February 27, 2020

Analysis

# The Economics of Race

Black America has had less wealth, less income, less education, and poorer health than white America for as long as records have been kept. To account for this disparity, economists have advanced three types of explanations: genetic, cultural, and structural. While the first of these had mostly fallen out of favor among social scientists by the mid-20th century (until a worrying revival in recent decades), the latter two have been adopted by somewhat distinct research communities that frequently collide. According to the theory that emphasizes culture, racial disparities are the result of social capital deficits. This is the view that has been most widely adopted by the mainstream of the economics profession, and I refer to it as the neoclassical economics of race. By contrast, the structural theory argues that racial disparities in socioeconomic outcomes are created and maintained over time by American institutions, which privilege white Americans at the expense of Black Americans. This view is known as stratification economics, and, as I argue here, it offers a more accurate and empirically sound explanation for racial disparities in America than its counterpart. The neoclassical and stratification approaches disagree over the causes of and remedies for racial disparities in socioeconomic outcomes and differ substantially in their understanding of income, education, wealth, and health.

### Income

Outside of market imperfections, neoclassical economists see variations in income as a result of differences in human capital—the stock of skills, talent, and experience deployed by individuals in the labor market in exchange for a wage. This is the basis from which they reason about income disparities by race: either, the account goes, Black Americans lack the sort of skills that are valued in the labor market, or they are being irrationally discriminated against by employers. Gary Becker’s 1957 book The Economics of Discrimination pioneered this view. In it, Becker posits employers and coworkers discriminate because of an irrational preference against hiring or working alongside Black people. Because racially-biased employers implicitly devalue Black labor, they would only employ a Black worker if they could do so at a discount—reducing the starting wage of Black hires. Similarly, racially biased white workers would expect a wage premium to work alongside Black workers. In theory, this type of preference-based discrimination cannot persist over time, as talented Black workers eventually find non-discriminatory firms to employ their skills, and these nondiscriminatory firms prove more productive than their racially biased counterparts in the long run.

In a 1973 paper, Kenneth Arrow introduced statistical discrimination—a more contemporary neoclassical take on income and hiring discrimination. The theory of statistical discrimination rationalizes discriminatory behavior at the individual level; in this view, employers have limited information with which to judge the future productivity of all prospective hires, and thus rely on group-level statistics, heuristics, and stereotypes to decide whether to make an offer of employment and what that offer should be. Educational attainment is one signal employers might rely on to make these predictions, but, according to the theory of statistical discrimination, employers tend to believe that Black educational attainment is a noisier signal than white educational attainment, or that Black workers are in general either less productive or less reliably productive than white workers.

Supposed cultural or social capital deficiencies also play a role in neoclassical explanations of racial disparities in income and employment. Economist Glenn Loury and sociologist William Julius Wilson both suggest that decades of diminished cultural expectations brought on by limited opportunities for social and economic advancement have left Black communities deficient in the skills, cultural habits, and social connections necessary to succeed in the modern labor market. Though no inherent disparities exist between Blacks and whites, Blacks enter the labor market unprepared to compete with white workers and are thus justifiably paid less.

The primary flaws of neoclassical explanations for racial income disparities are that they are both ahistorical and apolitical; that is, such explanations do not deal with the empirical, historical circumstances which brought about these disparities, and they do not account for the role of direct political decisions (or the lack thereof) in perpetuating said disparities.

By contrast, stratification economics contends that racial disparities in income and employment persist over time and across the educational distribution because there is an economic benefit to employers and white workers. For employers, racial wage or occupational differentiation among employees reduces their capacity for collective bargaining; so long as white workers maintain a higher wage or occupational rank relative to Black workers, their relative superiority can be enough to suppress more extensive workplace demands.

Stratification economics also rejects the notion that statistical discrimination based on perceived group-level characteristics or signal reliability is justified behavior on the part of employers, and views supposed human capital and cultural deficiencies among Black Americans as an ex post justification for observed labor market disparities. Stratification economists have looked to audit studies for proof that race-based discrimination is neither the result of human capital deficiencies, nor of an irrational reasoning process which is resolved by the market in the longrun. In studies where resumes of varying quality were sent to employers, differing only in whether the resumes were assigned a white or Black-coded name, white resumes received significantly more callbacks for interviews. In many cases white resumes received more callbacks than Black resumes with significantly more “human capital” (as measured by education), and fewer “cultural deficiencies” (as measured by contact with the criminal justice system). The unjustified belief that Blackness adds so much uncertainty to a signal of candidate quality is racism itself; it serves to preserve privileged occupations for white job candidates.

The empirical persistence of racial disparities in income and employment repudiates Becker’s theoretical analysis of taste-based discrimination and calls into question the plausibility of Arrow’s statistical discrimination hypothesis—if the source of discrimination was indeed some lack of signal reliability, it is unlikely that firms would simply remain unable to properly judge Black resumes. Unless one adopts an unfalsifiable view of “the long-run,” it is hard to argue the case that racial discrimination is punished by the market over time. It seems more consistent with the evidence at hand that such discrimination is in fact rational for businesses, or at least for businessowners. On this theory, then, there is no need to justify Blacks’ consistently higher unemployment rate and lower wages ex post through an appeal to cultural deficiencies.

### Education

Racial disparities in educational attainment and achievement are widespread and have only narrowed slowly over the past 40 years in the United States. Neoclassical economists have attempted to explain these gaps through an individualist lens. They argue that individual Black students lack the motivation or talent to excel at schooling because of a cultural undervaluation of education. “Oppositional culture” theory is a set of ideas imported from sociology used to explain Black students’ supposed lack of investment in their education. The theory holds that Black students may purposefully avoid doing well in school so as to not be seen as “acting white.” Another explanation popular in behavioral economics suggests that Black students (and Black people generally) place higher value on the present than the future, leading them to underinvest in activities that take a long time to pay off like education. There is little evidence that Black students value education less than their white counterparts, or that Black people broadly associate education with white identity; in fact, Black people have been found to invest more in education when compared to white people of similar socioeconomic background.