What explains the racial unemployment gap?

Since the 1930s, the racial unemployment gap has widened dramatically. Economics and history, rather than verbose rhetoric, explain the influences that caused a sustained gap in the unemployment rates. The attached graph shows that blacks had about the same unemployment rate during the early 1900s; even less than whites at one point. There are many reasons why and each have their own merit. The most important reason, however, is the minimum wage.

First, it’s important to understand history. The turn of the 20th Century was marked with reduced foreign labor from various immigration restrictions and increased demand for Americans goods. The combination created employment shortages and rising wage rates. The North’s industrial economy boomed and attracted blacks away from the South’s agricultural industry; largely in part from recruitment efforts by Northern industrialists.

In 1910, only 11% of the black population lived outside the South. By 1950, that nearly tripled to 32% and an even larger portion of the black labor force were migrants. Simply put, blacks were undercutting whites and firms (along with black labor) accepted the lower wage trade off. Heavy restrictions on immigration also made it easier to assimilate into the Northern workforce – specifically the Quotas Act of 1920. As a result, blacks experienced gains in wages, education, and political expression.

The mass exodus to the North, in search of higher wages, reduced the South’s total labor force by about 30%. Southern blacks now had even more autonomy in their market, which ultimately achieved “farm tenancy” and other benefits.

Although the Great Depression affected employment for everyone, the racial unemployment gap does not rapidly diverge until later. It never permanently exceeded 1% difference until 1940. So what happened? In 1938, the Fair Labors Standard Act imposed the very first minimum wage. From then on, the gap widely expands.

Minimum wage forced out the least skilled labor in the market. At the time, it happened to be blacks, especially black youth. Why? The first minimum wage was $0.25 in historic dollars. That means anyone whose productivity is not currently valued to at least $0.25, they will be unemployed. In other words, the effect is narrowed to lower skilled labor. The compounding effect is a lower amount of long run employment and income growth.

For example, the Employment Policies Institute studied over 600,000 data points to focus on 16 to 24 year old males without a high school diploma. They found that every 10% increase in the federal or state minimum wage decreased black youth employment by 6.5%. In fact, this effect was seen over the period following the original minimum wage.

To explain in the long run, in 1970 black labor force participation rate for 20 – 24 was slightly higher than whites, but fell to 90% of whites in 1980. During that same time, the black unemployment rate went from 62% higher than whites to 130%.

Young blacks reached their 20s with no marketable job skills as a result of zero work experience. By not participating in the labor force, young blacks could not develop the human capital necessary to maintain employment and income growth. Other factors, such as the Great Society”, also diminished black labor force development. The minimum wage, however, undoubtedly harmed their long term benefit.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s