The Black-White Wage Gap: How Inequality and Monopoly Amplify Racial Discrimination

Following the police killing of George Floyd last year, Howard University professor William Spriggs wrote, “Is now a teachable moment for economists?” Under a heading of Black Workers Stopped Making Progress on Pay. Is It Racism?, Eduardo Porter of the New York Times addresses the question. A chart shows how Black men’s wages as a percent of White men’s wages rose rapidly from under 40% during World War II to 59% in 1970, then slowly declined until taking a plunge in 2008 and then recovering to 56% in 2019. In short, the wage gap closed dramatically while Jim Crow laws remained in effect, and then stagnated even as Black education improved and overt racism declined.

The default position of neoclassical economics, as originally expounded by John Bates Clark, holds that a Black-White wage gap cannot exist. In 1898, Clark wrote, “the share of wealth that falls to any producing agent tends, under natural law, to equal the amount that he creates. A man’s pay tends to equal the value of the product or fraction of a product that can be specifically imputed to him.” In other words, if Blacks are paid less than equivalent Whites, that’s because they are intrinsically less productive.

This position became politically untenable in the 1950’s with Brown vs Board of Education (1954) and the growing civil rights movement. In 1957, Chicago economist Gary Becker proposed that both individuals and employers exercise “a taste for discrimination.” It seemed obvious that individuals might discriminate in choosing with whom to associate. But for employers to discriminate, that meant they were sacrificing profits. That contradicted the Chicago neoclassical model, which holds that a fully competitive market drives all profits to zero. (Just throw in some “shadow prices” for natural resources and bingo! Zero profits!) Firms making zero profits obviously could not afford to discriminate.

Alternatively, in the Chicago model, employers who enjoyed a degree of monopoly profit were sacrificing some of that profit to indulge personal preferences such as luxurious offices, pretty secretaries, and a compatible white male workforce. But the monopoly explanation ran afoul of two of Chicago’s core doctrines: First, their insistence that monopoly in the US was minor and even beneficial in allowing economies of scale and thus lower consumer prices. Second, their claim that regulation was crippling the economy, especially regulation favoring unions and protecting workers. That made it undesirable to layer on new regulation against discrimination. Moreover, even as Congress passed the historic Civil Rights Act of 1965, the rapid rise in Blacks’ relative wages since the war seemed to show the market was solving the problem.

Since that time, as the graph indicates, Black wages have stagnated. The discussion has likewise remained stuck in a debate over racism versus inadequate skills. Eduardo Porter interviews economists on both sides. Two Black economics professors, Spriggs of Howard and Darrick Hamilton of the New School in New York City, insist on racism. According to Dr. Spriggs, “Trapped in the dominant conversation, far too often African American economists find themselves having to prove that African Americans are equal.”

An economics professor at the University of Chicago, Erik Hurst and his colleagues blame technological change. Otherwise, how to explain the fact that Black wages rose fastest before the abolition of Jim Crow? The professors observe that, over the years, returns have disproportionately increased for jobs requiring abstract skills, notably working with computers. Yet, even as their overall education has improved, Black men have made little progress in obtaining such jobs. According to Dr. Hurst, that has cancelled out gains in education.  To which Dr. Spriggs retorts, “Silicon Valley says, ‘Yeah, but they are not skilled.’”

Porter concludes by quoting economics professor Kevin Lang at Boston University that the question must be addressed within the broader context of growing inequality. That’s a start, but there’s a big piece of the story missing. Consider the following graphs: The first graph comes from a 2020 paper by Emmanuel Saez and Gabriel Zucman on Trends in Income and Wealth Inequality. It shows how New Deal reforms, including vigorous anti-trust enforcement, produced a steady downward trend in wealth share of the top 0.1% –until the late 1970s. The other is the Economic Policy Institute graph of the Productivity-Pay Gap. It shows the percent increase of labor productivity and of compensation since 1948. The two lines overlap until the mid 1970’s, when the compensation line flattens. The two graphs have a striking feature in common with the graph of the Black-White wage gap: There’s a kink or discontinuity just before 1980.

We know what happened back then: Chicago-neoclassical influence rose under President Jimmy Carter and then Ronald Reagan became President. Reagan dramatically cut income and corporate taxes, while raising Social Security payroll taxes to compensate for the loss of revenue. That made the federal tax system much less progressive. Simultaneously, following the Chicago revision of thinking about monopoly, Reagan cut back anti-trust enforcement, allowing mergers and acquisitions that would have been unthinkable ten years before. Reagan also got tough on unions, famously breaking the Air Traffic Controllers strike in 1981.

The Chicago-Reagan Revolution helps explain the U-turn in wealth share in the late 1970s. But what’s the connection to the growing wage-productivity gap and Black wage stagnation?

The productivity line in the EPI graph shows the increase in net output per manhour worked. As Adam Smith pointed out in the first chapters of the Wealth of Nations, economic growth depends on producing more output per manhour, by adopting labor-saving technology and organizing work to obtain greater economies of scale. However, this process can be pushed further and faster than the growth of the labor supply, creating unemployment and depressing wages. The EPI graph suggests that starting in the late 1970s, that’s what happened. See Is New Technology Destroying Jobs?

In the real world, both greater wealth inequality and greater monopolization create a bias to using fewer workers in production. Large corporations and wealthy individuals suffer a management bottleneck, which they address by automating or simply avoiding labor-intensive activities. For example, in the days of Jimmy Stewart’s It’s a Wonderful Life (1946), local bank officers made small loans to customers they knew personally; today’s big banks make small loans, if at all, by computer algorithm. Meanwhile, monopolies increase profits by withholding production and squeezing employees and subcontractors. The trouble with analyses like those of Dr. Hurst and colleagues is they assume that production changes just happened, independent of political choices that had economic consequences.

Back to racism. Chicago is quite correct that monopoly power enables (mostly White) employers to indulge personal preferences. Some may hold racist views. Others may just find it more convenient to hire friends and family of existing employees. Either way, an artificial scarcity of jobs created by inequality and monopoly gets amplified across racial barriers. As Dr. Hamilton of the New School puts it, “The fact is there are a limited number of jobs and we sort them based on power. Race is a deciding factor.”

Published on Dollars & Sense Blog 7/19/2021

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