Looking to economics for help in addressing enduring discrimination

Q. What does economic research broadly show about racial discrimination in the labor market?

Most of the work around this topic deals with the persistent differences between Blacks and whites in employment or wages in the U.S. labor market. Economists have used many variables to explain away these differences, from skill levels—which includes training and education—to tenure on the job, to age and even IQ.

The research has explored certain sectors of the economy, from manufacturing to the public sector to higher education, to see if these racial differences are present.

Yet, despite all of these compounding factors, differences persist that can only be explained by employer race-based preference. The literature has shown that such behavior on the part of employers can only be explained if race-based preferences are somehow being included in a maximizing equation.

However, under no form of profit maximization can such behavior be accepted where valuable human resources are not fully utilized.

Q. What impediments do Black workers face finding a job? Do they earn less because they are Black?

The impediments begin for Blacks seeking employment from the very outset. Some research has shown that non-Black job applicants of equal ability receive 50 percent more callbacks than Blacks.

To further amplify on the issue, some research has shown that Black males without criminal records receive the same rate of callbacks for interviews as white males just released from prison when applying for employment in the low-wage job market.

With such handicaps existing from the start, it is no surprise that a wage gap exists. Some estimates show that gap to be as large as 28 percent on average and as large as 34 percent for those earning in the highest end (95th percentile) of the wage distribution.

Q. Besides employer discrimination, are there other systemic factors hurting the labor market outcomes of Black workers?

There are disparities that exist in the areas of education and health. Employers want workers who are trainable and present.

Black workers, who have been poorly trained or suffer inferior health outcomes, will suffer disproportionately.

In addition, the impacts of the criminal justice system cannot be overlooked. Some recent research has shown that for the birth cohort born between 1980 and 1984, the likelihood of incarceration transition for Blacks was 2.4 times greater than for their white counterparts. Given this outsized risk of incarceration, the prospects of long-term unemployment are dramatically increased.

Q. Do you think recent attention to racial disparities will have an impact?

It remains to be seen whether recent events will have impacts that are sustaining. The good news, without question, is that we are having these conversations. The differences have been longstanding, but only recently have they drawn this much intense attention. Thus, we have an opportunity to revisit the literature and update old and outdated models and ways of thinking.

What needs to happen is that more research should take place, with race being more than a convenient indicator variable entered at the back of some regression analysis.

Q. What about other racial and ethnic groups? In what way does racial discrimination affect Hispanics?

The United States is interesting in that it is a mixture of a great many racial/ethnic groups, all uniquely contributing to the fabric of the economy and the culture. Hispanic labor market outcomes have been woefully understudied. In most cases, the research centers around males. As Rhonda Sharpe, president of the Women’s Institute for Science, Equity and Race, has famously said, “We must disaggregate the data.”

Hispanic women in both low- and high-wage employment categories face discriminatory impacts far different from their male counterparts. Critically important to this discussion, but often overlooked, are issues of remittances, legal status and migration patterns.

Q. How do economists measure discrimination? What are factors that may make it hard to identify and measure?

Typically, these discussions start from the premise of ceteris paribus, or all things equal. Thus, for example, if we take two workers of the same age, educational background, gender, etc., we should expect that their wages be comparable.

However, this sets up a false narrative from the beginning in assuming that all things are equal. For instance, Trevon Logan of Ohio State University has done some very interesting work on “Black-sounding names,” which might exclude a group of candidates from ever being interviewed or given a job.

What makes this difficult to uncover is that research over the past 20 years has shown that there are statistically significant differences in wages across gender and race even after accounting for observable characteristics like education and training. What also complicates matters is that research has shown that wage privacy policies make it difficult for Black workers to realize that they are not receiving equal pay for equal work. This also holds true across gender.

More recent research using experimental designs has yielded promising results [showing the nature of underlying discriminatory practices]. David Neumark at the University of California–Irvine did a great job in a recent Journal of Economic Literature piece surveying all of the techniques, both in the lab and field, which have been employed over the last few decades.

Q. How much does discrimination cost the U.S. economy? Which regions bear an outsized part of that burden?

Despite the fact that engaging in racial discrimination in the labor market is not profit-maximizing, it still persists. In a recent paper (“The Price of Prejudice”) in the American Economic Journal: Applied Economics, [Morten Størling] Hedegaard and [Jean-Robert] Tyran provided some interesting conclusions. In particular, they found that those engaging in discrimination were willing to give up 8 percent of their earnings to avoid working with someone of a different ethnicity.

The work was done in Denmark, so how much of it translates to the U.S. job market is not clear. One thing that is overlooked often in these discussions is the human cost of such interactions. Black workers subjected to these injustices might be less inclined to look for further employment opportunities for fear of more psychological scarring. As alluded to earlier, having this much productive human capital sitting on the sidelines is foolish.

Q. What is the solution to racism in the labor market? Do we need more regulation and enforcement?

It would appear that racism in the labor market is a reflection of racism in the society. It would seem that using economic tools would be the best solution. We, as economists, know that incentives matter in changing behavior. It [strategy of providing incentives] is not necessarily effective in changing the thoughts or feelings of people. Thus, we want an outcome where people do not “act” on their aberrant feelings.

Regulation seems shortsighted because, as I alluded, these items are not always easily detectable. However, they rarely can happen in a vacuum without others knowing. Thus, incentivizing whistleblowers would help. It has been proven effective in other areas of the workforce where criminal or life-threatening behavior has been occurring.

Another idea, which has been proposed by William Darity Jr. of Duke University, is that of a “baby bond,” which would be issued to a child at birth and held in trust until the child turns 18. At that point, the endowment could be used to pay for college, buy a house or start a business.

If the problem in the labor market is that a demographic group is being systematically shut out, then nothing shakes up markets like competition. If these underrepresented minorities are that talented, as we believe they are, then giving them the capital to become competitors to those engaging in discriminatory behaviors would cause elimination of the discriminators or changes in practices that would make them become more inclusive.

Q. You have a broad research agenda, including several studies on economic freedom and inequality. What are some of your findings as they apply to minority groups in the labor market?

[James] Gwartney, [Robert] Lawson and [Walter] Block stated in their 1996 paper (“Economic Freedom of the World: 1975–1995”) that “Individuals have economic freedom, when (a) property they acquire without the use of force, fraud or theft is protected from physical invasions by others and (b) they are free to use, exchange or give away their property as long as their actions do not violate the identical rights of others.”

This ideal seems noble. Some of my earlier research found that the implementation of such ideals could, under certain circumstances, lead to faster economic growth. However, later work by me and others found that the benefits were not uniform for the entire income distribution.

There is a string of economics known as “stratification economics,” which shows that Black median income would occupy the 32nd percentile of the white distribution. Since Blacks primarily occupy the lower rungs of the income distribution, they cannot fully enjoy the perceived benefits of economic freedom.

Furthermore, one proposition of economic freedom is that economies need defined and functioning court systems. It makes sense given that no two agents will be willing to enter into a contract for goods or services if there is no way to later adjudicate disputes. However, minorities are more likely to interact with the criminal court system, while others will mostly interact with the civil court system. The difference is striking.

Q. You have been very successful in a profession where Blacks are woefully underrepresented. What can economists do more broadly to be more diverse as a profession?

Although I have been successful in economics, it has not come without some amount of psychological trauma. When I arrived at the University of Alabama in 1998, the economics department had never hired a Black faculty member. Sadly, that is still the case at more economics departments than not. I would not call those initial years hostile, but they were not inviting either.

I stuck to my plan, which was to publish articles to the best of my ability and teach good classes. The pressures were there to mentor Black students, serve on countless committees to “diversify” things and be a role model. I took on the extra tasks but never lost track of my goal. I saw so many of my Black counterparts fall into the trap. They had outsized service burdens compared to their peers, which they took on with the encouragement of the administration. However, when promotion and tenure evaluation time arrived, they were dismissed for not “meeting the high standards of the unit.”

The answer for economics departments wanting to diversify our profession is rather simple: use economics! We, as economists, know that incentives matter. Yet, when it comes to issues of diversity, we seem to be at a loss for what to do. However, we have clearly defined metrics of what qualifies as good research, teaching and service. We then tie promotions, salaries and funding to those metrics, which incentivizes others to engage in those activities. Do the same for diversity and watch the landscape of our profession change overnight.

Q. You are co-chair of the American Economic Association’s (AEA) Committee on the Status of Minority Groups in the Economics Profession. Has the committee made progress in recommending changes to the AEA?

In June 2020, the AEA put out a statement about diversity and inclusion. I, along with my co-chair at the time, Ebonya Washington of Yale University, were opposed to statements that had no action plans attached. Thus, the committee proposed six concrete actionable items that the AEA could/should do to be a leader in setting the tone for the profession. Five of those six items were adopted. As of this time, I am not at liberty to discuss them in any detail, as they have not been publicly released.

Q. By 2045, the U.S. will be a majority-minority nation where non-Hispanic whites will make up less than half of the population. Are you optimistic that the economy will evolve quickly enough to ensure the success and prosperity of minority groups?

I think that I must be optimistic about the future. What employers are yet to realize, but will have to come to grips with, is that successful market outcomes for minority groups mean success for them also. By that I mean, this is not a zero-sum game where one group will only improve at the expense of the other.

In fact, history has shown us the opposite.

Once minorities are fully utilized and integrated in the labor force, the economy as a whole will enjoy a different type of prosperity than has ever been experienced in the U.S. Once again, we must remember the introductory idea we teach to our college freshmen about the circular flow of the economy in that those fully engaged minority employees become fully engaged consumers.