Cohort, signaling, and early-career dynamics: The hidden significance of class in black-white earnings inequality

Abstract

A central tenet in the now classic Wilson hypothesis surrounding racial earnings inequality emphasizes the elevated labor-market challenges for black workers of limited productive assets, yet the empirical evidence on this issue remains inconclusive. In this article, drawing on the Panel Study of Income Dynamics (PSID), I uncover three mechanisms that tend to underestimate the difficulty facing lower segments of the black labor force: (1) the built-in bias of cross-sectional data that conflate career stages, (2) the cohort bias that concentrates on labor-market dynamics of a conservative era, and (3) the interplay between discrimination and productivity signaling that delivers heterogenous outcomes among black job seekers. When these mechanisms are accounted for, a pattern that is consistent with the Wilson hypothesis emerges – well-equipped African Americans see narrowed gaps in early-career earnings with Whites. These findings reconcile conflicting evidence in existence and provide guidance for future work.