The Role of Location in Evaluating Racial Wage Disparity

Dan Black,Lowell J Taylor,Natalia Kolesnikova,Seth G Sanders

doi:10.2139/ssrn.1468435

Abstract

A standard object of empirical analysis in labor economics is a modified Mincer wage function in which an individual's log wage is specified to be a function of education, experience, and an indicator variable identifying race. We analyze this approach in a context in which individuals live and work in different locations (and thus face different housing prices and wages). Our model provides a justification for the traditional approach, but with the important caveat that the regression should include location-specified effects. Empirical analyses of men in U.S. labor markets demonstrate that failure to condition on location causes us to (i) overstate the decline in black-white wage disparity over the past 60 years, and (ii) understate racial and ethnic wage gaps that remain after taking into account measured cognitive skill differences that emerge when workers are young.

Highlights

In hundreds of studies social scientists have examined the role of minority status in wage determination by estimating variants of the Mincer earnings function1, ln(wi) = β0 + β1Ri + β2Ei + γ (Xi) + i; (1)the expected log wage of individual i is specified to be a function of an indicator variable for minority demographic status Ri, education Ei, and typically, some function of such covariates as age or experience, given by γ (Xi)
The expected log wage of individual i is specified to be a function of an indicator variable for minority demographic status Ri, education Ei, and typically, some function of such covariates as age or experience, given by γ (Xi)
We study the properties of wage gap estimates from regression (1) when individuals live in locations that have differing prices, especially differing wages and housing prices

Summary

Introduction

It is important to keep in mind that the estimate of the average treatment effect contains the impact of “unobservables.” for example, if we implement our estimator by matching on all available observables (age, location, and education), we are still leaving out important ways in which black and white workers differ in the labor market. We see the empirical work we present here as underscoring the value of taking into consideration the role of location in the process of evaluating labor market phenomenon In this respect our work is related to important recent research by Moretti (2013), who shows that careful attention to price differences across locations alters our understanding of changes in inequality in U.S over the past 30 years

What if preferences are non-homothetic?

Findings

Conclusions