Economics and race

SIGNIFICANCE: Racial differences, especially in earnings and employment, are of ongoing empirical and theoretical interest to economists. Racial differences in labor markets are caused by demand-side factors, such as discrimination in hiring and pay, by supply-side factors, such as different levels of education and work experience, or by a combination of supply and demand factors.

There are many differences between races in the sphere of economic activity. Differences appear in earnings, wealth, and income; employment patterns within and across occupations, industries, and geographical regions; unemployment rates; educational and job experience attainment; and socioeconomic factors such as family structure, crime rates, and life expectancy. In the United States, non-Hispanic White and Asian individuals have the most favorable economic status by all the measures listed above, while African Americans generally have the least favorable status; Hispanic and Indigenous Americans fall in between on most economic measures. Unemployment rates have generally been lowest among White individuals, especially for the young. White people generally earn higher wages and salaries and, therefore, generally have higher family incomes than individuals who belong to minority groups. Additionally, White people command a larger than proportionate percentage of national wealth, which includes investment income as well as earnings; they are disproportionately represented in managerial and professional occupations.

Socioeconomic factors tend to compound the relatively unfavorable economic status of minority individuals, who have higher average household and family sizes, so their smaller family income is divided among more people. Minority groups are more likely to reside in female-headed households, which typically have lower incomes.

Race and Income

The study of the role of race in determining income is a topic that can be approached from both the demand and supply sides of the labor market. For example, measuring earnings differentials by race falls under the areas of human capital theory and discrimination theory. Human capital theory, a supply-side argument, argues that a person’s wages are determined in large part by their productivity and that an individual’s productivity can be increased by investment in education or on-the-job training; therefore, differences in earnings by race can be linked to differences in human capital attainment. Discrimination theory, a demand-side theory, says that the wages paid to workers reflect the preferences of employers, employees, or customers as to the race of the worker. In any of these three cases, the workers in the preferred group or groups receive higher wages than equally productive workers receive in the other, disliked groups. Discrimination may affect the acquisition of human capital and its effective use on the job. If minority groups are denied full access to educational opportunities, then they will enter the workforce possessing fewer marketable skills than their White peers and will command a lower wage. Also, if workers believe they are likely to encounter discrimination in the workplace, they may invest less in human capital than otherwise and earn even less than they would in the absence of discrimination in the labor market.

There are many other possible sources of racial differences relating to differential labor productivity and differential access to productive assets. Acquisition of English is a crucial step in achieving higher earnings for immigrants. Additionally, minority individuals who have strong support networks to rely on for job opportunities will prosper relative to their isolated peers. People of color may have imperfect access to capital markets because of discrimination by lenders and a lack of accumulated family assets.

Programs and Effects

Various policies have been enacted to influence either supply or demand-side forces in order to lessen racial economic differences. The civil rights legislation passed in the United States in the 1960s addressed many forms of discrimination, such as segregated schools. In such systems, White students and Black students were separated into different schools purported to be of equal quality (separate but not equal), with the goal of making a quality public education available to all races. Legislation preventing discrimination in hiring has been passed in an attempt to ensure that jobs are open to all qualified applicants regardless of racial origin. Job training programs have been set up by private and public groups in disadvantaged communities. Finally, affirmative action policies have attempted to counter years of discrimination by setting formal hiring quotas for minority individuals in large firms and governmental agencies.

Much research has focused on measuring the effects of antipoverty and antidiscrimination programs. There has been an increase in the earnings differential between races. Data from 1960 show an earnings differential for workers employed full-time (thirty-five or more hours per week, at least forty weeks per year) of 0.66, or 66 cents earned by a non-White male to every dollar earned by a White male; this ratio had risen to 0.80 by 1980. How much of this earnings increase can be attributed to the civil rights legislation passed in the 1960s and how much is attributable to independent societal forces is a hard question to answer, especially since discrimination can affect both investment in productive skills and the return obtained on those skills.

Another topic of continuing interest to economists is the effect of the minimum wage on minority employment. Black youth unemployment hit record levels in the 1970s and 1980s; if discouraged workers were included, then nonworking rates for Black males were as high as 75 or 80 percent in many urban locales. Some critics question whether the minimum wage keeps employers from hiring some of these youths. It appears that rises in the minimum wage affect Black workers, especially the young, disproportionately. If young Black Americans experience difficulty in their initial entry into the labor force, their subsequent work history may be altered unfavorably relative to a situation where they can enter a job which is low-paying but may lead to more lucrative subsequent employment.

Interest also focuses on assessing the success of various microeconomic policies, such as job training initiatives. Concern with the high minority unemployment rates led to the use of job creation programs at the federal and local government levels in the 1970s. Researchers have attempted to determine if enrollment in a job training program improves earnings for participants relative to those not enrolled (or relative to what they would have earned without receiving the training). Generally, gains in earnings appear to be modest for participants.

Controversial Programs

The extent of poverty among different races and the effects of government assistance programs on racial groups have also been studied. One controversial topic is whether the Aid to Families with Dependent Children (AFDC) program (now called the Temporary Assistance for Needy Families [TANF] program) created more low-income Black female-headed households than would have existed otherwise. Critics of AFDC argue that it encouraged low-income young females to have more children out of wedlock than they would otherwise have had and to remain out of the labor force while receiving support in the form of AFDC benefits. In the twenty-first century, these assumptions and judgments are acknowledged as discriminatory and baseless, but at the time, they were commonly debated.

Another controversial topic is the effect of affirmative action policies on racial earnings and employment differences. While workplace race segregation has declined over time, it continues to persist. Using the Duncan Segregation Index to measure race segregation by occupation, researchers showed that in 1960, 45 percent of non-White men and 50 percent of non-White women would have had to move into White-dominated occupations in order to achieve workforce desegregation for each sex. By 1986, only 29 percent of non-White men and 26 percent of non-White women would have had to change jobs in order to achieve complete racial desegregation. While affirmative action programs combined with antidiscrimination laws appear to have increased hiring and promotion rates for minorities, critics argue that there may be costs in decreased productivity if less qualified applicants are hired to fill a hiring "race quota."

Comparative Studies

Government, through legislation and implementation of programs, has had a large influence on race-based income differences, and government agencies hire large numbers of minorities. In 1960, the earnings differential in the public sector for non-White versus White males was 0.64; the private-sector differential was 0.79. This trend continued, although the difference narrowed. By 1980, the public and private sector differentials were 0.79 and 0.86, respectively. It is unclear whether these differences were the result of less discrimination in hiring and pay in government than in the private sector.

Another use of economic concepts in studying racial issues is to compare economic variables, mainly earnings, for different immigrant groups. The United States has experienced many waves of immigrants. While nineteenth-century and early twentieth-century waves of immigration were from Europe, immigration in the 1970s and 1980s consisted primarily of an influx of Southeast Asians and a mass of mostly undocumented immigrants from Mexico and Central America. It is interesting to examine earnings differences for immigrant groups over time: A general pattern is that immigrants make low earnings relative to Americans when they first arrive and subsequently improve their earnings status; their descendants then make even higher earnings than did their parents. Whether newer waves of immigrants will experience this same pattern of steady improvement in economic status or will constitute a permanent underclass in American society is debatable.

Another puzzle for economists is why some immigrant groups prosper in the labor market relative to others. Asian immigrants, especially Chinese and Japanese, have higher earnings and employment rates than other immigrant groups. An interesting pattern is that predominantly Black immigrant groups, such as those from the Caribbean, have higher earnings than do nonimmigrant African Americans. A large part of these differences appear to be attributable to the higher education of the successful groups. Research continues to focus on the persistent racial wealth gap and the impacts of systemic racial discrimination, such as disparities in education and housing, that limit income equality and upward mobility among minority groups. Many studies have attempted to identify practical ways to address these issues to help inform policymakers. However, some researchers note that because of the intergenerational effects of racial discrimination, progress will be slow.

US Historical Patterns

Interest in racial differences in the United States stems from two historical phenomena: the forcible introduction of a large number of Black individuals into the country through the institution of slavery, and the basic fact that the US population has been fed throughout history by large waves of immigrants.

The main focus on racial differences in the United States has been on Black-White differences. African Americans occupy a unique position in the historical legacy of the country as the only racial group to have been forced to enter the country in large numbers through the institution of slavery. Their pattern of assimilation into the economic mainstream appears to differ substantially from those of all other groups of immigrants.

There has been much debate about whether this unique historical position is responsible for the subsequent lack of success on the part of Black individuals to improve their socioeconomic status as rapidly as other racial groups, such as Chinese and Japanese immigrants. In the 1980s, several “neoconservative” economists, including George Gilder and Thomas Sowell, argued that social class is a more important determinant of racial income differences than is discrimination. Other economists, however, including Thomas Boston, argued that class is the product of racial discrimination and, therefore, it is not useful to draw a distinction between class and discrimination as possible causes of Black Americans' low socioeconomic status.

While much research has focused on identifying the sources of economic differences between racial groups, many economic researchers are more interested in evaluating and improving social programs aimed at narrowing these differences. There are many issues concerning the appropriate methodology for achieving both research agendas. One basic problem is how to measure the relative contributions of labor supply and demand factors to an individual’s wage rate. Another problem is how to evaluate a program by comparing participants to a control group’s experiences: If the participants are not carefully matched to appropriate controls, results may be attributed to differences in the groups rather than the program’s effects. Also, the widespread use of nonexperimental data to evaluate program effects is inherently problematic because so many influences occur simultaneously: Changes in the non-White to White earnings differential between 1960 and 1980 may have been caused by increased governmental anti-discrimination efforts, by erosion of prejudice in society regardless of governmental actions, or by increased productivity of minority workers. Ongoing debates over the appropriate use of research tools ensure the continuing role of economists in the discussion of societal racial differences.

Bibliography

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