Understanding the Sources of Ethnic and Racial Wage Gaps and Their Implications for Policy

Abstract

Previous studies show that controlling for ability measured in the teenage years eliminates young adult wage gaps for all groups except Black males, for whom the gap is reduced by approximately three-fourths. This suggests that disparity in skills, rather than the differential treatment of such skills in the market, produces racial and ethnic wage differentials. However, minority children and their parents may have pessimistic expectations about receiving fair rewards for their skills in the labor market and so they may invest less in skill formation. Poor schools may also depress cognitive achievement, even in the absence of any discrimination.

We find that the evidence on expectations is mixed. Although all groups are quite optimistic about the future schooling outcomes of their children, minority parents and children have more pessimistic expectations about child schooling relative to White children and their parents when the children are young. At later ages, expectations are more uniform across racial and ethnic groups. Gaps in ability across racial and ethnic groups also open up before the start of formal schooling, and the different trajectories of Hispanic and Black students indicate that differences in schooling cannot be the source of cognitive disparities. Finally, test scores depend on schooling attained at the time of the test. Adjusting for differences in schooling attainment at the age the test is taken reduces the power of measured ability to shrink wage gaps for Blacks, but not for Hispanics.

We also document the presence of disparities in noncognitive traits across racial and ethnic groups. These characteristics have been shown elsewhere to be important for explaining the labor market outcomes of adults. This evidence points to the importance of early (preschool) family factors and environments in explaining both cognitive and noncognitive ability differentials by ethnicity and race.