Does a Foot in the Door Matter? White-Nonwhite Differences in the Wage Return to Tenure and Prior Workplace Experience

Abstract

[Author Affiliation]Arthur H Goldsmith, Department of Economics, Washington and Lee University, Lexington, VA 24450, USA; GoldsmithA@wlu.edu; corresponding authorDarrick Hamilton, Milano--The New School of Management and Urban Policy, 72 Fifth Avenue, New York, NY 10011, USA; hamiltod@newschool.eduWilliam Darity Jr, Department of Economics, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514, USA; darity@unc.edu This work is supported by grant #0213838 from the National Science Foundation.[Acknowledgment]We are grateful for suggestions provided by Barry Hirsch and seminar participants at Bond University, Gold Coast, Australia. In addition, we are grateful for comments from Julie Hotchkiss, Co-Editor for this journal, and two anonymous referees. This paper was presented at the 2004 Southern Economic Association Meetings.1. OverviewThere is an extensive literature documenting the lower wages of black and Latino workers relative to white workers in the United States. The explanations for these racial and ethnic wage disparities have ranged from differential accumulation of human capital to labor market discrimination.1 Farmer and Terrell (1996), and more recently Lewis and Terrell (2001), extend this literature by advancing a hypothesis, which we summarize as the theory of ability misperception . This hypothesis explains how group membership may differentially influence the gains associated with workplace experience, and hence the relative wages of black and Latino workers over the course of their working lifecycle.Their basic idea is twofold: First, employers believe nonwhite employees acquired fewer skills on prior jobs than white workers. Thus, employers will reward additional experience with prior employers to a greater extent for white workers than for nonwhite workers. We refer to this hypothesis as Proposition 1 . This first proposition falls under the umbrella of statistical discrimination, which explains wage inequality as a result of employers offering nonwhite workers lower wages as a result of employer reliance on their perception that the distribution of skills for nonwhite workers is worse than that of white workers.Second, as employers directly observe nonwhite workers on the job, they come to realize that their perceptions concerning the distribution of skills for nonwhite workers were incorrect and, consequently, they have underrated the ability of nonwhite employees. This learning leads employers to update their assessment of the relative productivity of nonwhite workers. Therefore, racial/ethnic differences in the return to additional tenure or seniority with the current employer will be smaller than the racial/ethnic difference in the return to prior experience when Proposition 1 holds. This prediction constitutes Proposition 2 of the theory of ability misperception .In addition, we introduce a third proposition (or a strong form of Proposition 2), which suggests that the returns to additional tenure for nonwhite employees will actually exceed that of white employees. Thus, Proposition 2 requires that the difference in returns to additional tenure with the current employer between nonwhite and white workers be smaller than the difference in returns to prior experience, while Proposition 3 requires that nonwhite workers actually receive a higher return for tenure. The purpose of this paper is to advance the existing empirical literature aimed at evaluating the validity of the propositions central to the theory of ability misperception using data drawn from the Multi-City Study of Urban Inequality (MCSUI).If Farmer and Terrell (1996) and Lewis and Terrell (2001) are correct that employers underestimate the skills of nonwhite workers before directly observing them at the worksite, then many capable nonwhite applicants will be denied work, and, if employed, will suffer undue economic losses. …