Responsible researcher: Bruno Benevit
Original title: Minimum Wages and Racial Inequality
Authors: Ellora Derenoncourt and Claire Montialoux
Intervention Location: United States
Sample Size: 490,000 worker-years
Sector: Work
Variable of Main Interest: Income
Type of Intervention: Minimum wage
Methodology: DID, TD
Summary
The wage gap between whites and blacks highlights a historic social problem in the United States. However, during the Civil Rights era this difference was significantly reduced between the late 1960s and early 1970s. The objective of this article was to estimate the impacts of the Fair Labor Standards Act implemented in the 1960s, which led to the adoption of the minimum wage for several productive sectors in which the majority of the black population was employed. Using the difference-in-differences methodology, the authors demonstrated the affected sectors saw increases in workers' wages, higher impacts for black workers, and no effect on workers' employment levels.
In the United States, one of the most notable inequalities concerns the persistent economic disparity between different racial groups (BAYER; CHARLES, 2016; CHETTY et al. , 2020). A central aspect of these disparities is the difference in earnings between black and white workers. The average annual income difference between these two groups is currently 25%.
Over the past 70 years, this gap has narrowed significantly only once, during the late 1960s and early 1970s, when it was reduced by approximately half. The period was marked by the implementation of Civil Rights policies for the black population in the United States. Specifically, the Fair Labor Standards Act (FLSA) of 1966, implying the adoption of the federal minimum wage for several sectors representing the economically active black population.
In this sense, understanding the factors that contributed to this historic improvement can offer relevant information for the adoption of policies that reduce racial disparities that still persist today.
Several anti-discrimination policies were adopted in the United States during the 1960s, known as the era of the black rights movement. Such policies implied institutional improvements in favor of the education, income and political rights of the African-American population.
Within this context, the 1966 FLSA introduced the federal minimum wage for several sectors of the American economy that were underrepresented by the black population at the time: agriculture, hotels, restaurants, schools, hospitals, nursing homes, entertainment, and other services. Industries affected by the FLSA accounted for 20% of the total U.S. workforce, and one-third of African-American workers. While the 1938 FLSA covered only 54% of the American workforce, reform to the FLSA in 1966 introduced the federal minimum wage to another 21% of the workforce, representing one-third of the entire African-American workforce (compared to 18% white workers).
The introduction of the minimum wage for several new sectors occurred in 1967 and was initially below the federal minimum wage, converging to the federal minimum wage level until 1971, with the exception of the agriculture sector (equalling in 1977). As observed in industries covered by the 1938 FLSA, the ratio of the federal minimum wage to the average wage reached a ratio of between 40% and 50% during the 1970s.
This study used four databases to evaluate the impact of the 1966 FLSA: (i) industry wage reports published by the Bureau of Labor Statistics (BLS); (ii) microdata from the Current Population Survey (CPS) since 1962; (iii) data from the United States decennial Census; and (iv) data on state minimum wage legislation by industry and gender.
The sample includes all workers aged between 25 and 55 years. To eliminate distortions caused by very low annual earnings, self-employed workers, workers in group homes, unpaid family workers, and individuals who worked less than 13 weeks per year and/or less than three hours per week were excluded. Workers from all sectors that were covered in the 1938 FLSA were considered as controls (sectors incorporated in other reforms were disregarded). All salaries have been converted to 2017 dollars.
The study presents several analyzes to verify the impacts of the 1966 FLSA on wages from February 1967 onwards. To this end, the authors verify the impacts of the adoption of the minimum wage in the affected sectors of the American economy through several databases. Demographic, labor and regional characteristics were used as covariates, in addition to industry and time fixed-effect variables.
The first analysis of the article considered data from the CPS. The difference-in-differences (DID) method was used to evaluate the impact of the 1966 FLSA on the wages of workers treated after 1966 (the minimum wage came into force in 1967) compared to workers in the control group. The logarithm of the workers' salary was considered as the outcome variable. Additionally, the authors estimated several models with different covariates considered.
As a second strategy for identifying the effects of the policy, the authors used CPS data and considered the share of workers affected by the implementation of the 1966 FLSA who were below the minimum wage and the average wage increase observed among these workers to estimate the effect of the intervention on wages. Additionally, the effects were estimated considering education (up to 11 years of schooling and more than 11 years of schooling), race (whites and blacks) and the quartile of workers' salary distribution.
In the third strategy, BLS data was considered to estimate the impact of implementing the minimum wage on hourly wages in the affected sectors. To this end, the DID and triple difference (TD) methods were adopted. The DID method follows the model adopted in the first analysis, while the TD method checks the combination of the impact of the treatment in the southern states of the United States, the region with the highest concentration of the black population in the country.
The fourth analysis assessed the impacts of the 1966 FLSA for separate subsamples of white and black workers. Data from the CPS and the treatment periods 1967-1972 and 1973-1980 were considered. This strategy employed several DID models, considering state fixed effects or the interaction between years and states. The authors also performed an analysis to verify the effect of the policy on wages in states without minimum wage laws in January 1966.
Finally, the authors performed several analyzes to verify the impact of the 1966 FLSA on other indicators. Therefore, the DID method was used to estimate the impacts on the number of hours worked annually and the probability of being employed. Additionally, the authors compute counterfactual scenarios to assess the impact of the policy on employment-wage elasticity and the wage gap between white and black workers.
The results indicated a significant increase in the wages of workers in the sectors affected by the implementation of the minimum wage from 1967 onwards. Considering the DID analysis with CPS data, the 1966 FLSA resulted in an increase of 5.3% in the wages of these workers. workers in relation to workers in the control group sectors. The authors also estimated that 16% of workers in these industries were affected, implying a 34% increase in wages - resulting in an effect of 5.4% for all workers in the treated industries, close to the coefficient of the DID analysis. The results using the BLS data were similar.
Regarding the heterogeneity of the treatment effect, the results indicate that the 1966 FLSA more strongly affected workers with less education (10.1% compared to 2.5%) and in the lowest quartile of the wage distribution (+7 %). Black workers were the most affected, seeing an increase almost twice as high (9.5%) compared to white workers (5.4%).
Using the TD method and using data from the BLS, the authors found higher impacts (7.5%) in states in the southern United States, a region with the highest concentration of black workers. Additionally, states in the treaty group without the presence of minimum wage laws prior to the implementation of the 1966 FLSA were more affected than states that already had similar laws (4.1%).
The implementation of the FLSA did not result in changes in supply and demand dynamics in the labor market. Observing the period before and after the reform, the authors identified the effects of the reform on the elasticity of labor supply. Furthermore, no significant effects were identified on the probability of being employed.
In this article, the authors evaluated the impacts of the 1966 FLSA labor reform, establishing the minimum wage for several sectors of the economy that concentrated a large portion of black workers in the United States. Using a robust methodology, the authors demonstrated that this policy caused a large increase in the wages of the most socioeconomically vulnerable workers without affecting employability in the sectors covered.
Because the reform had large positive effects on wages but small effects on employment, it reduced not only the racial earnings gap among employed individuals but also the racial earnings gap overall. Therefore, this study provided compelling information for public policy makers, demonstrating the minimum wage's potential for reducing social inequalities and presenting evidence related to possible undesirable effects of this policy.
References
BAYER, P.; CHARLES, KK Divergent Paths: Structural Change, Economic Rank, and the Evolution of Black-White Earnings Differences, 1940-2014 , n. w22797. Cambridge, MA: National Bureau of Economic Research, Nov. 2016.
CHETTY, R.; HENDREN, N.; JONES, MR; PORTER, SR Race and Economic Opportunity in the United States: an Intergenerational Perspective. The Quarterly Journal of Economics , vol. 135, no. 2, p. 711–783, 1 May 2020.
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