The Role of Location in Evaluating Racial Wage Disparity
Federal Reserve Bank of St. Louis Research Division Working Paper 2009-043B
34 Pages Posted: 6 Sep 2009 Last revised: 19 Jul 2010
Date Written: July 16, 2010
A standard object of empirical analysis in labor economics is a modified Mincer wage function in which an individual's log wage is specified to be a function of education, experience, and an indicator variable identifying race. We analyze this approach in a context in which individuals live and work in different locations (and thus face different housing prices and wages). Our model provides a justification for the traditional approach, but with the important caveat that the regression should include location-specified effects. Empirical analyses of men in U.S. labor markets demonstrate that failure to condition on location causes us to (i) overstate the decline in black-white wage disparity over the past 60 years, and (ii) understate racial and ethnic wage gaps that remain after taking into account measured cognitive skill differences that emerge when workers are young.
Keywords: wage regressions, racial wage disparity, theory of local labor markets
JEL Classification: J31, J71, R23
Suggested Citation: Suggested Citation