THE EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION AGAINST BLACK MEN

MARJORIE L. BALDWIN and WILLIAM G. JOHNSON*

Whcn labor supply curves are upward-sloping wage discriminaiion againsc black men reduces not only their relatve wagcs, bul also their relative employment races. Using data from the 1984 Survey of Incomc and Program Participation, the authors estmate wage discriminaiion against black men and, for the first time, quantify the effects of thai discriminaiion on the employment of black and white men. They find
,

that 62% of the difference in offer wages to black and white men. and 67% of the difference in their observed wages, cannot be attributed to
differences in productivity. Assuming that the unexplained wage diffcrential is attributable entirely to emphjyer discriminaiion, then the disincentive effects of wage discriminaiion reduced the relaiive employment rate of black men from 89% to 82% of white men s employment
'

rate. Thus, wage discriminaiion and its employment effects resulied in

a substantial transfcr of resources from blacks to whites in 1984.

have been numerous cmpirical There studies of labor market discrimination in the United States since the publication of Becker's Economics ofDiscriminaiion

(1971).

Although the rescarch is moti'

cient mix of majority and minority labor reduces profits, but the model assumes that employers view the loss of profits as an acceptable price for the satisfaction of their tastes for discrimination. The pecuniary
benefits of discrimination are, therefore,

vated by Becker s models, it has not fully

s predictions. Onc important omission relates to the cffcct of wage discrimination on employment. Becker's model of employcr discrimination predicts that prejudiced employers will hire more than the optimal number of majority workers and less than the optimal number of minority workers. The ineffitestcd Becker
.

'

restricted to those majority workers who areemployed atproductivity-adjusted wages that exceed non-discriminatory offer wages. These predictions are the most important
distinctions between Becker's model and
Marxian or radical theories that conceive

of discrimination as a tool that employers use to maximize profits (Reich 1981;

Roemer 1979).

Marjorie L. Baldwin is Associaie Professor of

A daca appendix with addilional resulcs, and cop-

Economics ai Easl Carolina Univcrsity. Creenville,

North Carolina, and William O. Johnson is Professor

of Healih Economics in the School of Healih Admin-

istracin and Policy and Professor of Economics, De-

ies of the compuier programs used lo genrale ihese resulcs, are available from Marjorie Baldwin Dcpan.

parcmem of Economics. ac Arizona Siate Universicy. Tempe, Arizona.

ment of Economics. East Carolina Liniversity. Creenville, Norch Carolina. 27858-4353

Induslrial and Labor Rlations Review, Vol. 49. No. 2 Januarj' 1996) by Cornell Universil).
0019-7939/96/4902 $01.00

302

EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION

303

A test of the hypothesis that prejudiced empioyers use inefficient combinations of rainorityandmajority workers rcquires that the employment effects of discrimination be estimated. With two exceptions, however, studies ofwage discrimination against blacks have ignored the wage-cmp!oyment relationship, implicitly assuming that labor suppiy schedules are perfectly inelastic
(Cain 1986). Shulman (1987) used com-

reduces the wages of black workers. Unless labor suppiy curves are perfecy inelastic, however, this assumption implies that discrimination also increases the employment of white workers and reduces the employment of black workers. Using Thurow s (1975) model, we derive expressions for the effect of discrimination on the employment and wages of black workers and white workers in a perfectly competitive labor
'

plaints to the EEOC as a proxy for the incidence of employer discrimination, and found that discrimination reduced the probability of employment for black workers. The findings were not, however, linked to estimates of wage discrimination. Gilman (1965) decomposed the black-white unemployment differential to determine the effcct of employer discrimination on black unemployment rates. The article focused
on the demand for minority labor. Suppiy

market. The Thurow Model

Thurow adopted Becker's assumption that white empioyers maximize a utility function that includes profits and tastes for discrimination against blacks. When faced with a wage rate, W, white empioyers act as if the black wage were W(l + D), where D,
the
"

market discrimination coefficient, is

"

responses to discriminatory wage rates were

not considered.

a function of the number of discriminating empioyers in the market and the intensity
of their tastes for discrimination. Thurow noted that discrimination shifts the demand for black workers t the left. The effect of
'

Thurow (1975) was the first to develop a

model of discrimination that considers the

implications of upward-sloping suppiy curves. He provided a theoretical analysis

of the welfare effects of discrimination that

included expressions for the employment losses to blacks. The present study is the first to provide empirical estimates of the employment effects described in Thurow s model, direcy linked to estimates of wage discrimination against black men. The data for this study come from Wave III ofthe 1984 panel ofthe Survey ofIncome and Program Participation (SIPP). The SIPP is a nationally represeniative survey of the noninstitutionaiized population of the United States that provides detailed information on respondents earnings and employment. Wave III was selected for this study because it includes supplemental information on education and work history. Our estimates of wage discrimination and its employment effects are derived from a sample 13,414 men who pardcipated in the 1984 panel.
' '

discrimination on the employment of black workers depends on the magnitude of D and on the elasticities of suppiy and de-

iVoa) be the equia B librium wage and employment of blacks when empioyers are (are not) discriminatory. If the black suppiy curve is perfectly inelastic, then employer discriminacin reduces wages and has no effect on employment. In this case, the loss to blacks equals the wages lost by black workers: (1) {W0-WB) N0B.
At the opposite extreme, if the black suppiy curve is perfectly elastic, black employment
falls with discrimination but black workers

mand for black labor. Let W and N (W0 and

earn the same wage as whites. In this case, the loss to blacks equals the wages lost by
black workers who would have been em-

ployed in the absence of discrimination:

(2)
Discrimination and Employment Everyone assumes that discrimination increases the wages of white workers and

= (NBB - NB) W0.

In the more realistic case where the black

suppiy curve is upward-sloping, discrimination imposes wage and employment losses

304

INDUSTRIAL AND LABOR RELATIONS REVIEW

Figure 1. Gains and Losses from

Discrimination.3

the sum of the wages lost by employed blacks and the wages lost by blacks who are unemployed as a result of discrimination. Relative losses depend on the elasticities of supply and demand for black labor. E
,

and e and on the size of the market discrimination coefficient. If we substitute

the approprate elasticities into equation (1), the wage loss to employed blacks can be expressed as a function of the nondiscriminatory wage and employment rates:
(4)
t.*t4

Nb

Nob

Employment

where e OH /e ejequals thechange in black employment.1 The wage loss to blacks who are not employed at the discriminaidty wage is obtained by substitutng into equation (2),
(5)
Thurow did not consider the effect of

discrimination on white employment. -If

blacks and whites are substtutes, however,

discriminatory employers will hire relatively

more white workers than will non-discrimi-

natory employers. The next section extends Thurow s analysis to derive expres'

sions for the effect of discrimination on the

wages and employment of whites. Effects on White Employment

Now Nw Employment

aPanel A shows wage and employment losses for

blacks, and Panel B shows wage and employment

Assume that discriminating employers seck to replace blacks, who will not work for the discriminatory wage rate, by hiring additional whites. The demand for white

gains for whites. The figures are varations of Thurow's (1975:158) diagrams showing white gains
and losses from discrimination.

on blacks (Figure 1. Panel A). In thai case, the total losses to blacks cqual

'

workers incrcases by ANg, the change in black employment. In the unlikely case in which the market supply curve of white workers is perfectly elastic, a prejudiced employer could discrimnate without los-

ing profits. In the more likely case in which

(3) Li+L iWtrWM+

'

WK
not think the discussion u worth (he complexuy ihai
it would introduce since (he poisbilUy has not been considered in models of discriminalion. ' In Thurow's (1975:246) noiation, P0 is (he non,

The possible effecw of backward-bending porlions of ihe supply curve of labor are not considered
in (he models, bul our methods ofeslimalion do not

discriminalory wage rate and rand r

are (he elasuci-

excludc (he possibility that such effecis exisi We do

(ics of supply and demand for black labor.

EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION

305

the market supply curve for white labor is upward-sloping, equilibrium wages and employment of white workers increasc. Let and Nw (W0 and A/0J be the equilibrium wage and employment ofwhites when employers are (are not) discriminatory. The total gains to whites from employerdiscriminationagainstblacks.shown in Panel B of Figure 1, equal

a method introduced by the authors to

measure the employment effects of wage discrimination against black men (Baldwin andjohnson 1992a). The methods of estimating discriminatory wage differentials
and the disincentive effects associated with the differentials are described in the next scction.

(6) G, + G, = {Ww- W0)A

+ {Nw- N0J Ww.

Measuring Wage Discrimination

the sum of the wage gains to whites who would be employcd in the absence of discriminaron (G,) and to those who are em-

We use Oaxaca's (1973) decomposition to estmate the extent of wage discrimination against black men. Wage equations of
the form

ployed to replace blacks (C2). As before, the relative gains depend on the elasticities of supply and demand for white labor, r] and r\J The wage increase to whites who
.

(9)

W = PX. + cX + e

are estimatcd separately for black and white

were employed at the non-discriminatory

wage equals
(7)
SlN.

men. The dependent variable (W) is the hourly wage ratc of the ith workcr; X is a
vector that includes a constant tcrm and a

set of variables, such as education and ex-

perience, that represent workers produc-

"

and the gains to employed white workers

who would not work at the non-discrimina-

tivity; X is the sample selection variable;

and
term.4

is a mean-zero random disturbance

tory wage equal

(8) C,.
n.
1

Following Reimers (1983), the mean offer wage differential between white (W)
and black (B) workers can be expressed as

Equations (5) and (8) represent the employment cffccts ofwage discrimination
that resulc from the incentive and disincen-

(10)

tive effects of discriminatory wage rates.'

Before 1992, studies of discrimination mea-

sured wage losses to employed minority workers but omitted the employment gains and losses to majority and minority workers, implicitly assuming that supply schedules are perfcctly inelastic. This article uses

where / is the identity matrix and 5 is a vector of weights. The vector of wcights 5, represents the relationship between the non-discriminatory wage structure and observed wages.5 We use Cotton s (1988)
, '

'

We assume that supply curves are cominuous and

4Our

primary results use the non-log specificalion

Resulis

upward-sloping. This excludcs (he possibility, sug-

of the wage equation so that (he estimates can be

presented in dollars as well as percentages
authors.
'

gested by Cilman (1965), that a federally mandaied mnimum wage, or a collectively bargained wage floor, transales wage discrimination into reduclions in the
cmploymenl of minority workers. Cilman s logic is
'

for the semi-log specifications are available from the If the nondiscriminatory wage structure is ihe
.

appealingly simple. An employer whose tastes for

discrimination would Icad him to hire minority work-

observed wage structure for white men {that is

crimination reduces black men
'

dis-

s wages but does not

Since

ers at wages that are below the legislatcd or collectively bargained mnimum will not hire those workers.

affect the wages of white men) then 8 . L If ihc nondiscriminatory wage structure is the observed
.

wage structure for black men then 5-0

.

306

INDUSTRIAL AND LABOR RELATIONS REVIEW

weighting scheme, setting 5 equal to the proporton (5 = 0.90) of employed workers

who are white.4

We next describe the use of Baldwin and

The left-hand side of equation (10) represents the difference between the mean

Johnson's (1992a) estimator to measure the effect of discriminatory wage differentals on the employment of black and white
men.

offer wages of black and white workers. The first tcrm on the right-hand side represents the pan of the offer wage differential
that is attributable to differences in work-

The Employment Effects of Wage Discrimination The Baldwin-Johnson estimator is a threestep technique that estimates the employment effects ofwage discrimination in terms of probabilities of employment for the average majority or minority worker. The first step is to estmate the observed probabilityofemploymentfor the average black (white) man, TI (J= B, W), as a function of

productivity. The second term represents the part of the differential that is attributable to employer discrimination and
ers

'

a residual effect.

The Oaxaca decomposition has been the method used to estmate wage discrimination for more than twenty years. The estimates in this study incorprate the improvements introduced by Reimers (1983) and Cotton (1988). The improvements do not, however, solve what has long been recognized as a limitation of Oaxaca s approach, namely, the assumption that dis'

ch racteristics that influence employers

'

'

offer wages, workers reservation wages, or

both. Estimates of fl are obtained from the

crimination can be measured as the re-

coefficient estimates of a probit likelihood function in which the dependent variable cquals one if the individual is employed
and zero otherwise. If we let Zbe a vector

sidual (the second term in equation (10)). Although the residual can be further decomposed into discriminatory and non-discriminatory components (Blinder 1973), the results are not robust (Jones 1983). Thus, in practice one must assume that the
estimates obtained in this manner are an

that includes offer wage and reservation wage variables the probit likelihood func,

tion is

ti?] (j-B.W) where E represents individuis who work, represents individuis who do not work,
and <I> is the cumulative distribution function of a standard normal random variable.

upper bound on wage discrimination. Only in the unlikely situation in which all of the significant influences on wages are included in the estimating equations would the residual term be equal to the discriminatory

wage differential. The results of this study,

like the results of all of its predecessors,

must be interpreted with that limitation in

mind.

Assuming that an individual accepts employment if the offer wage is ai least equal to his reservation wage, probit estimates of

the coefficient vector, Y/cr, yield an estmate of the offer wage-reservation wage
the true non-discriminatory wage is unobservable,

differential that is correct to the adjust-

Reimers (1983) suggested setting 5 equal to 0.5. the

midpoint.

ment factor, o (Killingsworth 1983). The

observed probability of employment for the average black or white man is then

Cotton'j method is based on the assumptions that (I) absent discrimination, the wage structure will be some function of exisng black-white wage structures, and (2) the non-discriminatory wage structure

'

given by

will be closer to the white wage structure than to the

black wage structure. Baldwin andjohnson (1992b)

demonstrated that these popula non weights are consistent with Becker s model of the effect of discrimi'

(12)

nation on employment-

{j = B. W).

EMPLOYMENT EFFECTS OF WACE DISCRIMINATION

307

The sccond step is to estmate the probability of employment for the average man
n the absence of discrimination (FT ) by

correctng the offer wage-reservation wage

differental for the effect of employer dis-

The third step is to estmate the differences in employment, AJV , resulting from the disincentive effects of wage discrimination. For both black and white men,

crimination on offer wages. By the properlies of least squares estmaton, the offer wage to the average worker is
(13)

(16)

j=B W,
,

where (/ = VV, B) is a vector of mean vales of variables in the wage equation and P is the vector of estmated coefTlcients. Assuming that the nondiscriminalory offer wage structure is determined by the proportons of white and black workers in the labor forc, the offer wage of the average worker in a non-discriminatory market is

where n is the popuiation size. Since nw< AJVW is positve and represents employment gains to white men resulting from wage discrimination against blacks. Multiplying &j by the estmated offer wage yields estimates of the losses to blacks (LJ and gains to whites (Gj) resulting from the employment effects ofwage discrimination. In the following sections, we present estimates of wage discrimination against black men, and its employment effects, using data from the 1984 panel of the Survey of Income and Program Participation.
Data
.

(14)

.(0.90 +0.10 P,) .

(j-B,W)

It follows that the discriminatory offer wage differental is J - W and7

The data are for 13,414 working-age men

who were interviewed in Wave III of the

(15)

0> '

o,

Survey of Income and Program Participation (SIPP) .9 Ten percent (1,393) of the

sample is black. There are 10,137 employed white men and 980 employed black
men in the Wave III cohort."

obtain estimates of the adjustment factor,

Clearly, n0j can be estmated only if we

'

a , distinct from y/G. We use Heckman s (1976) method to estmate a .*

'

Our results are based on estimating wage

equation (9) separately for black and white

Note that W?
,

ve for whites wnen there is discrimination. There-

W ispositive forblacksand nega-

fore. noj>

n, and the probability of employment for

blacks increases in the absence of wage discrimina-

tion. Similarly. n,, < nH and the probability of employment for whites decreases in the absence of wage discrimination. ' Assuming that hours worked are proportional to the difference between the offer wage and the reservation wage. a; can be estmated from

men. The vector X., which represents worker productivity includes the following variables: disability, years of education three factors representing health limitations, three measures of work experience, and a set of binary variables that represent job characteristics. The binary indicator of
, ,

rience variable in the wage equation by the coeffi-

cient of job experience in a regression of hours worked on all offer wage and reservation wage variables (Heckman 1976).
'

Survey of Income and Program Participation

and the sample selection variable, X

hours worked on (v
,

Regressing
,

(SIPP) Wave III Rectangular Core and Topical Module Microdata File, prepared by the Bureau of the

where (l is a factor of proportionality relating the offer wage-resrrvaon wagedfTerential to total hours

* \) yields an estmale oa/n (and. therefore. 0 )

;

Census (Washington. 1986). Men who worked al any time dunng the four'"

worked. An estmate of

can be

obtained bv dividing the coefficient of the job expe-

month survey period are considered employed. Selfemplovcd men are excluded.

308

INDUSTRIAL AND LABOR RELATIONS REVIEW

disability, equal to one if the worker has a health impairment that s subject to prcjudice, is included to control for discrmina-

of men employed in capital-intensive industries.

lion against mcn with disabilities." The

health limitation variables are generated flrom a factor analysis of 12 measures of workers functional and sensory capacities and increase in valu with poorer health.11 Measures of work experience include years workcd with current employer, years workcd with other employers, and years not working and not in school. Years worked with the current employer is also included as a square term to capture diminishing investments in job-specific human capital over time. The variables that representjob char'

Employed black men are, however, more likely to be working part-time and more likely to be employed in low-skill oceupations than white men. Although the average duration of employment with the timeof-interview firm is nearly equal for the two groups, black men have many more spells ofnon-employment during their labor forc years than do white men. The higher prevalence of part-time work among blacks implies that the productivityconirolled wage differentials that we estmate are too small. Employee benefits,

which represented 16% of the total compensation of labor during the 1980s
(Ejacentini and Cerino 1990), are omitted

acteristics control for black-white differ-

ences in unin membership, public sector employment, part-time employment, employment in a capital-intensive industry, and occupation. The samplc selection variable, X, is a control for sample selection bias because wagcs are unobserved for nonworkers. It is constructed from probit employment functions estimated for the full samples of black
and white men.ls

from our calculations.14 Since part-time workers typically receive less generous fringe benefiu than do full-time workers, the true black-white wage differentials are larger than our estimates.15 The estimated coefficients of equation (9) are the basis for our estimates of wage discrimination and ks employment effeets. These resuks are reponed in the following
section.

Means of the variables in the wage equations are presented in Table 1. The observed wage differential of $2.94 is approximately 28% of the white male wage. Although the wage differential is large, the samples of black and white men are similar in many respeets. The average difference in education is less than one year. Approximately the same proportion of employed blacks and whites are physically impaired, and there is Hule difference in years worked for current employer or in the proportion

Wage Discrimination

Weighted least squares estimates of the parameters of equation (9) for black and white men are reponed in Table 1. Nearly all the coefficients are statistically significant and display the expected signs." In

''

Employee benefits included in the 16% estmale

'

are retiremem income benefits. health benefits. and

" For a more detaled descripiion of the disability indicator, see Baldwin andjohnson (1994). " Functional capacities include, for examplc, the

ability to walk one-quarter of a mile, lift a weighi as

other benefits (unemployment insurance, workers compensaon. Ufe insurance. disability insurance). but not paid leave. In general, questions on fringe benefits are not included in the core queslionnare of SIPP. Data on fringe benefits wcre collected in a lopical module that accompanied Wave 6 of the 1984
panel.
" In 1984, employers provided retiremem benefits to 51.4% of full-time workers bul only 10.9% of pan-

heavy as 10 pounds. and climb a flight of stairs. Sensory capacities include the abiliiy to read words
and leliers in ordinary newsprint, to hear normal

conversation, and to speak clearly. The factor analy-

sis procedure is described in Lambrinos (1981).

Deuils are available from the authors.

time workers. Healih benefus were provided to 72.2% of full-lime workers but only 16.3% of pan-lime workers (Piacentini and Cerino 1990).
"

Estmales of the probit funcuon are reponed in Appendix Table AI.

"

One imponani cxcepiion is ihe resull thai ihc

"
.

coefficieni for periodsof workabsences. ihai is

years

EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION

309

Table I. Means and Weighted Least Squares Estimates for Hourly Wage Equaons.
(Standard Etrors in Parentheses)
Whiu Black

VanabU

(N- 10.137) (Pop. 46.082.859)'

-

(N - 980) (Pop. - 4.877.024)

Mean

Mean

CoeJJicient

Coefftcient

Wage
Health: FACTOR!
-

10.34

7 40
.

(5.01)
0 05
.

(10.11)
-

0 229
.

0 05
.

0 199
.

(0.20)
FACTOR2
FACTOR3 Years of Educacin DUabled Unin Member Public Sector Worker
-

(0.217)
-

(0.76)
-

(0.351)
-

0 19
.

0 211
.

0 17
.

0 229
.

(0.29)
-

(0.185)
-

(1-00)
0 01
.

(0.302)
-

0 02
.

0 117
.

0 164
.

(0.34)
13.03

(0.129)
0 553"
.

(155)
12.22

(0.179)
0 485"
.

(1.90)
0 04
.

(0.029)
-

(6.40)
0 04
.

(0.056)
0 384
.

0 749.

(0.15)
0
.

(0.363)

(0.45)
0 29
.

(0.680)
1 417"
.

23

1 029* .
.

(0.28)
0 15
.

(0.161)
-

(1.02)
0 20
.

(0.274)
-

1 835"
.

0 150
.

(0.24) Part-Time (Works < 35 hrs./wk.)

Years Worked: 0 10
.

(0.191)
-

(0.90)
0 14
.

(0.311)
-

0 788"
.

1 136"
.

(0.20) Currenl Employer

7 75
.

(0.234)
0 376"
.

(0.78)
7 56
.

(0.358)
0 302"
.

(5.83)

(0.022)
-

(18.47)
-

(0.042) .
-

Current Employer (Squared) Oiher Employers Otber Employers (Squared)

Years Not Worked and
Not in School

0 005"
.

0005"
0 109"
.

(0.001)
9 16
.

(0.001)
8 46
.

0 259"
.

(6.63)
-

(0.020)
-

(20.75)
-

(0.040)
-

0 005"
.

0 002
.

(0.001)
0 55
.

(0.001)
1 30
.

0 080"
.

0 036
.

(140)
0 40
.

(0.030)
0 825"
.

(7.90)
0 39
.

(0.035)
0 940"
.

Works in Capital-Imensive Induicry

(Mfg.. Mining. Transporiaon) Occupaiion:"

Professional-Manager
Service Skilled Semi-Skilled Laborer X

(0.33)
0 22

(0.146)
3 318"
-

(1.10)
0 12
.

(0-281)2 924"
-

(0.28)
0 10
.

(0.202)
-

(0.73)
0 18
.

(0.459)
-

1 892"
.

0 491
.

(0.20)
0 21
.

(0.252)
-

(0.87)
0 16
.

(0.411)
0 370
.

0 614"
.

(0.27)
0 17
.

(0,202)
-

(0.82)
0 22
.

(0.418)
-

1 594"
.

0 830-

(0.25)
0 10
.

(0.225)
-

(0.94)
0 17
.

(0-402)
-

1 901 ..
.

0 281
.

(0.20)
0 22
.

(0.254)
-

(0.85)
0 39
.

(0.415)
-

1 681"
.

0 333
.

(0.13)

(0.536)
-

(0.59)
10
.

(0.703)
-

Intercepc

10

0 509
.

1 445
.

(0.507)

(1.091)
0 399
.

f?
F-value
'

0309 227.508

33.526

Population lotals equal sum of the sample weighis. Omilled occupation: clerical and sales-

Significani ai ihe 05 level: "ai ihe .01 level (two-iailed lesis).

Source: S1PP. WAVE 111 (1984).

310

INDUSTRIAL AND LABOR RELATIONS REVIEW

addition, the wage structures for black and white men are significantly different at the
.

01 level."

We adjust observed wages for selectivity

bias to obtain offer wages." The average

offer wages of black and whiie workers are $7.53 and $10.70, respectively. The offer wage differential ($3.17) is then decomposed into a part that represents differences in productivity and a part that represents discrimination and an unexplained residual. The results are reponed in
Table 2.

wage differential is larger for blacks Thus, unin membership reduces the black-white offer wage differential by $0.06 or approximately 1.9% of the total differential.19 We expect that blacks in public sector jobs will, all else equal, encounter less wage discrimination than blacks in prvate sector jobs. Coefficient estmales of the wage equation support this hypoihesis: while men working in public sector jobs face a significant negative wage penalty while black
.

men do not. Black men are, however, more

Slightly more than one-third ($1.20) of the offer wage differential is attributable to black-white differences in human capital and occupational distributions. Differences
in education account for $0.44 of the offer

wage differential while differences in work experience and part-time employment account for only $0.01 and $0.03 ofthe differential. Differences in occupational distri,

likely than white men to work in public sector jobs (20% compared to 15%). As a result, the overall effect of public sector employment is to increase the black-white offer wage differential by $.09. Contrary to Heywood's (1989) conclusin that discrimination against black workers in public sector jobs was at least as severe as in the
prvate sector in the mid-1980s, our results

imply that the wage differential is smaller

butions account for an additional $0.67,

in the public sector than in the prvate

sector.

reflecting the concentration of black men in lower wage occupations. Black men ar more likely than whites to be unin members, and the positive unin
*

not working and noc in school, is insignifcani for black men bul significant and posilive for whiie men.
Our prior hypoihesis was that absences from work

reduce offer wages by reducing ski I Is gained through experience. The counter-intuitive result may be a cost of our desire to clarify the results by estimating
them in dollar terms rather than logarithms. The

results from the logspecifications (available from the authors) show that missing experience is insignificant for both blacks and whites. Some of the charac-

teristics of the underlying data permii the speculation-and ii is only a speculation-that the positive

estimate for missing experience occurs because a higher proportion of the work absences of white men are voluntary absences from work for ihe purpose of job search. The average durations of absences for
white men are less than one-half the durations for

The unexplained portion of the offer wage differential is $1.97, or approximately 18% of the white male offer wage. Thus, nearly two-thirds ($1.97/$3.17) of the offer wage differential is not explained by differences in the productivity-related characteristics of the workers. We interpret the residual as the upper bound of the valu of the discriminatory wage differential because, as we indicated in a previous section, it is likely that some of the significant determinants of productivity are omitted from the model. It is also possible, however, that some of the variables that represen t endowments are not truly unaffected by discrimination, offsetting some of the effeets of the
omitted variables.

The occupational distribution is likely to

be affected by discrimination but it is diffi-

black men. and white men have, on average, more

income and assets with which to finance a voluntary
absence from work. , TTheFvalueis5.2<F-20,

11077). Results of the

cult, a pnori, to predct the size of the discriminatory effect. Because oceupaton has such an important effect on the esti-

wage regression estimatedjointly for black and white

men are available from the authors.
"

The negative sign on the sample selection variAllhough not strictly comparable our results are conssteni with Ashcnfeller s (1972) conclusin that
,

able implies that men who have above-average wage

"

offers have even better opportunities outside the

labor market. and are, therefore, less likely to be employed (Reimers 1983).

'

the relative wages of black men are higher than ihey

would be in (he absence of labor unions
.

EMPLOYMENT EFFECTS OF WACE DISCRIMINATION

311

mates, we also present results from a model that exeludes the occupational controls, providing a range within which the upper bound of the discriminatory dierential is likely to be found. The results, which are presented in the
last column of Table 2, are based on the

TabU 2. Decompositions of Racial Wage Differentials.

With

Withoul VariabUs

Occupatumal Occupalional

Descnption of Differential Observcd Wage DfTerencial OfTer Wage Differential Components of the Offer Wage Differential'
Health Factors'
Education

VariabUs

coefficient estimates reported in Appendix

Table A2. Compared to the oceupation-

J2.94 $3.17

$2.94 $3.37

controllcd estimates, the offer wage differential is $.20 larger and the discriminatory wage differential plus residual increases to 75% of the offer wage differential. Excluding the oceupation variables increases the size of the components of the differential attributed to education, experience, unin membership (reduction in a negative number), and part-time work. Il is tempting to speculate that the variables just described account for the nondiscriminatory components of the effeets of oceupation on wages and the residual of the equation now includes the discriminatory effeets. Lacking strong priors for the effect of discrimination on occupational status, we suggest only that our primary estimates may not be the upper bound of the true discriminatory wage differential. Our basic results are comparable to estimates of the unexplained black-white wage differential reported by Donohue and Heckman (1991:1610). Using CPS data, they estimated a single earnings equation controlling for age, education, regin, urban residence, and race. The unexplained earnings dficit for blacks was approximately 20% in 1983 and 18% in 1985. To see how much we gain by including controls for sample selection bias, experience, and oceupation in our model, we replicated the Donohue-Heckman specification using the 1984 SIPP data. The unexplained earnings dficit for blacks increases from 18% to 23% of the white male wage. Employment Effeets
Wage discrimination discourages some

$0.01

$0.01
$0.71 $0.02
-

Experience' Oceupation'
Unin Public Sector Part-Time

$0.44 $0.01 $0.67 $0.06

$0.09
$0.03 $0.01 $0 00

$0.02 $0.07

$0.05
$0.01 $0.00

Capital-Incensive Industry
Disabled

Offer Wage Differential

Not Attributable to
Discrimination

$1.20 $1.97
-

$0.84

Discriminatory Offer Wage

Differential
.

$2.53

Entry equals (x

XgXO.QOp. t pg)

"

Algebraic sum of "a" for a vector of coefficients. Source: SIPP. Wave III (1984).

estimates of the employment function (Table Al) and the least squares estimates of the wage function (Table 1) following equations (12), (15), and (16). The results are reported in Table 3. Wage discrimination reduces the probability of employment for black men by ve percentage points, a loss of 375,000 jobs. Discrimination increases the probability of employment for white men by 0.2 percentage points, a gain of 99,000 jobs.20 Wage
discrimination, therefore, results in a net

loss of 276,000 jobs, suppordng Becker's (1971) prediction that discrimination re-

"

Ideally. the employment function shouldinclude

all the variables in the offer wage function (X). Some

of these variables, such as the controls for experience

andjob characteristics, are unobsened for non-work-

black men from working and eneourages some white men to accept employment. Estimates of the employment effeets ofwage discrimination are derived from the probit

ers and are, therefore, omitted from the probit functions. This limits the selectivity correction in ihe

model. When the estimates of employment effeets

are based on wage equations that are not corrected for selectivity bias black men lose 320 000 jobs and white men gain 86 000 jobs.
, , ,

312

INDUSTRIAL AND LABOR RELATIONS REVIEW

TabU 3. Wage and Employmenl EfTecis

of Discrmination Against Black Men
Wge Effect'

lion in wage income in 1984. Our estimates of the employmenl effects, however, make
it clear that black workers who are em-

Observed Wage Diffcrenal (VW- Wa]

Offer Wagc Differcntal

$2.94
$3.17

ployed at discriminaiory wages are not the

only losers" from wage discriminaiion. We
estmate that more than 375,000 black men
"

('/vQtXW
Wage Difference Due to Endowments
A
'
-

29.6%
$1.20 $1.97

gopw*
.

.IOM w- )

Wage Difference due lo Discriminaiion

A' A" - A'

were not employed because their rcservation wages were higher than the discriminaiory wage rate offered to blacks bul lower than the non-discriminatory offer wage. Assuming that these men could have worked full-time at the non-discriminatory wage
rate, their lost income in 1984 is $7.0 bil-

(i'/VV'JxlOO
Employment Effects Differences in Jobs
AW
,

18.4%

lion.

We cannot estmate how many of

these black men connue lo scek better-

= [n

I%J . n

; - Whi te
; . Black

99.326
-375.880

Nec Difference in Jobs

-276,554

Annual Wage Gains to Whites ($ billion)

Employed: C, .( -W K,, Addional Employmenl: Cj-A , Wy,

Annual Wage Losses to Blacks ($ billion)

22.1 2-1

paid jobs and how many become discouraged and leave the labor forc, bul it is likely that the disincentive effects of wage discriminaiion both increase the unemployment rate and reduce the labor forc participation rate for black men. Black men who are discouraged by low discriminaiory offer wage rales and choose
to leave the labor forc mustseek altrnate

Employed: LX'[v t-WB)NB Not Employed: j.Afl w;s

.

16.9 7.0
g = 9.26.

Blacks: Wt = i 7.40; VV . $ 7.53;

means of supprt. Thus, by narrowing the gap between the offer wage and transfer payments, wage discriminaiion reinforces the disincentive effects of public assistance
programs.

Whites: HV = $ 10.34;

-$10.70; Wjw. 10.46

Source: S1PP, Wavelll (1984).

duces omput and results in an inefficient

use of labor.*1

Becker's (1971) model prediets that majority workers are the only winners from wage discriminaiion. White men gain from wage discriminaiion against blacks in two ways. Firsl, employed white men earn a discriminaiory wage premium. Second,
" "

Black men who were employed at discriminatory wages lost a total of S16.9 bil-

some of the white men who would not work

" Our results mayunderstate the effect of discriminaiion on black employmenl because we limil our

eslimates lo discriminaiion within occupalion and

because we cannotmeasure the disinceniive effects of

discriminaiory wages on ihe hours worked by em-

ployed black men. If. for example, the eslimates of

employmenl effects are based on equaiions from which the occupalion variables are excluded, blacks

at the non-discriminatory wage accept employment at the higher, discriminaiory wage. In 1984, white men gained nearly 100,000 jobs as a result of wage discriminaiion against black men. The total income gained was $24.2 billion. The effect of wagc discriminaiion on employmenl depends on the wage elasticitics of supply and demand for black and
white labor.** One test of whether or not

lose 449.000 jobs and whites gain 112.000 Jobs. On

the oiher hand. our results may oversiate the effect of discriminaiion on black employmenl because we have
"

The wage elasticity of labor supply, Q, is com-

specified the wage equation in non-log form. When

the eslimates of employmenl effects are based on

puied from il %A/,//%ilVV, where %A/> ( -p/

expression for %A/.(,
Z
.

loglinear wage equations, blacks lose 99,000jobs and

whites gain 31,000 jobs.

= the weighied total of work-

EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION

313

our estimates are reasonablc is ihe wage elasticities they imply. Because we analyze employment (working or noi working), ihere are no previous estimates against

white employment rate). Although white men gained jobs because of discrimination, the employment gains for whites were
much smaller than the losses to blacks. Thus, our results are consistent with

which to compare our

results.15 Three cri-

teria can, however, be used. First, theory

Becker's (1971) prediction that discrimination reduces total output. Becker's model also predicts that market

predicts that wage elasticities are positive for the labor forc participation decisin. Second, since blacks generally earn lower wages than whites, the wage elasticity for blacks is expected to be higher than the wage elasticity for whites. Third, wage elasticities for both groups are expected to be neither perfecdy elastic or pcrfectly inelastic. Our results, which imply uncompensated wage elasticities of 0.34 for black
men and 0.09 for whitc men, conform to

these expectations.
Conclusin

competition will eliminate discriminatory wage differentials in the long run. The observed persistence of discrimination, resulting in the employment of an inefficient mix of black and white workers, suggests that the short run, in this case, is very long indeed, or that market rigiditics limit the full effects of competition. For these reasons. Donohue (1987) argued thatTitle Vil legislation may be efficient in the long run
because it accelerates the movement toward a discrimination-free labor market.

Our results imply that productivity-standardized offer wages to black men were

82% of the average offer wage to white men

in 1984. The results are consistent with

Discrimination reduced the relative wage income of blacks by two percentage points in 1984. in absolute terms, the monetary gains to whites offset the monetary losses to blacks. Thus, wage discrimination against
black men results in a transfer of substantial resourecs from blacks to whites that

previous studies of wage discrimination against black men, using different methods and data. The employment effects of wage discrimination reduced the relative employment of black men in 1984 by seven percentage points (from 89% to 82% of the

ers in thc

weighis), L0i = (no//n() .

group (chai is, ihe sum of ihe sample In ihe expression for %AW, ' i the offer wage for ihe average worker in
0;

ihe jM group = 5 + (j

(where X; is a vector of

is, presumably, only partly offset by welfare payments. In the process of effecting this transfer, large numbers of black men, who would be willing to work at nondiscriminatory wages, are left unemployed. Wage discrimination is also expected to affect the proportion of black men who work part-time. Since discrimination reduces the relative price of leisure time, it encourages some black men to reduce hours of work and accept part-time jobs. To the
extent that it can be measured, this effect

mean vales of che variables in the wage equation

wage. (O.gfj
"

excluding X) and w0l

the nondiscriminatory offer

.lOfj ) X,
,

shouid be added to the wage and employment losses of full-time workers to determine the total effect of discrimination on the income of black men.

Most studies use hours worked rather than parThe

ticipation as their measure of labor supply.

'

studies of men reviewed by Pencavel (1986). for example, only look at hours of work. Studies of participation either do not include workers wages in the

Wage discrimination has other longerterm effects. Discrimination increases the

participation function or include wages but neither repon wage elasticities or provide the information
needed to calclate the elasticities (see. for example.

incentives for black men to drop out of the labor forc and seek public assistance. If
discrimination reduces the rewards for skilled labor relative to unskilled labor, then it also reduces the incentives for black

Boskin 1973: Bowcn and Finnegan 1969). Boskin's

(1973) estimates of wage effects on participation are positive for all the age-sex-marital status-race groups
in his study.

men to invesi in additional human capital.

314

INDUSTRIAL AND LABOR RELATIONS REVIEW

By reducing black men's incentives to work and weakening incentives to invest

in education, discrimination limits the

floors prevent employers from expressing

tastes for discrimination in the form of

wage differentials. Together, the direct

and indirect effeets of discrimination not

potential of a generacin of black men to be productive members of the mainstream labor forc.

There may be direct employment effeets

of discrimination in addition to the indirect effeets we have measured. These are

only reduce wages and labor forc participation in the short term, but also reinforce a pattern of marginal attachment to the
labor forc that further limits black men's

most likely to oceur in markets where wage

opportunities to advance by increasing their productivity.

TableAl Mximum Liketibood Estimates for Probil Functioas

(Standard Errors in Parentheses)

-

White

Black

Independenl VariabU
Constam
Health

(N- 12,021) (f>-54.717.125)'

-

(N- 1,393)

(P- 7,051,733)
-

1 738"
.

1 782"
.

(0.135)
FACTOR1 FACTOR2 FACTOR3
Years of Education
-

(0.350)
-

0 090"
.

0 131"
.

(0.021)
-

(0.051)
-

0 333'*
.

0 285"
.

(0.020)
-

(0.054)
-

0 111"
.

0 066
.

(0.021)
0 037"
.

(0.043)
0 069
.

(0.006) Income (thouiands of dollars)

(0.015)
0 135
.

Property
Other

0 087"
.

(0.013)
-

(0.284)
-

0 146"
.

1 145"
.

(0.024)

(0.199)
0 007
.

Spouse'i Earnngs
Disabled Marital Status
-

0 014
.

(0.008)
0 643"

(0.027)
-

0 747"
.

(0.058)

(0.145)
0 710"
.

Married. Spouse Present Married, Spouse Absent or Separated

Widowed
-

0 410"
.

(0.045)
0 098
,

(0.124)
0 330
.

(0.108)
-

(0.172)
-

0 033
.

0 139
.

(0.155)

(0.271)
0 081"
.

Age

0 143"
.

(0008)

(0.020)
-

Age Squared Log Likelihood

'

O 002"
.

0 001"
.

(0.0001)
-

(0.0002)
-

1196.77

176.11

Population locis equal sum of the sample weights.

Siaiistically signieant ai the .05 level; ''al the .01 level (two-tailed tests).

Source. SIPP. Wavc UI (1984).

EMPLOYMENT EFFECTS OF WAGE DISCRIMINATION

315

Tabte A2

Weighted Leas! Sqtures Estmales for Wage Equations with No Occupaton Variables
(Standard Errors in Parentfaeses)
White Black

(N - 10,137)
Variable

(N - 950)

(P - 46,082,859}-

{P-4,877.024)-

Interccpt
Health FACTOR! FACTOR2
FACTOR3

5 405"
.

3 397"
.

(0.445)
-

(1.026)
-

0 159
.

0 139
.

(0.22S)
-

(0.364)
-

0 163
.

0 130
.

(0.190)
-

(0.312)
-

0 114
.

0 212
.

(0.132)
Years of Education

(0.185)
0 641"
.

0 901"
.

(0.025)
Oisabled
Unin
-

(0.054)
0 015
.

0 574
.

(0.373)
0 291
.

(0.699)
1 107"
.

(0.162)
Public Sector Worker Part-Time
-

(0.281)
0 098
.

1 438"
.

(0.193)
-

(0.318)
-

1 226"
.

1 217"
.

(0,237)

(0.367)
0 328"
.

Specific Experience Spccific Experience Squared General Experience General Experience Squared
Missing Experience Capital-lntensive Industry
A
. -

0 437**
.

(0.022)
-

(0.043)
-

0 006"
.

0 005"
.

(0.001)
0 297..

(0001)
0 096
.

(0.020)
0 005"
.

(0.041)
-

0 001
.

(0.001)
0 088"
.

(0.001)
0 030
.

(0.031)
0 643"
.

(0.036)
0 613'
.

(0.143)
-

(0.261)
-

2 062"
.

0 025
.

(0.548)

(0.723)
0 353
.

$
F-value

0 268
.

248.310

36.662

'

Populaiion roais equal sum of the sample weighls. Siaiisiically signiHcant at the .05 level; "ai the .01 leve! (two-tailed tests).

Sourcn SIPP. Wavelll (1984).

316

INDUSTRIAL AND LABOR RELATIONS REVIEW

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