The racial earnings gap persists—but not because of where workers live

It has been an enduring feature of the American labor market that Black workers earn less than White workers. Data on median family earnings going as far back as 1947 show that families headed by a White worker made about twice what other families earned. And in their new Institute working paper, David Card, Jesse Rothstein, and Moises Yi find that full-time White workers earn roughly 30 to 40 percent more, on average, than full-time Black workers across the 200 largest U.S. cities.

Many factors determine an individual’s pay, so there are many possible sources for the Black-White earnings gap. One hypothesis focuses on workers’ proximity to jobs and specifically to “good” jobs at firms with high pay premiums—that is, firms that tend to pay higher wages than other employers. This hypothesis first emerged in the 1960s, a time when White families flocking to the suburbs changed the racial composition of American cities. If Black workers tend to live farther away from good jobs than White workers, the theory goes, then geography could be limiting employment opportunities—and hence earnings—for Black workers.

Card, Rothstein, and Yi assess this hypothesis in their paper. Using data from the Census Bureau’s Longitudinal Employer-Household Dynamics (LEHD) program, they identify the home address and employer address for full-time workers. Their data confirm the large racial earnings gap but find no evidence that Black workers systematically live farther from good jobs than White workers do. The racial earnings gap does not appear to arise from differences in proximity to employment.

Why some workers are paid more: The role of “good jobs”

In a classic economic framework, workers with similar abilities are paid similar wages no matter where they work. Firms pay workers based on how productive they are, and workers with similar abilities have similar productivity.

In reality, workers with similar abilities do not always earn the same wages. This is a robust finding emerging from over a decade of labor economics research, including earlier work by Card, Rothstein, and Yi. Some firms consistently pay more than other firms, and the same worker may earn more at one firm than at another.

So which lucky workers get the jobs with high pay premiums? Well, living within a reasonable commuting distance probably helps, particularly in the pre-COVID-19 world when approximately 85 to 95 percent of jobs were on-site. Long commutes come with costs, both monetary and psychological, particularly in large cities.

These observations—that some firms pay better than others and commute distance matters—led Card, Rothstein, and Yi to the questions at the heart of their analysis. Are Black workers less likely than White workers to be employed at firms with high pay premiums? And, are Black workers less likely to live close to these good jobs?

Measuring the gap: Employment at firms with high pay premiums

For their analysis, the economists use the LEHD database, which is built from quarterly earnings reports provided by employers to state unemployment agencies. What makes the LEHD unique is that it connects employees to specific employers, an essential ingredient to measuring firm-specific pay premiums. The economists limit the data to Black and White workers between 22 and 62 years of age who earn at least $3,800 a quarter, roughly equivalent to full-time employment at federal minimum wage. These restrictions help the comparison capture “like” workers who are working full time.

The economists then use workers’ home and work addresses to determine what city they live and work in. The statistics are reported for three groups: older industrial cities, newer sunbelt cities, and the remaining cities among the largest 200 in America.¹

In line with previous research, the data show that average wages for Black workers are lower than average wages for White workers: 37 percent lower in older industrial cities, 41 percent lower in newer sunbelt cities, and 49 percent lower in the remaining 183 largest cities. Average commute times, however, are similar for Black and White workers, with Black workers having slightly shorter commutes across the groups of cities.

To better understand the sources of the earnings gap, the economists use a statistical model of earnings that accounts for worker-specific characteristics and the pay premium at the firm where the worker is employed. They find that the difference in average pay premiums accounts for a relatively small share of the overall racial earnings gap. In other words, Black workers are as likely as White workers to be employed at firms with high pay premiums. This pattern is consistent, the economists write, with the fact that Black workers are more likely to be covered by unions than White workers are, because union wages tend to be higher than nonunion wages.

Are Black workers farther from jobs?

Next, Card, Rothstein, and Yi evaluate how proximity to jobs varies for White workers and Black workers. What share of all jobs fall within a given distance of Black workers’ homes versus White workers’ homes?

Their analysis finds there isn’t much difference in how far White workers and Black workers live from the jobs available in their city. At every distance, the share of jobs within a certain distance from home is similar for Black workers and White workers.

What’s more, as the figure shows, the fraction of “good” jobs within a set distance from home is also similar for Black and White workers. The x-axis is distance from home. The y-axis is the share of high-pay-premium jobs in the city that are within that distance. So for example, in older industrial cities, 9.5 percent of high-pay-premium jobs in the city are within 10 miles of Black workers’ homes and 7.7 percent are within 10 miles of White workers’ homes. “There is no indication that there is a systematic shortage of jobs, or of good jobs, within a reasonable commuting distance of Black workers,” the economists write.

This analysis uses as-the-crow-flies distances, which of course is not how workers get to work. However, analyses using commute-time measures instead of direct distance point to similar conclusions.

Place still matters

Card, Rothstein, and Yi provide evidence that proximity to jobs does not appear to contribute to the racial earnings gap. However, their data confirm that a large racial earnings gap does exist. So what factors might be at play?

In new research, Card, Rothstein, and Yi are looking at the neighborhood where children grow up. Incomes tend to be correlated with parents’ incomes, and children of high-income parents are more likely to be high earners themselves. The economists find that parental income explains about half of the racial earnings gap.

They then examine whether incomes of neighbors matter independent of one’s parents’ income. And they find that they do. “Some of the mechanisms that we find evidence for involve social and professional networks,” Yi said. “If you grow up in certain neighborhoods, you probably have more leads or referral networks that will help you get a better job off the ground.”

While parents’ income and childhood neighborhood appear to explain much of the racial earnings gap, they don’t explain it all, suggesting other factors are at play too. There is still much to understand about the mechanisms that make parental income and childhood neighborhood matter so much—and how our institutions might help promote economic opportunity for all.

Endnotes

1 The economists combine results across cities due to reporting restrictions set by the U.S. Census Bureau to protect the privacy of individuals’ data. The “older industrial cities” are Chicago, Philadelphia, Detroit, Pittsburgh, Cleveland, Newark, Buffalo, Baltimore, Minneapolis, and St. Louis. The “newer sunbelt cities” are Los Angeles, Houston, Atlanta, Miami, Dallas, San Diego, Phoenix.