Post-School Investment and Wage Differentials: Some Further Evidence

Abstract

The topic of wage differentials between demographic groups has received a great deal of attention in the literature. Among the most researched areas are wage differentials based on race and gender. Studies have consistently found that men earn more than women and whites earn more than blacks. Many attempts have been undertaken to explain these wage differentials with two main explanations evolving over time. The first claims one group is paid less than another due to discrimination. Thus the fact that white males earn more than black males may be due to employers' and employees' distaste for hiring and working with minorities. The second main explanation claims different groups have different levels of human capital. Thus black males earn less, not because of discrimination, but because they have fewer acquired skills than white males. Wage differentials are obviously important for public policy. If workers are paid differing amounts simply because of their race or gender, then society is not fully utilizing its resources. This would indicate a need for stronger government intervention to remove discriminatory practices by businesses. For example, this intervention may take the form of affirmative action programs or mandating comparable worth. However, if the gap in wages is due to choices made by individuals which lead to differences in human capital, then the wage differentials may be justified. As a result government intervention is not only unnecessary, but may be an example of inefficient regulation. Since no easy way exists to measure the extent of discrimination, the standard method has been to decompose the residual of a wage equation into explained and unexplained portions. The idea being that some of the wage gap can be explained by differences in attributes between groups of individuals. Goldin and Polachek [5] point out that attributes may also be due to discrimination. If for example, blacks are the first to be laid off, this may result in lower levels of experience. This is not by choice and may indicate discrimination. Also there is a question of which is the appropriate base group. For example, the researcher has two alternatives when examining the wage gap between black and white males. He or she can take the predicted black wage given white characteristics as a percentage of white wages or take the actual black wage as a percentage of predicted white wages given black characteristics. In many cases the choice is not really clear and as a result often an average of these two is taken by employing a dummy variable for either