Understanding the Black-White Earnings Gap

Today, African American men working full time and year round have 72 percent of the average earnings of comparable white men. For African American and white women, the ratio is 85 percent. And during good times and bad, the black unemployment rate is typically stuck at about double the white rate. The persistence of these gaps is the subject of both a scholarly and a popular debate that is ideological as well as technical.

There are two broad views of what is occurring. One view attributes persistent earnings inequality to the injuries of social class compounded by the legacy of segregation and slavery: family background and poor schools and a resulting deficit of cognitive skills are said to explain most of the gap. But a second strand of thinking identifies changes in the labor market and lingering racial discrimination as major factors.

It's not as if this debate is just so much conjecture. There is an extensive body of research on the subject. Numerous studies, in fact, find that not even half of the racial differences in test scores can be explained by family background and school quality. They also show that the economic returns to the test scores and their determinants vary by race and that even when test results are effectively equal, racial earnings gaps remain. So, plain discrimination remains part of the story.

Yet, many researchers and policy-makers persist in calling for education as the sole remedy for addressing the economic challenges of African Americans. Education is of course important, but even more important in explaining these gaps are macro-economic factors and changes in institutions that influence labor markets.

Since the 1970s, more Americans have been getting more and better schooling. Yet earnings and income inequality have increased substantially. For men, from 1975 to 2005, the ratio of the 90th (highest) and 10th (lowest) percentiles of the earnings distribution jumped by over two percentage points from 3.8 to 5.9, with three-quarters of the increase occurring in the upper half of the income distribution. The ratios for women exhibited similar, though less dramatic, shifts. Thirty years ago, the average college graduate earned 38 percent more than the average high school graduate. Today, the gap is 63.4 percent. Much of that widening is due to the decline in the real earnings of high school graduates.

Just as there is a huge research literature on the cause and cure of black-white earnings gaps, there is a parallel scholarly debate about what caused rising income inequality generally. Many contend that the gap reflects a rapid increase in employers' need for better-skilled workers. Once again, education is seen as the remedy for restoring opportunity to low- and moderate-skilled Americans of all races.

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The consistently understated factor explaining what has occurred during the past three decades is a weakening of the labor-market institutions that once produced increased equality -- both racially and among workers generally. These factors include weaker rates of job creation during periods of economic expansion, diminished power of unions, a shift from manufacturing to services, and greater ease of offshoring, as well as increased returns to skills. All these factors undercut earning power among workers with lower skill levels, who were disproportionately African American. But they also undercut worker bargaining power generally, so higher skills are only part of the solution.

By the same token, the increased income concentration at the very top reflects factors such as deregulation, globalization, and a weakening of government counterweights to inequality -- factors that have almost nothing to do with the distribution of skills. And although some racial discrimination persists, in many respects black and white workers find themselves in a convergent condition of greater economic vulnerability. Because of the well-documented shift in labor demand toward better-skilled workers, the lower third of the white wage distribution and bottom half of the African American wage distribution have been unable to keep pace with moderate-skilled whites and high-skilled blacks and whites. Thus, a portion of the racial wage gap is actually due to a host of "race neutral" factors -- changes in the labor market that adversely impacted both blacks and whites. Since a larger portion of African Americans faces these challenges, a disproportionate share is disadvantaged. However, a growing percentage of white workers are now experiencing the same kinds of economic challenges that most African Americans have been facing since the 1970s.

Weak Job Creation.
During the recent economic expansion (2002?2007), the economy generated approximately half the number of jobs that are typically created in an expansion. Average monthly job growth lagged behind the growth in the labor force. The economy failed to create enough jobs to either absorb the natural growth in the labor force or extend prosperity to disadvantaged Americans who were out of the labor force. Hidden unemployment -- involuntary part-time work, people who have given up looking for work, people doing intermittent day labor -- remained stubbornly high.

This slow rate of job creation relative to labor-force growth has undercut the ability of workers to demand better compensation, fringe benefits, job security, or safer working conditions. Though lingering discrimination may have a disproportionate impact on blacks, the trend affects all Americans.

The Diminished Power of Unions.
In 1983, 20.1 percent of working Americans were union members. Today that percentage is 12.1 percent and is under 8 percent in the private sector. The union-wage premium -- the wage advantage that union membership typically yields -- has narrowed, too. During the 1980s, estimates from the Current Population Survey ranged from 34 percent to 39 percent. Today, the estimate is 30 percent. So, the erosion in power has two dimensions. Fewer workers are receiving the benefits of collective bargaining, and if a worker is a union member, the wage advantage has diminished.

And although some unions in the skilled trades had a history of racial exclusion, the union movement as a whole, particularly in the postwar era, has been a force for greater opportunity and upward mobility for African Americans and other non-white racial and ethnic groups. To the extent that organized labor has been weakened, so has that source of greater earnings equality.

Shifts from Manufacturing to Services.
In 1970, 25.1 percent of jobs were in the manufacturing sector. Today that figure is 10.1 percent. The manufacturing earnings advantage relative to private services has all but vanished. After peaking at 14.9 percent in 1985, the manufacturing-earnings advantage fell to 10 percent in the mid-1990s, and 5 percent from 2000 to 2005. Today, there is virtually no difference between the two sectors' average hourly wages. The convergence occurred because service-sector wages grew faster than manufacturing wages did during the 1990s, and since 2003, service wages trended upward, while manufacturing wages failed to keep pace with inflation. Since the mid-1990s, along with adding a large number of lower-paying service-sector jobs, the sector also added a large number of higher-wage jobs, while in the manufacturing sector, high-wage jobs vanished or were replaced with lower-wage jobs.

Implicit Contracts Have Eroded.
Among nearly all groups, regardless of educational attainment and experience, the odds of displacement have risen in recent years. Average tenure on the job has fallen and many younger workers understand that most of them will work for multiple employers during their careers. At the same time, transitional programs such as Unemployment Insurance became less supportive. (There are proposals to generalize the Department of Labor's Trade Adjustment Assistance Program to any worker who loses his or her job through no fault of his or her own.) Employer-provided benefits, such as health insurance and retirement packages have also dwindled. And if an employer does offer benefits, employees bear an increasingly larger portion of the costs.

Technological Change.
The application of information technology to the production of all types of goods and services has led to a surge in demand for workers with not only computer skills but also a variety of capabilities, such as problem-solving skills. The application of IT also made global markets more integrated, substantially reducing the cost of moving goods and information. Princeton University economist Alan Blinder has estimated that "between 22 [percent] and 29 percent of all U.S. jobs are or will be potentially offshorable within a decade or two."

This shift in demand, however, does not mean that the search for more-advanced workers explains all of the widening income inequality. Nor does it mean that earnings gaps will be solved primarily by skills training, especially since offshoring makes even the most-advanced workers more vulnerable.

Failure of Government to Counteract These Trends.
Where do we go from here? Consider two widely used economic-development indicators: public- and human-expenditure ratios. The former is the percentage of gross domestic product that goes to public expenditure. The latter is the percentage of GDP devoted to such outlays as social-insurance funds, housing and community services, health, recreation and culture, elementary and secondary education, and higher education.

The ratios were introduced in the 1991 Human Development Report of the UN Development Program, as a way to assess a country's values and priorities. The economic-development literature identifies eight human-priority areas: literacy, K-12 education, higher education, basic health standards, curative care, primary health care, hospitals, and Social Security. We focus our discussion on the human-expenditure ratio.

The chart at right plots the human-expenditure ratio from 1959 to 2004. From the early 1960s to the mid-1970s, human expenditure grew steadily, peaking at just over 17 percent. Since then, the pace of growth has slowed dramatically. The figure plots two trend lines. One is based on average annual growth from 1959 to 1975. The other is based on average annual growth from 1959 to 2000. These linear projections indicate that current human expenditures are below trend. In fact, they have been below trend since the 1980s.

The slowdown is consistent with three stories: 1) Perhaps an additional dollar spent on human priorities is more efficient than it was prior to the 1990s. Less investment is needed to achieve the same human-development outcomes; 2) Or maybe, by the end of the 1970s, human expenditures reached a self-sustaining threshold. Since then, increases are associated with meeting recurring needs, such as investing in the education of successive cohorts; and 3) Alternatively, the stagnation in human expenditure coincides with the growth in black-white inequality and has something to do with the increase in income inequality. I favor the third explanation.

The human-expenditure ratio mirrors income inequality's path, almost doubling from 1959 to the mid-1970s but for the remainder of the 1970s to the present, slowing in growth considerably. If the pattern of expenditures prior to the mid-1970s and the pattern from 1959 to 2000 had continued, today the ratio would range from 22 percent to 32 percent. Income of the typical African American would not have stagnated, and inequality growth would not have been dramatic. Quite troubling is that during the current economic expansion the ratio stagnated, coinciding with stagnating real incomes for much of the population.

Are these relationships causal? To answer this question, my research explored the causal links between human expenditures and a variety of economic indicators over the past six years.

I find that states where human-expenditure ratios grew the most over the past five years are associated with currently having higher income, lower poverty, a smaller percentage of families below the self-sufficiency budget, lower food insecurity, and more residents with health-insurance coverage. Union membership is highest in these states. Policies such as the Earned Income Tax Credit are positively related to increases in the human-expenditure ratio. States with larger growth in their human-expenditure ratio are more likely to have a state EITC, which complements the federal government's EITC.

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Simply put, public budgets face major economic and political constraints. Individuals and businesses don't want to make the necessary investments, especially if they mean higher taxes, and few politicians have the courage to build the case for the needed investments. Congressional deficit hawks are even balking at a second short-term stimulus package.

Thus, any new source of funds will have to come from a combination of the repeal of the Bush tax cuts for the wealthiest and the redirection of existing revenues. Here is some food for thought: According to the National Priorities Project, the $656.1 billion in Iraq spending that's been approved to date could provide over 193 million Americans with health care for one year or 679 million homes with renewable electricity. The $656.1 billion could also finance the construction of 5 million affordable housing units.

The Gulf Coast area has some of the greatest need for human-expenditure investment. The contribution by Louisiana taxpayers of $5 billion to the Iraq War could be used to build 60,000 affordable housing units. Alabama's and Mississippi's contributions to funding efforts in Iraq could build over 72,000 and 37,000 units, respectively. At the second anniversary of Hurricane Katrina, many individuals and families still remained officially homeless, occupying approximately 82,000 Federal Emergency Management Agency trailers: 45,000 in Louisiana, 20,000 in Mississippi, and 400 in Alabama. If managed properly, these dollars could have a tremendous impact on the Gulf region, with even a modest shift generating major human returns.

In sum, the economic well-being of an increasing number of Americans has converged toward the experiences of many African Americans, an economic fragility that has less to do with low educational attainment and more to do with structural changes in the U.S. economy and diminished human-expenditure investment in people and institutions. As human expenditures slowed, the adverse impacts of the diminished investment moved up the U.S. income distribution.

Today's human-expenditure investment is much lower than what would have occurred if the pace of earlier investment had been sustained. What got us in this predicament? We are living the consequences of failing to take the sage advice of the mechanic in the 1971 Fram oil-filter commercial: "Pay me now or pay me later."

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