Prejudice and the Economics of Discrimination

Transcription

1 Pelmnay Pejudce and the Economcs of Dscmnaton Kewn Kof Chales Unvesty of Chcago and NB Jonathan Guyan Unvesty of Chcago GSB and NB Novembe 17, 2006 Abstact Ths pape e-examnes the ole of employe pejudce n dscmnaton aganst acal mnotes. We show that the wdely accepted theoetcal esult fom Becke (1957) that competton ultmately foces pejudced employes to shut down hnges on the mplct, pecula assumpton that a pejudced employe's tastes ae not taken wth hm to any othe ole he mght occupy n the labo maket. Agung nstead that acal pejudce s lkely potable acoss oles, so that a pejudced employe who shuts down and takes a new job would be a pejudced woke at that job, we show that whethe pejudced employes shut down n the long-un depends on the expected acal composton of the co-wokes at othe fms. Dscmnaton can theefoe suvve f somethng pevents fms fom segegatng pefectly by ace a esult we llustate wth the example of mpefect substtuton n poducton. We ague that Becke's employee dscmnaton model should be vewed as a geneal model of dscmnaton, wth the oles of employes and employees detemned endogenously. The second pat of the pape pesents empcal evdence on acal pejudce and ts elatonshp to black-whte wage gaps acoss egons of the U.S, somethng not pevously done n the lage dscmnaton lteatue. We dscuss tends and coss-sectonal pattens n acal pejudce usng data fom the Geneal Socal Suvey. We then show that suvvng employes ae not less pejudced than the aveage woke, as the standad eadng of employe dscmnaton models would suggest. Second, usng data fom the Cuent Populaton Suvey fom 1973 to 2002, we show that the black-whte wage gap s geatest n the most pejudced egons of the U.S, and that t has nceased most n egons wth the smallest eductons n pejudce. Fnally, we show that, as pedcted by Becke (1957), blackwhte wage gaps ae moe closely elated to the pejudce of the "magnal dscmnato" than to the aveage pejudce n an aea. The authos thank Gay Becke and Kevn Muphy fo helpful dscussons egadng ths wok, semna patcpants at Whaton and CUNY fo the suggestons and Phl Wenged fo eseach assstance. Guyan thanks the Unvesty of Chcago GSB and the Industal Relatons Secton at Pnceton Unvesty fo eseach suppot. All eos ae ou own.

2 1. Intoducton Becke s (1957) The Economcs of Dscmnaton launched the fomal analyss of labo maket dscmnaton among economsts, and povded a famewok that has pofoundly nfluenced all subsequent wok on the subject. Becke s analyss focused on the elatonshp between acal pejudce among whtes and dscmnaton aganst acal mnotes n a compettve model. In contast to much of the contempoaneous lteatue, Becke fomalzed the defnton of acal pefeences, depctng them as an aveson to coss-acal nteacton. In a sees of models, he analyzed the effect of the possesson of such pefeences among customes, co-wokes and employes. In the shot-un veson of the employe dscmnaton model, acal pejudce causes some employes to egad black wokes as moe expensve than they tuly ae. Despte beng equally poductve, the model shows that blacks mght nonetheless eceve lowe wages n equlbum. In the long un, howeve, as new, unpejudced employes ente the maket, the esultng compettve pessue foces estwhle dscmnatng employes to shut down and leave the maket. The noton that employe, taste-based dscmnaton cannot suvve n the long un was futhe fleshed out by Aow (1972), who memoably emaked that the employe dscmnaton model pedcts the absence of the phenomenon t was desgned to explan. 1 Faced wth ths appaent lmtaton of taste-based models of employe dscmnaton, most ecent theoetcal wok on dscmnaton has tended to gnoe the ole of pejudcal tastes among employes entely as a souce of acal wage gaps, emphaszng nstead consdeatons lke mpefect nfomaton n statstcal dscmnaton models (Agne and Can (1977), Altonj and Peet (2001)), mpefect competton n dual labo maket and local monopsony models (Doenge and Poe (1971), Black (1995)), and acal dffeence n poductvty (Neal and Johnson (1996)). 2 But s the wdely-held vew that dscmnaton based on employe acal dstaste cannot suvve n the long un waanted? And, s the coespondng eseach focus on altenatve explanatons to the vtual excluson of analyses of acal pejudce justfed? Casual empcsm suggests that pejudcal feelngs of the most odous sot wee a featue of the Amecan landscape fo many scoes of yeas, and logc dctates that these vews have had somethng to do wth acal dscmnaton aganst mnotes. Gven ths, plus the pofound nfluence of Becke s conceptualzaton of pejudce, ths pape e-examnes the possble ole of employe acal pejudce as a souce of acal dscmnaton. We conclude that the commonly accepted dea that pejudce-based dscmnaton cannot suvve n compettve makets s not theoetcally tue unde a easonable modfcaton of the assumpton about how pejudce lkely opeates. Futhe, we pesent substantal empcal evdence showng that acal pejudce, and especally employe acal pejudce, appeas to matte empcally fo acal wage gaps, contay to the null unde whch most economsts now opeate. Ou analyss s boken nto two pats. The fst e-examnes pejudcal tastes n a model of compettve equlbum. Ths theoetcal pat of ou analyss dffes fom Becke s ognal 1 Aow (1972), p Some ecent empcal wok offes tantalzng evdence that acal pejudce mght matte fo acal wage detemnaton. Fo example, n an nteestng and wdely-known pape, Betand and Mullanathan (****) fnd that esumes wth black soundng names sent to potental employes eceved fewe call backs than dd othe esumes. Although statstcal dscmnaton mght account fo these esults as suggested by late esults on namng conventons studed by Fye and Levtt (****), the fact that so many pesonal tats of lkely nteest to employes ae explctly contolled fo on the false esumes leaves open the possblty that some othe foce, possbly acal pejudce, mght be at wok. 1

3 model and the analyses that followed n two smple but subtle ways. Fst, we teat the tems employe and co-woke as efeng less to dstnct maket actos than to patcula oles played n the labo maket. By mplctly teatng employes and co-wokes as dffeent actos, Becke s analyss assumes that the employe who shuts down hs fm smply becomes a woke, concened only about the wage he eceves. In effect, Becke s analyss assumes that havng feelngs of acal anmus ae ole dependent. By contast, ou analyss pesumes that the pejudced employe who shuts down hs fm n the face of competton caes any acal anmus he possesses nto any othe labo maket ole he plays. That s, a pejudced employe who shuts down becomes, n ou famewok, a pejudced woke, concened both about the wages he eceves and the ace of hs new co-wokes. We show that the vey easonable assumpton that an ndvdual s acal pejudces ae ndependent of the patcula ole he plays n the labo maket damatcally changes the conclusons about when o whethe pejudced employes shut down the fms n the face of long-un competton. We show, n patcula, that a pejudce-based model yelds a long-un equlbum n whch dscmnaton s not necessaly dven out of the maket. Because a pejudced employe must consde the countefactual acal composton of hs co-wokes when decdng whethe to shut down hs fm, the pesstence of acal wage dffeences due to dscmnaton depends on the maket's ablty to segegate wokes by ace. Any hndance to segegaton may lead to long-un dffeences n wages attbutable to pejudce. We fomally show ths esult usng the example of mpefect substtutablty n poducton by skll level. Fnally, snce ou analyss endogenzes an ndvdual s decson to be a woke o an employe, t makes clea that employe and employee dscmnaton whch have htheto been analyzed n two sepaate models can, and should, be teated n a sngle famewok. Havng e-establshed a potental mpotant theoetcal ole fo acal pejudce n a standad compettve model of wage detemnaton, the second pat of ou pape tuns to an execse neve befoe conducted n the lage lteatue on dscmnaton fomally assessng the empcal elatonshp between pejudce among whtes and the acal wage gap. To measue pejudce, we use the ch nfomaton on acal sentments avalable n multple waves of data fom the Geneal Socal Suvey (GSS). We summaze acal pejudce among whtes as a whole, and among whte employes and hgh-sklled wokes sepaately. Afte showng boad pattens of acal pejudce acoss egons, and summazng how they have changed ove tme, we test one stong mplcaton of the vew that competton foces dscmnatoy employes to shut down: suvvng employes should have less pejudce than the aveage whte woke. In fact, we show that employes ae moe not less pejudced than aveage. Ths fndng suggests that dscmnatoy employes ae not foced to shut down n the face of competton. We next fomally assess the assocaton between these pejudcal feelngs and the wages of blacks and whtes acoss dffeent egons n the U.S. To conduct ths pat of ou analyss, we mege data fom the GSS wth ndvdual level data fom the Cuent Populaton Suvey (CPS). We pefom a sees of egessons elatng ndvdual wages to vaous measues of pejudce among whtes n the Census dvson. Geneally, we fnd that the acal wage gap tends to be lagest n Census dvsons whee aveage epoted pejudce among whtes s hghest. Though slghtly less obust, we also fnd that black wages have deceased most n those dvsons wth the smallest eductons n acal anmus ove the past thty yeas. These elatonshps ae found whethe aveage pejudce n the dvson s measued among whtes oveall, among whte employes, o among hgh-sklled wokes specfcally. The standad pejudce dscmnaton model suggests that t s not the pejudce among all whtes o among all whte employes whch detemnes the acal wage gap, but athe the pejudce of the employe who s ndffeent 2

4 between hng a black and a whte woke n equlbum. We use a smple theoetcally-based agument, combned wth nfomaton about the ncdence of blacks n the dvson, to dentfy the (pejudce of) the magnal dscmnato n the data. The esults ae qute stkng and supsngly obust, gven the obvous measuement eo nheent n dentfyng the magnal dscmnato. Just as the model would pedct, we show that the oveall wage penalty expeenced by blacks s lagest whee ths magnal employe s moe acally pejudced. Despte the stong coelaton between the vaous communty pejudce measues studed, we show that n a hose-ace of the vaous measues, most of the assocatons above load onto the magnal dscmnato tem athe than the aveage pejudce measues. The absence of an nstument fo pejudce n the egesson analyss pevents us fom agung that the vaous assocatons we document ae causal. Howeve, the ch set of covaates fo whch we ae able to contol usng the CPS data means that we ae able to exclude some of the most obvous altenatve explanatons fo the pattens we document such as the noton that the most acst places n the county ae also places wee black ae less sklled, at least along the dmenson of yeas of completed schoolng. And, we estmate boadly smla esults, though slghtly less obust, when we conduct analyses examnng changes wthn a Census dvson ove tme. Futhemoe, the hose-ace specfcatons show that black elatve wages ae lowe n Census dvsons whee the magnal dscmnato s moe pejudced, even contollng fo measues of aveage pejudce n the dvson. And usng the measue of magnal dscmnato mpled by the model, black elatve wages have nceased most n the Census dvsons whee the pejudce of the magnal dscmnato has declned most, even contollng fo changes n measues of aveage pejudce n the dvson. On the whole, the esults ae boadly suggestve of an mpotant ole fo acal pejudce among whtes n explanng acal wage dffeences. The combnaton of these empcal esults wth the theoetcal esults fom the fst pat of the pape showng that employe pejudce can theoetcally lead to long un wage dffeences fo blacks agues stongly fo a econsdeaton of the noton that acal pejudce has lttle to do wth explanng obseved wage and ncome dffeences by ace. The emande of the pape poceeds as follows. The next secton befly evews the shot and long un equlba n Becke s employe acal dstaste model. In Secton 3 we pesent an analyss n whch pejudces ae teated as ole ndependent, so that acal pejudces of an employe s taken wth hm to any othe ole he occupes n the maket ncludng especally that of an employee at anothe fm. We pesent esults assumng, n tun, pefect and mpefect substtutablty of labo n poducton to llustate how the latte assumpton geneates esults dffeent fom the standad Becke analyss. In Secton 4 we pesent empcal evdence of the dstbuton and evoluton of acal pejudce among whtes, the elatve pejudce of employes, and the effect of communty wde acal pejudce on the elatve wage eceved by blacks. Secton 5 concludes. 2. A Revew of Becke s (Ds)Taste Models of Dscmnaton Basc Setup In the smplest veson of the employe dstaste model, Becke assumes that black (B) and whte (W) wokes ae pefect substtutes n poducton. Becke s key assumpton s that an employe s utlty depends on both the pofts he eceves and on the numbe of blacks 3

5 he hes. Specfcally, an employe eceves dsutlty employs. Let employe s utlty, V, be gven by d fom each black woke he V = π d LB. (1) π = f KL, + L K wl wl s the employe s poft. The vaables In (1), ( ) B W B B W LW and LB efe to whte and black labo; ww and wb denote black and whte wages; s the cost of captal; and f () s a poducton functon that s constant etuns to scale n captal and labo. We dop the subscpts on the fm s choce of labo and captal fo convenence. Pejudce d s zeo fo unpejudced pesons and postve othewse. Fnally, we assume thoughout that all employes ae whtes who do not dffe n the poductve capacty as wokes. Employment of whte wokes at all employes s detemned by the famla fst-ode f f condton, = ww. The fst-ode condton fo black labo, = wb + d, s L L dffeent because of the dscmnatoy taste of the employe, and captues the essence of Becke s nsght. To a pejudced employe, hng a black woke costs moe than the wages he must pay that woke. Pejudce causes employes to behave as f black wokes monetay wages ae hghe than they actually ae. Snce black and whte wokes ae pefect substtutes n poducton and utlty s lnea n dscmnatoy dstaste, each employe smply hes the type of labo that s cheape to hm. An employe theefoe hes only whte wokes f and only f ww < wb + d, and hes only black wokes othewse. Shot-un equlbum In the shot-un, fm sze, whch we assume to be equal acoss fms, and the numbe of fms ae both fxed snce thee s no enty of new potental employes. The dstbuton of dscmnatoy tastes among employes s theefoe gven n the shot un. Equlbum n the shot un eques that no employe pefes to he wokes of a dffeent ace at maket wages, no woke pefes to wok at a dffeent fm at maket wages, and all wokes ae employed. 3 Becke shows that, n equlbum, the wage dffeence between blacks and whtes s not detemned by the aveage level of pejudce among all employes, but athe by the pejudce of the most pejudced employe who hes blacks n equlbum the magnal dscmnato. Effcency eques that blacks be soted nto hghe cost that s, moe pejudced fms only afte all jobs at less pejudced fms have been flled. If thee ae enough employes wth d = 0 W, all blacks wll be employed by these fms. The magnal dscmnato s unpejudced n ths case, and thee s no equlbum wage dffeence between blacks and whtes. If, nstead, the numbe of 3 We assume nelastc labo supply fo the tme beng fo smplcty, but t s not necessay. 4

6 unpejudced employes s small elatve to the numbe of black wokes, full employment eques that at least some blacks must wok fo pejudced employes. Wages adjust as blacks ae soted to eve moe pejudced employes untl the maket cleas and untl the last peson to he blacks s ndffeent between hng a black and * whte woke. Equlbum wages and pejudce of the magnal dscmnato, d > 0, ae gven by w = w + d * W B such that all wokes ae employed, and each employe * satsfes hs demand fo labo. Employes wth pejudce hghe than d he only whte wokes, and blacks wok fo othe employes. Gven a suffcently smooth dstbuton of d ' s, the magnal dscmnato s just ndffeent between hng whte and black wokes. Long-un equlbum In the long-un, employes can change sze o shut down and new employes can ente the maket. An employe chooses captal and labo to maxmze utlty subject to the constant that hs utlty as an employe exceed that fom hs next best altenatve wee he to shut down. The ognal Becke analyss and all subsequent wok make the easonable assumpton that ths altenatve actvty s to sell hs labo on the labo maket A and be an employee at anothe fm. Let the utlty fom ths altenatve be V, and A suppose that the employe s wage n that altenatve job s w. If π epesents the money poft assocated wth the optmal choces of labo and captal, and L B denotes the numbe of blacks the employe would choose to he f he wee to stay open, t follows that an employe shuts down hs fm f A π d L V. (2) B The wage eceved n the altenatve job s the same fo all (whte) employes. To see ths, notce that the pce at whch an employe can sell hs labo on the compettve maket s smply a wage detemned by the magnal poduct fo someone of hs type. As employes do not dffe n poductvty, each employe, wee he to become a woke, A eceves some wage w whch equals the magnal poduct fo pesons of that type. 4 Impotantly, Becke s analyss assumes that the utlty n the altenatve job depends solely on the wage the peson eceves n that job. The shut-down decson fo an employe s thus A π d L B w. (3) A A pefectly elastc supply of unpejudced employes guaantees that π = w, meanng that the shut down decson fo an employe smplfes to 4 An altenatve would be to allow fo dffeences n poductvty among employes. Ths skll heteogenety mght be two-dmensonal whee one dmenson, say entepeneual skll, makes wokes elatvely moe poductve as employes and the othe makes them elatvely moe poductve as wokes. The esultng compaatve advantage mght lead to ents whch employes could use to puchase dscmnaton. Though we thnk such a model s ealstc, we choose not to ntoduce such heteogenety hee because we want to show that dscmnaton can suvve competton wth fee enty of compettos. Fo a dscusson of such a model, see e.g. Heckman (1998). 5

7 d L 0. (4) Expesson (4) shows the man mplcaton of the long-un veson of the employe dscmnaton model, and the one that has geneated the most contovesy. In the long un, fee-enty and pefect competton along wth constant etuns to scale technology mply that no employe wth the dscmnatoy tastes descbed by Becke can eman n busness. It s costly to dscmnate, and the maket dves those wth hgh costs out of busness. Taste-based dscmnaton s eadcated by competton. 3. Role Dependent Pefeences In ths secton we show that the esults about employe dscmnaton outlned above hnge cucally on an mplct assumpton that s, n ou vew, unealstc. We show that a slght modfcaton n what s assumed about pefeences changes the esults fom the employe dscmnaton model, and suggests a way to model employe and employee dscmnaton n a unfed model athe than wth two sepaate analyses that have been the nom n the pecedng lteatue. 3.a. The Shut-down Decson Revsted As we have noted, the standad analyss assumes that an employe s altenatve opton, wee he to shut down hs fm, s to become an employee at anothe fm. As n the pevous lteatue, we assume that the wage the employe would eceve at that A altenatve fm s w fo all employes. Howeve, unlke the eale lteatue, we do not assume that the employe s utlty n that altenatve job s a functon only of the wage. Instead, we assume that the pejudce that a peson holds as an employe s caed wth hm f he wee to be an employee n anothe fm. The assumpton mplctly mantaned n pevous analyss s that pefeences ae ole-dependent, and n patcula that they ae pesent only when the peson plays the ole of employe and uttely absent when he plays any othe ole n the labo maket. Fomally, the vaable d n the pevous secton denoted the pejudce of an employe. Now, we stess that d s peson s ' EE pejudce when he s an employe, and d s hs acal pejudce when he s an EE employee. Ou assumpton of potable acal pejudce mples that d = d. By contast, the assumpton mplctly mantaned n Becke s analyss and n subsequent nfluental ctcsms lke that of Aow s that fo pejudced ndvduals wth d > 0, EE d = 0. To see the mplcatons of ths easonng, consde a efomulaton of the long-un shut down decson pesented n the eale secton. Recall, that the standad analyss says that an employe shuts down f A π d L w. (5) B B 6

8 EE If and epesent, espectvely, a peson s acal pejudce when he s an d d A employe and when he s an employee, and f L B epesents the numbe of black woke s at hs lkely altenatve job, expesson (5) s the specal case of the condton whee EE d = π d L w d L A EE A B B 0. The way that the pevous lteatue specfes an employe s altenatve utlty n effect mposes the vey stong assumpton that a peson s acal anmus depend only on whethe he s an employe; somehow, the same peson cast n the ole of employee has no anmus about the blacks who ae hs co-wokes. The smplest specfcaton of ou assumpton of ole-ndependent pefeences s to EE suppose that d = d = d. Wth ths assumpton, the long-un shut-down decson becomes A A π d( L B LB) w. (7) Expesson (7) shows that the a pejudced peson who happens to be an employe consdes how the acal makeup of hs ncumbent fm compaes to that of the fm he would jon as employee f he wee to shut down and fnd a job. The model could be genealzed to nclude uncetanty about the acal make up of the altenatve fm. 5 Notce that, n geneal, the assumpton of ole ndependent pefeences damatcally changes conclusons about whethe pejudced employes shut down n the long un. Fo example, f the employe expects that the numbe of blacks co-wokes at the job he would get f he shut down s lkely to be the same as the numbe of blacks n hs A ncumbent fm, o L B = LB, he s ndffeent between shuttng down and emanng open n the long un, even when hs costs, net of pejudce, ae hghe than hs compettos. Moe geneally, snce hs money ncome s the same eveywhee, a atonal pejudced ncumbent employe wll only shut down f he expects that hs lkely altenatve job wll have fewe black wokes than he has hed n hs fm. Ou analyss shows that pejudced employes do not necessaly shut down n the long un, as agued n the pevous lteatue; whethe they do o not depends on how acally ntegated fms ae n the economy oveall. Expesson (7) shows that when pefeences ae ole ndependent, t s the A condton L B L that detemnes the shutdown decson. The pevous lteatue eaches B the concluson that dscmnatos ae nevtably dven out of the maket by assumng mplausbly that d = 0. Ou analyss shows that, n fact, dscmnatos ae dven out EE of the maket only f maket condtons ae such that evey atonal pejudced employe can expect to fnd an altenatve job n whch fewe blacks ae employed as wokes. Indeed, when acal anmus s potable acoss oles, pejudced employes defntely leave (6) 5 Ths uncetanty mght be dven, fo example, by costly seach o by tunove among futue co-wokes. A A In ethe case, the employe bases hs expectaton of V on the dstbuton of possble L B. 7

9 the maket n the long un only f the maket s segegated enough by ace to ensue that evey pejudced employe can fnd job at a fm at whch blacks ae not employed. 3.b. Unfyng the Employe and Employee Dscmnaton Models In addton to the employe dscmnaton model, Becke pesents a sepaate analyss focusng on pejudce among employees, o co-wokes. In the standad veson of the employee dscmnaton model, some whte wokes ae pesumed to have dstaste fo nteactng wth black co-wokes. Whte wokes have utlty gven by EE U = w d LB (8) whee w s the wage the woke eceves at the job, LB denotes the total numbe of black wokes wth whom he woks, and the EE supescpt ndcates that d s the ndvdual s taste as an employee about hs fellow employees. Expesson (8) fomalzes Becke s noton that a pejudced employee acts as f hs wage s lowe when he has black cowokes. The key esult fom Becke s analyss of the employee dscmnaton model s that wage dscmnaton and occupatonal segegaton ae dstnct and opposng foces. If black and whte wokes ae pefect substtutes n poducton, fms can be pefectly segegated by ace. In ths fully segegated equlbum, no ndvdual must be compensated fo wokng wth someone he dslkes. Two sepaate labo makets fom n equlbum, wth wokes n each beng pad the magnal poduct. As these ae equal, thee s no equlbum wage dffeence. Wage dffeences ase n ths model to the extent that black and whte labo cannot be segegated n equlbum. Any mpedment to segegaton may lead to a long-un black-whte wage dffeence even n fully compettve makets. Impefect substtutablty of hgh- and low-sklled wokes wth dffeent skll endowments acoss aces s one such natual mpedment. In geneal, howeve, unde the pefect substtuton assumpton that s assumed n Becke s man analyss, the effect of pejudce held by co-wokes s pefect segegaton wth no wage dffeences. The eade wll notce that the standad employee dscmnaton model leads to pecsely the same analyss as does the employe dscmnaton model wth potable acal pejudce. Ths suggests that wth ths moe easonable assumpton of how pejudce opeates, t s not useful to analyze the maket effect of pejudce n the two dstnct models of employe and employee dscmnaton as has geneally been done n the dscmnaton lteatue. A woke s utlty fom wokng at a gven fm s, by ou easonng, smply a functon of hs wage and of the acal makeup of the fm, and not at all of whethe he plays the ole of employe o employee at the fm. Wth olendependent acal pefeences, any dsutlty he eceves fom coss-acal contact s unaffected by whch of these two oles he plays at the fm. And, thee s no eason to suppose that hs wage s hghe o lowe smply because he s an employe athe than an employee. The employe at a fm dffes fom an employee manly because the employe chooses the patcula acal composton of the wokes at the fm. No peson would accept lowe wages fo the ght to make ths choce snce he could, n a compettve economy, wok at some othe fm at whch someone else has chosen the patcula acal mx he hmself would have chosen. 8

10 So long as thee s no skll heteogenety and thus no compaatve advantage to beng an employe, ndvduals must, n equlbum, be ndffeent between playng the ole of employe o employee at a gven fm, and also between playng ethe ole n anothe fm wth exactly the same acal makeup. The wage a pejudced woke eceves as ethe an employe o employee at fm wth a gven acal makeup must theefoe be lowe than the wage he eceves n ethe ole at a fm wth a hghe facton of black wokes as hs dsutlty fom coss-acal contact s lage n the latte case. In sum, the assumpton of pefeences that ae potable acoss oles leads to a fomalzaton that s ndstngushable fom what was called the employee dscmnaton model n Becke s analyss. Blacks and unpejudced whtes do not cae about the acal makeup of the cowokes and ae ndffeent about the acal makeup of the fms to whch they sot themselves as wokes. Pejudced whtes by contast dslke nteactng wth black co-wokes and eceve a hghe wage fo dong so whethe as employees o as the patcula sot of employee called an employe. The extent to whch thee s acal dscmnaton n equlbum depends exclusvely on the natue of poducton and on the dstbuton of acal pejudce among whtes oveall. In patcula, even f some whtes ae pejudced, thee wll be no acal dscmnaton n equlbum f wokes can costlessly be segegated by ace n the poducton pocess. If pefect acal segegaton s costly o othewse dffcult to acheve, some blacks may be foced to wok wth pejudced whtes, and blacks wll eceve a lowe wage than whtes n equlbum. Effcency guaantees that coss acal contact wll occu between blacks and the least pejudced whtes fst, wth the most pejudced whtes beng the most lkely to wok n segegated envonments. The equlbum wage gap should be detemned not by the oveall level of pejudce among whtes but athe by the pejudce of a magnal dscmnato who, gven the numbe of blacks n the economy and the equlbum wage, s just ndffeent between wokng wthn an ntegated envonment and n a pefectly segegated fm. 3.c. The Example of Impefect Substtutablty In ths secton we fomally study the effect of mpefect substtutablty of labo n poducton the most lkely eason why the labo maket mght not be acally segegated n equlbum. Thee ae othe easons why t mght be dffcult to segegate the maket by ace, such as costly seach o the pesence of acal employment quotas. We dscuss mpefect competton both because the ease of exposton, and because ths was an example dscussed by Becke n hs ognal dscusson of co-woke dscmnaton. We suppose that ndvduals ae ethe black( B ) o whte( W ), and possess ethe hgh( H ) o low ( L) skll. All fms have dentcal poducton functons whch ae constant etuns to scale n captal, hgh-sklled labo and low-sklled labo. We assume that black and whte labo of a gven skll level ae pefect substtutes, but that hgh and low sklled labo ae mpefect substtutes fo one anothe. Constant etuns to scale allows us to, wthout loss of genealty, consde a fm to be a sngle hgh-sklled woke 9

11 matched wth some numbe of low-sklled wokes. We teat ths hgh-sklled woke as the fm s esdual clamant. In geneal, a hgh-sklled woke s utlty s whee (,, ) ( ) U = π d L +L (9) H H L H B B π H H H L L L L L L = f K LB + LW LB + LW K wblb wwlw, d s ndvdual s taste fo s dscmnaton and L denotes the total employment of wokes fom skllclass s ( H, L) and ace ( B, W) at ndvdual s fm. Snce we consde the case of a sngle hgh-sklled woke matched wth some numbe of low-sklled wokes, ths utlty functon can be e-wtten U H f K, L L L L K w L L L w L L L L = + d L (10) ( ) B W B B W W whee the hgh-sklled labo tem s dopped fom the poducton functon because we have assumed t to be equal to one. Shot-Run Equlbum Fm sze s fxed n the shot-un. Thus, each hgh-sklled woke s paed wth a fxed numbe of low-sklled wokes. Although the set-up s smla to the shot-un veson of Becke s employe dstaste model, wth hgh-sklled wokes sevng the ole of the employe and low-sklled wokes sevng the ole of employees, we speak nstead of hgh- and low-sklled wokes fomng teams to stess the fact that thee s no stuctual mpotance to the ole of employe. The shot-un equlbum s eached as follows. Odeng hgh-sklled wokes by the d, low-sklled blacks ae allocated fst to the least dscmnatoy hgh-sklled wokes. The last hgh-sklled woke to be matched wth low-sklled black wokes s the magnal dscmnato. In equlbum, the black-whte wage gap must be just hgh enough to compel the magnal dscmnato to match wth low-sklled blacks but not hgh enough to nduce the next most dscmnatoy hgh-sklled woke to do the same. All hgh-sklled wokes wth d geate than that of the magnal dscmnato pa wth whte low-sklled wokes; all hgh-sklled wokes wth d lowe than the magnal dscmnato s pa wth black low-sklled wokes. No hgh-sklled woke pefes to eplace hs low-sklled wokes wth those of the othe ace, and no low-sklled woke pefes to change fms. If thee ae not enough non-dscmnatoy hgh-sklled wokes to match wth evey lowsklled black, thee must be a low sklled acal wage gap n equlbum, o wb < w L L W. At least one hgh-sklled pejudced whte must wok wth low-sklled blacks n ths case, and he can be nduced to do so athe than wok wth a whte low-sklled wokes only f black wages ae lowe. It s also obvous that thee ae n equlbum no fms consstng of a hgh-sklled woke and both low-sklled blacks and dscmnatoy low- B 10

12 sklled whtes. In such fms, low-sklled whtes would have to be compensated fo wokng alongsde blacks. 6 Long-un equlbum In the long-un, the sze of teams of hgh-sklled and low-sklled wokes can vay. It s useful to speak as f the hgh-sklled woke chooses the numbe of low-sklled wokes wth whom to match. Snce labo supply and acal pefeences ae potable fom one job to the next, t s not useful to speak of a fm shuttng down. Wth nelastc labo supply, n equlbum each woke must wok at some fm. A hgh-sklled woke who shuts down hs fm must n equlbum wok at some othe fm. Fst-ode condtons To see the equlbum matchng of hgh- and low-sklled wokes, consde fst a non-dscmnatoy hgh-sklled woke assessng how many low-sklled wokes to team up wth. Snce black wages ae lowe than whte wages n equlbum, and snce he s ndffeent about the ace of the low sklled pesons n hs team, hs poblem s smply how many black low-sklled colleagues to have at the wage of w B. The fst-ode condton fo ths poblem s theefoe the famla f L L = w L B. (11) f L Snce hgh-and low-sklled labo ae mpefect substtutes, s deceasng n L. L L L L* Theefoe, gven w B thee s some optmal level L, whch would be the optmal lowhgh skll ato at evey fm f thee wee no dscmnatoy tastes. We hencefoth efe L* to L as the optmal skll ato because t s the one that would maxmze total physcal poducton n the economy. Now consde a hgh-sklled woke wth d > 0. In ode to acheve a low-hgh skll ato L* of L, he must ethe suffe the dsutlty of wokng wth black wokes o he lowsklled whtes at the hghe whte low-sklled wages. Both of these optons ncease the effectve low-skll wage, and thus lowe a pejudced hgh-sklled wokes demand fo L* all low-sklled wokes, elatve to the optmal level L. A pejudced hgh-sklled woke s fst-ode condton s f L = wb + d. L L B (12) 6 It s possble that because of ndvsblty and fxed fm sze thee would be one fm whose low-sklled wokes ae ntegated. 11

13 If he chooses to wok (fom a team) wth low-sklled blacks, he acts as f the black lowskll wage s hghe than ts nomnal value because of hs dsutlty of wokng alongsde blacks. As a esult, he chooses a skll ato L that s lowe than the optmal skll L* ato L. L* B If nstead he chooses to wok wth whte low-sklled wokes, the fst-ode condton s f L = ww. (13) L L W Snce L L L* L* ww w B, the optmal LW s also lowe than L. In equlbum pejudced hghsklled wokes wll fom teams wth low-sklled blacks f L L wb + d < ww, (14) and wth low-sklled whtes othewse. Equlbum wage settng The equlbum matchng of hgh- and low-sklled wokes s as follows. Black lowsklled wokes ae allocated fst to un-pejudced hgh-sklled wokes. If thee ae enough un-pejudced hgh-sklled wokes to match wth black low-sklled wokes at ths ato then thee need not be any wage dffeence. If howeve, thee ae moe lowsklled black wokes than can be absobed by non-dscmnatoy hgh-sklled wokes, some dscmnatos wll be compelled to wok wth those fo whom they habo dstaste. Pejudced hgh-sklled wokes ae nduced to he blacks by an equlbum educton n w L B elatve to w L W. As low-skll wages of blacks fall elatve to those of whtes, adjustments on two magns seve to clea the maket fo low-sklled blacks. Fst, the educton n w nduces any gven un-pejudced hgh-sklled peson to match wth moe L B low-sklled blacks. Second, the educton n w L B elatve to w L W nduces nceasngly moe pejudced hgh-sklled whtes to match wth low-sklled blacks nstead of whtes. The wage dffeence that cleas the maket fo low-sklled blacks and whtes s the long-un equlbum low-skll acal wage gap. Thee s once agan a magnal dscmnato who s ndffeent between matchng wth black and whte low-sklled wokes. All hghsklled wokes wth d geate than the magnal dscmnato fom fms and wok whte low-sklled wokes; and hgh-sklled wokes wth d lowe than the magnal dscmnato s pa wth black low-sklled wokes. No hgh-sklled woke pefes to eplace hs paed low-sklled wokes wth those of the othe ace, and no low-sklled woke pefes to change fms. If the ato of low- to hgh-sklled wokes s the same acoss ace and all black hghsklled wokes ae non-dscmnatoy, the magnal dscmnato s black and no acal dffeence n wages ases. In ths case, segegaton fully substtutes fo maket dscmnaton. Smlaly, f the numbe of blacks elatve to whtes s vey small, then even f thee ae elatvely moe low-sklled blacks than whtes, the magnal employe of 12

14 low-sklled blacks s lkely to be an unpejudced whte, meanng that thee wll be no long-un equlbum wage gap. The stuaton s dffeent f the numbe of blacks s elatvely lage and/o f the ato of low to hgh-sklled wokes s much hghe among blacks than whtes. In these cases, the magnal dscmnato s lkely to be a pejudced hgh-sklled whte, and thee wll be a long un acal dffeence n low-sklled wages. A lage numbe of low-sklled blacks o a elatvely lage numbe of hgh-sklled dscmnatos means membes of these two goups must be matched wthn fms. As a esult thee wll be a pesstent acal wage gap among the low sklled n a compettve maket. How do hgh-sklled wokes fae because of the exstence of pejudce? Notce that unpejudced hgh-sklled pesons, both black and whte, beneft fom the exstence of pejudced hgh-sklled whtes. The educton n low-sklled black wages caused by the pefeences of these wokes leads unambguously to nceased eanngs fo hgh-sklled non-dscmnatos. As esdual clamants to evenues fom poducton, the cost savngs goes dectly to ncease the eanngs. In addton, the educton n wages nduces them to match wth moe low-sklled wokes, nceasng total poducton at the fm and futhe nceasng the ncome. Fo hgh-sklled whtes who ae pejudced the stuaton s slghtly moe complcated. Thee ae two goups of such wokes to consde: those who match wth low-skll blacks and those who match wth low-skll whtes. Consde the fome goup. These ae * * pejudced pesons wth d < d (whee d denotes the pejudce of the magnal dscmnato). Because of the dscmnatoy tastes, they choose not to take full advantage of the declne n facto costs. The declne n the nomnal costs causes an ncease n the ncome, but they do not expand the nteacton wth low-sklled wokes by as much as non-dscmnatoy whtes, and may n fact educe t. Net of the own dscmnatoy tastes, these wokes may peceve low-skll wages to have nceased o deceased as a esult of maket dscmnaton. If they peceve low-skll wages, net of the own dscmnatoy tastes, to have nceased and n tun educe the poductve nteacton wth low-sklled wokes, the ncome may declne. To see why they may eoneously peceve low-sklled wages to have nceased, consde the case whee the ente low-skll wage gap s accounted fo by a declne n low-skll black wages (.e. low-skll whte wages eman constant). Because the acal wage gap, and by assumpton the declne n L * w B, s equal to d, we can be sue that fo all whtes L L who match wth blacks n equlbum, d + wb < w0 (low-skll wages wth no dscmnaton). Net of the dscmnatoy tastes, these wokes peceve net low-skll black wages to have declned as a esult of dscmnaton. Now altenatvely consde the case whee dscmnaton causes low-skll whte wages to ncease. Snce we know L L * L L * w w = d, t must be the case that w w < d, whee the nequalty s stct. Any W B 0 B 13

15 L L * hgh-skll whte wth w0 wb < d < d peceves low-skll wages to have nceased. And the esultng declne n poductve nteacton wth low-sklled wokes may ovewhelm the effect of payng the low-sklled wokes wages below magnal poduct, leadng to a decease n the own ncome. The second goup of pejudced hgh-sklled wokes nteacts exclusvely wth low sklled whtes. The wages of ths most pejudced goup must fall. As a esult of the ncease n whte low-skll wages, these hgh-sklled dscmnatos choose to match wth fewe low-sklled wokes. It s among ths goup of wokes that we see most clealy Becke s nsght that dscmnatos pay some of the cost of dscmnatng. Black and Whte Net Gans and Losses fom Dscmnaton The pecedng shows that hgh- and low-skll blacks ae affected vey dffeently by dscmnaton, even though we have assumed whte pejudce not to be a functon of black skll levels. The maket s tendency to segegate dscmnatos and dscmnated tends to sepaate hgh-sklled blacks fom pejudced whtes. Hgh-sklled blacks beneft fom a decease n the pce of a complementay facto of poducton. Ths s obvously not the delbeate ntenton of whte acsts; t s athe a sde effect of the pejudce. The effect of pejudce s dffeent fo dffeent types of whtes as well. Only pejudced whtes wth the stongest acal feelngs lose unambguously fom the exstence of pejudce. Unpejudced whtes cetanly beneft, and whtes wth mld levels of pejudce may beneft as well. Is t possble to say somethng about whethe blacks as a goup gan moe (o lose less) fom the pesence of acal pejudce n the labo maket than do whtes? We tun to Becke (1957) to answe ths cental queston. Usng the analogy of two countes tadng, he emnds us that any educton n tade must be detmental to the total ncome of each of the countes. In ou case the countes should be thought of as black and whte, and tade as the poductve nteacton of wokes wthn a acally ntegated fm. Because dscmnaton causes a decease n the amount of poductve nteacton acoss ace, each ace must lose as a whole fom dscmnaton. But, who loses moe? Becke s analyss shows that the ato of black to whte total ncome falls as a esult of a decease n tade so long as n a wold wth no dscmnaton L IW ( ) NB > L I( B) NW L whee I ndcates the total ncome of each ace, and N ndcates total labo supply of low-sklled wokes by ace. Ths condton s clealy satsfed f thee ae fewe lowsklled blacks than low-sklled whtes. 7 7 A hgh-sklled woke who matches wth low-sklled blacks wll peceve the low-skll wage to have L nceased net of hs own pejudce f w d w. We can ewte ths condton w w < d. L L L B + > 0 0 B 14

16 4. Empcal Evdence about Racal Pejudce and Wages 4.a. Data descpton Remakably, vey lttle wok has been done n economcs studyng acal pejudce dectly, and no empcal wok of whch we ae awae has assessed the connecton between pejudce and wages. 8 Seveal questons thus eman unansweed. How do acst sentments vay acoss egons n the U.S? Is the level of pejudce to be found among dffeent types of wokes employes vesus non-employes consstent wth the long un pedctons of the theoetcal wok of Becke and Aow? How have acally pejudced vews evolved o tme, and have they changed dffeentally acoss dffeent types of people o places? Most mpotant fo ou puposes, what s the empcal elatonshp between acally pejudced feelngs among whtes n a communty and the absolute and elatve level of black wages n those places? In patcula, s thee evdence n the data to suggest that elatve black wages ae educed when pejudce s hgh among whtes oveall, among whte employes, and especally, when the pejudce of the whte peson who could plausbly be called the magnal dscmnato s hgh? We use data fom multple waves of the Geneal Socal Suvey (GSS) [ ] and fom multple waves of the May [ ] and Outgong Rotaton Goup [ ] fles of the Cuent Populaton Suvey (CPS) to attempt to answe these questons. The GSS s ou souce of data on acal pejudce. In many suvey yeas, ths natonally epesentatve data set elcted esponses fom suvey questons about mattes that ae clealy stongly elated to acally pejudced sentments. Pejudce s a nebulous constuct, so t s useful that the vaous questons posed n the suvey ove the yeas touch on the dffeent dmensons along whch acst sentments mght manfest themselves. Among othe thngs, espondents wee asked ove the yeas such questons as the feelngs about nteacal maage, the sense of whethe acally estctve housng covenants wee appopate, the vews about chlden beng acally segegated n schools, and the vew on whethe the govenment should be oblgated to help blacks. Ove the appoxmately 30 yeas of GSS data used n the pape, espondents answeed some twenty-sx dffeent questons elatng to some aspect of acal pejudce. A dffeent subset of the full questons was asked each yea, wth no patcula queston asked n each yea of the suvey, and wth much vaaton n the total numbe of tmes a gven queston appeas. In much of ou analyss to follow, we focus on changes n acal pejudce ove tme -- an execse whch eques dentfyng a consstent set of pefeence questons fom one yea to the next. When dong these analyses we study the sx queston whch jontly appea most fequently n the suvey. Table 1 lsts the GSS vaable abbevaton and a summay fo each of full set of 26 acal pejudce questons asked n the GSS. The shaded ows n the table ndcate the sx questons, used late n the analyss, whch jontly appea most fequently n ou data. 8 One excepton s Cutle et al (1999) who elate a subset of the questons studed n ths pape to levels of esdental acal segegaton. 15

17 We use esponses fom whtes aged 18 and olde, and ecode esponses so that hghe values coespond to moe pejudced answes. 9 To pemt staghtfowad aggegaton acoss questons and ntepetaton of magntudes, we nomalze each vaable usng the 1977 epot. Specfcally, we subtact off fom esponses to each queston the mean of the esponse to that queston n 1977, and dvde by the standad devaton of answes measued n the fst yea the queston was asked. 10 Two of the vaables (HELPBLK and RACOPEN n the table) wee not asked n 1977, but wee asked n both po and subsequent yeas. A lnealy ntepolated mean s subtacted fo these vaables nstead of the 1977 mean. Fo questons that wee ntoduced to the suvey subsequent to 1977 o that wee asked only n 1972, we nomalze by both the mean and standad devaton measued the fst yea the queston was asked. 4.b. Defntons of vaous pejudce ndces Rathe than pesent esults sepaately fo each of the 26 questons, we fom a undmensonal ndex of pejudce. To compute ths ndex, we compute the aveage of the nomalzed esponses descbed above to the full set of pejudce questons, sepaately fo each ndvdual*yea obsevaton n the GSS. Call ths vaable d ; call the mean taken subset ove the sx questons efeenced above d. Ou empcal wok focuses on communty level pejudce, whee the communtes we focus on ae the nne Census dvsons. These ae the smallest aeas of aggegaton avalable n both the GSS and CPS. We take vaous aveages of the ndvdual measues d to compute these communty pejudce measues. Ou analyss uses two man measues fo thee subgoups of the populaton: all whtes, whte employes (as ndcated by self-employed status), and hgh-sklled whtes (as ndcated by those wth at least 16 yeas of educaton). The fst measue of pejudce s the aveage of d by census dvson (ndexed by ) ove all ndvdual*yea obsevatons wthn the subgoup. We denote ths measue d fo all H whtes, d fo whte employes, and d fo hgh-sklled whtes. We pesent esults usng measues of pejudce fo hgh-sklled whtes fo two easons. Fst, the mpefect substtuton model dscussed above mples that t s the elevant measue of pejudce n detemnng equlbum black-whte wage dffeences. Second, beng a college gaduate s an altenatve ndcato (elatve to beng self-employed) of the knd of peson lkely to be an employe n the Becke model. 9 In most cases, ths ecodng s staghtfowad (e.g. those who would not vote fo an othewse qualfed black peson fo pesdent ae moe pejudced than those who would). In some cases the odeng of esponses s less clea (e.g. those who thnk the fedeal govenment s spendng too much mpovng the condtons of blacks may not be pejudced; they may thnk the fedeal govenment s spendng too much on eveythng). Howeve, n each case we thnk t s clea whch esponse was meant to denote geate pejudce. 10 We nomalze by the standad devaton n the fst yea the queston was asked athe than, say, the oveall standad devaton, because we want to avod a mechancal elatonshp between tends n esponses and the weght the queston eceves n the oveall aggegate. 16

18 Ou second measue of the pejudce n a communty s meant to appoxmate as closely as possble the theoetcal constuct of the magnal dscmnato that peson whose acal vews detemne the equlbum black wage gap f pejudce s ndeed an mpotant pat of the explanaton fo equlbum dscmnaton. The logc we use to constuct ths measue s staghtfowad and flows natually fom the easonng pesented eale n the theoetcal dscusson. Suppose that p pecent of the populaton s black. If acal pejudce govens hng and compensaton n the manne eale descbed, then effcency eques that wokes wll be soted fst to the least pejudced employes. If we assume that employes ae essentally the same wth espect to fm sze, then t follows that blacks wll wok at the p pecent least pejudced of all employes. A natual measue fo the pejudce of the magnal dscmnato, ˆ * th d, s thus the p -pecentle subset of the census-dvson-specfc dstbuton of d among whte employes, whee p s 11 the shae of the Census dvson that s black ove the full CPS sample peod. Motvated by the dea that employe status s endogenous, we also compute ths * magnal dscmnato measue of pejudce fo all whtes, denoted dˆ, and fo hghsklled whtes, denoted d ˆ H*. Notce also that none of the communty pejudce measues descbed above vaes ove tme. In some of ou analyss, we wsh to examne the effect of changes n a communty s pejudce ove tme. To compute a communty-wde tme-vayng measue d t, we take subset the aveage of d by census-dvson*yea ove all ndvdual*yea obsevatons. We H subset compute d t and d t by smlaly aggegatng d by census-dvson*yea fo each espectve subgoup. To compute a tme vayng measue of the magnal dscmnato s * th pejudce, dˆt we compute the p -pecentle of the census-dvson*yea-specfc subset dstbuton of d, whee p s the pecent of the wokfoce n the census dvson that s black ove the full CPS sample peod. We then compute dˆ * t and ˆ H* th d t as the p - subset pecentle of the census-dvson*yea-specfc dstbuton of d fo each espectve subgoup. 4.c. Pattens and tends n pejudce n the GSS We begn by descbng the geneal pattens of pejudce acoss egons of the U.S. and ove tme. Table 2 shows thee of the pejudce ndces fo each of the nne census 11 We constuct ou measues of the magnal dscmnato s pejudce as the p th pecentle of the dstbuton of subset d and not d because t s based on a constant numbe of questons n each yea. Snce d s an aveage ove esponses to dffeent numbes of questons n dffeent yeas, the vaance of d wll tend to be hghe n yeas n whch a smalle numbe of questons happened to be asked. Statstcs based on the tals of the dstbuton of d would dspopotonately measue pejudce n those yeas n whch a elatvely small numbe of questons wee asked. 17

19 dvsons. As descbed above, hghe values ndcate geate acal pejudce. The coelaton matx fo the pejudce ndces, shown n Appendx table 1, ndcates that all sx egon-level pejudce measues ae vey hghly coelated. Each ndex shows that acal pejudce s most sevee n the southeasten poton of the county, and least sevee n New England and n the West. Pejudce s geatest n the East South Cental dvson (Alabama, Kentucky, Msssspp, Tennessee), and next geatest n the South Atlantc (Delawae, Dstct of Columba, Floda, Geoga, Mayland, Noth Caolna, South Caolna, Vgna, West Vgna), and West South Cental (Akansas, Lousana, Oklahoma, Texas) dvsons. Pejudce s least sevee n New England (Connectcut, Mane, Massachusetts, New Hampshe, Rhode Island, Vemont), and n the Pacfc (Alaska, Calfona, Hawa, Oegon, Washngton) and Mountan (Azona, Coloado, Idaho, Montana, Nevada, New Mexco, Utah, Wyomng) dvsons. We suspect these pattens match many eades pos. The magntude of dffeences n measued pejudce acoss egons s also notewothy. The dffeence n d between the East South Cental and New England Census dvsons s on the ode of one-half of an ndvdual-level standad devaton. To put ths dffeence n pespectve, the medan East South Cental espondent has the same d as the 82 nd pecentle espondent fom New England. The medan-pejudced New England espondent would be at the 22 nd pecentle of the East South Cental pejudce dstbuton. It s nteestng to notce that blacks lve most pedomnantly n egons of the county whee acal pejudce s most sevee. Ths patten may ndcate that pejudce s caused n pat by coss-acal contact and by competton fo economc esouces. Futhemoe, as wth any suvey data, sgnfcant cae must be taken n ntepetng these esponses. Anothe concen s that egonal dffeences n answes to the GSS questons ndcate dffeences n cando about tue acal feelngs athe than dffeences n actual pejudce. If ths s the case, then we should fnd no elatonshp between measued pejudce and wage dffeences. A moe seous concen fo ou puposes s that the ndces ae coelated wth unobseved egonal dffeences n poductvty between black and whte wokes. Ths s a concen we addess below. Fgue 1 shows tends n esponses to the twelve most commonly asked GSS pejudce questons, aveaged acoss the ente sample of whtes. The fgue eveals a geneal downwad tend n epoted acal pejudce. As descbed above, each queston s nomalzed so that the mean esponse n 1977 s zeo, and the standad devaton n the fst yea t was asked s 1. The aveage esponse among whtes to each queston has declned steadly ove the past 30 yeas. Declnes ange fom close to zeo fo questons concenng govenment teatment of and spendng fo blacks, to moe than a half a standad devaton fo questons concenng laws about school and esdental ntegaton. In the mdange of declnes, at about a quate to a thd of a standad devaton, ae questons about the wllngness to vote fo an othewse qualfed black pesdental canddate, suppot fo laws concenng nteacal maage, and the desed acal composton of schools. 18

20 Fgue 2 shows tends n the un-dmesonal pejudce measue d t plotted sepaately fo each Census dvson. Two key thngs should be noted about the fgue. Fst, the declne n measued pejudce has been wdespead. Between 1977 and 1996 (the yeas ove whch d t s avalable) measued pejudce declned n each of the nne Census dvsons. Second, the elatve ankngs of pejudce acoss egons has been peseved. New England, and the Pacfc and Mountan dvsons eman the least pejudced, whle the East South Cental and South Atlantc dvsons eman the most pejudced, accodng to ou ndex. In shot, thee s a geat deal of vaaton acoss egons of the U.S. n levels of measued pejudce. Racal pejudce appeas to be geate n the South and lesse n the Notheast and West. Futhemoe, thee has been a maked declne n measued pejudce ove the past 30 yeas. Ths vaaton n tastes ases a natual queston: ae black-whte wage gaps lagest n the places wth the most sevee pejudce? The answe appeas to be yes, and the coelatons ae stkng. Table 1 shows that black wages ae lowest elatve to whtes n pecsely the census dvsons whee measued pejudce s geatest. Fgue 3 shows ths elatonshp clealy. Wth only 9 obsevatons, the pont estmate of s statstcally sgnfcant ( t = 3.37 ) and the unvaate egesson has an R 2 of d. The pejudce of employes Befoe tunng to a moe fomal analyss of the empcal elatonshp between egonlevel pejudce measues and the black-whte wage gap, we examne a moe dect test of the vew that compettve pessues should foce the most pejudced employes out of the maket. Pesons who suvve as employes would thus have less pejudce than whtes oveall. Ths s a testable mplcaton of the theoy, whch does not hold up well to scutny. Fo ths analyss, we teat pesons who descbe themselves as self-employed as employes. Though ths s not an deal poxy, t s faly close to what Becke meant n hs model of Employe Dscmnaton. The mpotant dstngushng chaactestc s that he can set wages of hs employees. In Becke s model, the employe s also the esdual clamant of the fm. In pactce many agents wth wage settng powe ae not also the owne of the fm. Howeve, the self-employed ae pobably moe lkely than the aveage woke to have the powe to make wage offes to employees. Impotantly fo ou puposes the vew that competton dves pejudced employes out ot busness stongly pedcts that fms owned by dscmnatoy self-employed should not suvve competton. In what follows fo ease of exposton we theefoe use the tems selfemployed and employes ntechangeably. Table 3 shows compasons of the esponses to each of the pejudce questons by whte employes and non-employes. Fo each queston, two egesson coeffcents ae epoted, each one fom a sepaate egesson. The left-hand coeffcent s the uncondtonal dffeence n d between self-employed and all othe whte wokes. A postve pont estmate ndcates that employes ae moe pejudced. The ght-hand 19