Competing Explanations of Male Interracial Wage Differentials: Missing Variable Models versus Job Competition

COMPETING EXPLANATIONS OF MALE INTERRACIAL WAGE DIFFERENTIALS: MISSING VARIABLE MODELS VERSUS JOB COMPETITION Persistent interracial wage differentials present a challenge for neoclassical models of discrimination, which claim that long run competition is not consistent with persistent discrimination. Accordingly, several missing variable explanations are proposed in the literature. These modifications have two implications. One, interracial wage inequality is due to interracial inequality in pre-labor market factors. Two, there is no correlation between intergroup segregation and interracial wage differentials. However, the job competition model of discrimination argues that persistent wage discrimination and racial and gender employment segregation are causally related. Also, this model shows that racial discrimination is linked to the profit maximizing behavior of firms and, thereby, is consistent with the existence of competitive labor markets. This study provides an empirical examination of the missing variable and job competition models of interracial wage inequality. The results argue strongly against the missing variables approach and strongly in favor of the job competition model. Specifically, this study finds that about one-half of the male African American white and Latino white interracial wage differentials are due to market discrimination African Americans and Latinos. Also, the positive and significant coefficients on the race-gender employment density variables strongly affirm the job competition model's contention that access to white (especially) male dominated jobs increases an individual's wage rate -regardless of race. Racial job segregation then is an important explanatory variable for racial wage discrimination.