkuch adds. Final­ly, and sur­pris­ing­ly, the researchers found that wage gaps nar­row over time as black work­ers stay at the same job. As an employ­er I may dis­crim­i­nate against you by offer­ing a low­er wage when I first hire you,” Spenkuch explains, but over time as you work for me, I come to know how good you real­ly are as an indi­vid­ual, and I adjust your wage accordingly.”

By tak­ing these vari­ables into effect along­side race, the researchers found that the raw” wage gap between black and white work­ers — which we observe at around 30 to 35 per­cent, if we don’t adjust for any­thing,” Spenkuch explains — nar­rows to between ten and twelve per­cent. This means that racial dis­crim­i­na­tion must account for at least a third of the fac­tors that con­tribute to black work­ers receiv­ing low­er wages than whites. It fol­lows intu­itive­ly from the two assump­tions in our mod­el,” Spenkuch says. Those assump­tions are not nec­es­sar­i­ly innocu­ous, but we feel con­fi­dent that they are plausible.”

Bias by the Numbers

The kind of racial bias that dri­ves this effect, says Spenkuch, is called sta­tis­ti­cal dis­crim­i­na­tion” — which has noth­ing to do with any emo­tion­al dis­taste for work­ing with minori­ties,” he adds. In our mod­el, employ­ers are pure­ly prof­it-seek­ing. The employ­er says, I don’t care why blacks are less pro­duc­tive on aver­age; I know that they are, because of the low­er SAT scores and oth­er data that are observ­able. There­fore, if I don’t know any­thing else about the can­di­date, I have to treat him as I would the aver­age can­di­date in that racial group — that is, less favor­ably. Of course, by law employ­ers are not allowed to do that. But the data show that it’s happening.”

Spenkuch is quick to assert that we haven’t nec­es­sar­i­ly over­turned the last twen­ty years of research on dis­crim­i­na­tion in the labor mar­ket with one study.” After all, if a third of the wage gap between black and white work­ers is due to racial dis­crim­i­na­tion, that means that the major­i­ty of the gap is still being dri­ven by oth­er fac­tors, such as dis­par­i­ties in edu­ca­tion qual­i­ty and oth­er so-called pre-mar­ket skill differentials.” 

Those fac­tors clear­ly mat­ter,” Spenkuch says. What we want to argue is that it’s wrong not to pay any atten­tion to dis­crim­i­na­tion, too. These results sug­gest that it’s still going on — and enforc­ing exist­ing leg­is­la­tion would sub­stan­tial­ly reduce the wage gaps we observe in the labor mar­ket. It wouldn’t elim­i­nate them. But it would nar­row them.”

Featured Faculty

Jörg L. Spenkuch

Associate Professor of Managerial Economics & Decision Sciences

About the Writer

John Pavlus is a writer and filmmaker focusing on science, technology, and design topics. He lives in Portland, Oregon.

About the Research

Fryer, Roland G., Devah Pager, and Jörg L. Spenkuch. 2013. “Racial Disparities in Job Finding and Offered Wages.”Journal of Law and Economics, 56(3), 633–689.

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