FRBSF Economic Letter
2017-26 | September 5, 2017
Disappointing Facts about the Black-White Wage Gap
More than half a century since the Civil Rights Act became law, U.S. workers continue
FRBSF Economic Letter
2017-26 | September 5, 2017
Disappointing Facts about the Black-White Wage Gap
More than half a century since the Civil Rights Act became law, U.S. workers continue to experience different levels of success depending on their race. Analysis using microdata on earnings shows that black men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites.
In 1964 President Lyndon B. Johnson signed the Civil Rights Act, prohibiting discrimination based on race, color, religion, sex, or national origin. The signing marked a shift in American law that proponents hoped would produce greater equality across all dimensions of society, including the labor market.
While many things have changed since that historic moment, the gaps in labor market outcomes between black and white Americans remain large and in some cases are increasing. In this Economic Letter we document these gaps and examine their key determinants. The findings point to persistent shortfalls in labor market outcomes for black men and women compared with their white counterparts that cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites.
Labor market outcomes for blacks and whites
A direct way to compare the labor market outcomes of blacks and whites is to look at unemployment rates and average hourly earnings for black and white men and women, as shown in Figure 1. The data come from the Current Population Survey (CPS) from 1979 to 2016; unemployment rates are published Bureau of Labor Statistics data, while average hourly earnings are based on our own calculations using earnings records from the CPS.
Labor market outcomes for black and white workers
Note: Shaded bars reflect NBER recession periods.
Conditional on being in the labor force, the average African American worker, male or female, is more likely to be unemployed (panels A and B) than their white counterparts. Indeed, unemployment rates for black workers are 6.4 percentage points higher on average during expansions than those for white workers over our sample. These gaps widen to 6.9 percentage points on average in recessions as the incidence of unemployment and the duration of job searches increase more for African Americans than for whites. Recent research by Cajner et al. (2017) finds that these outcomes are not the result of differences in education, age, or experience, but rather reflect other unmeasured factors. Whatever the cause, the persistent differential in the unemployment rates of black and white workers indicates that black job seekers face different job opportunities than their white counterparts.
Panels C and D show the wages earned by black and white men and women. The lines plot real average hourly earnings, which are usual weekly earnings divided by usual weekly hours worked adjusted for inflation using the personal consumption expenditures price index. Starting with men, panel C shows a sizable gap between the earnings of blacks and whites that has risen over time. In 1979, the average black man in America earned about 80% of the average white man ($15 versus $19 per hour). By 2016, this gap had grown such that the average black male worker earned just 70% of the hourly wage of the average white male worker. The data for women (panel D) show a similar pattern. In 1979, the average black woman earned about 95% of the average white woman. But nearly continuous divergence in earnings since that time has opened a more sizable gap; in 2016, the average black woman earned about 82% of what the average white woman earned. Wilson and Rodgers (2016) find similar trends in widening black-white earnings gaps.
Looking behind the earnings gap
To understand what drives the black-white earnings gap, it’s important to consider the factors that influence wages. Economic theory tells us that workers’ earnings should largely be a reflection of their productivity; this component can be measured indirectly using data on characteristics such as age, education, and industry/occupation. Other measurable factors that have been found to be important include where people live and their part-time status. Finally, factors such as institutions, historical pay norms, discrimination, and the effects of public policies like the minimum wage (Fortin and Lemieux 1997) can also affect pay, although they are far more difficult to measure.
Economists generally use a statistical method known as regression analysis to separate differences in pay related to observable factors from those related to other harder-to-measure factors. Figure 2 shows the results of such decompositions annually from 1979 through 2016. The black line plots the average percent earnings gap in each year, and the bars show the contribution to the gap from each factor; we include observable measures of differences in age, education, industry and occupation, state of residence, and part-time job status. The red portions of the bars show the part of the gaps unexplained by these factors.
Components of black-white earnings gap
The results highlight a number of crucial points about the earnings gap between black and white workers. First, a sizable portion of the black-white wage gap comes from the fact that blacks and whites work in different industries and occupations (light blue bars). This sorting matters