Government Participation in the Local Economy and Race- and Sex-Based Earnings Inequality

Abstract

Recent studies of the effects of the structure of local labor markets on individual earnings have failed to consider how earnings are affected by government participation in local labor and product markets. This study merges SMSA-specific data (including measures of government participation in the local economy) Into the Panel Study of Income Dynamics and regresses individual (log) earnings within race and sex groups on human capital, structural, and local labor market variables. I find that black women have higher earnings in metropolitan areas with greater government employment. Both black men and women receive higher earnings in areas where a large proportion of industrial output is consumed by the public sector. The earnings of white men are mainly predicted by human capital variables, while white women's earnings are most strongly affected by total hours worked. Race and Sex differences in earnings have been a fundamental concern of economists and sociologists for well over three decades. Within this time span, however, the dominant theoretical perspective on earnings and status attainment processes has shifted. In the mid sixties the human capital approach enjoyed great popularity in labor economics. This theory holds that people are paid according to the quantity and quality of the skills they bring to the market. Formal schooling and a long, continuous record of labor force experience are two critical factors in determining a person's wage (Mincer, 1974; Thurow, 1969). While the emphasis in sociology was on explaining a person's socioeconomic status, the approach was similar. Individual characteristics such as educational attainment and family socioeconomic background governed the allocation of individuals into occupational roles from which they derived status (Blau and Duncan, 1967). When the wider U.S. society became concerned with earnings inequality in the mid sixties, academics employed human capital theory to explain the existence of race and sex earnings disparities. Policy-makers designed programs based on the empirical work within the human capital perspective to eliminate such inequality. For example, research showed that the lower earnings of blacks are due in part to the fact that their level of schooling is lower than that of white men (Thurow, 1969). Based on this research, programs were designed to keep blacks in school and to upgrade the skills that they brought to the market in order to bring about earnings parity with white men (Aaron, 1978:Chapter 3)'