Persistent racial inequality in the United States
4 Racial discrimination today
Discrimination remains pervasive in the U.S. today, affecting everything from policing to online dating to healthcare to media coverage to how much a server gets tipped. We focus on three markets which are especially important in limiting Black economic mobility: labor, credit, and housing.
Labor market discrimination
Figure 5 shows persistent and large racial gaps in income and unemployment.
The extent of racial inequality in outcomes is understated in labor market data because of the large number of Black people who are in prison. As detailed in this article, since these individuals are not counted in labor market surveys, the extent of Black joblessness is understated in the statistics.
Figure 5 The top panel shows the real median income for each racial group counted by the U.S. Census Bureau. The data is presented in 2018 dollars. The bottom panel shows the ratio of Black to White unemployment.
Top: U.S. Census Bureau. 2022. Current Population Survey, 1968 to 2019 Annual Social and Economic Supplements. Bottom: Authors’ calculations from U.S. Bureau of Labor Statistics and Federal Reserve Bank of St. Louis. 2022. FRED.
Racial discrimination in the labor market helps produce and perpetuate these income and employment gaps. We define labor market discrimination as a situation where people are denied jobs, denied promotions, paid less, or treated unfairly based on factors unrelated to their productivity, such as race, gender, sexuality, age, and religion.
The racial gaps are not only the result of discrimination. Significant racial gaps in social networks, education, and skills could partly explain these racial gaps, but racial discrimination is an important and distinctively inefficient contributor to racial inequality: it prevents people who could do a job as well or better than others from being hired.
To understand the extent of discrimination, Figure 6 examines Black–White gaps between workers with similar levels of education. There are significant differences in unemployment and wage levels between Black and White workers with the same level of education. The unemployment rate for White workers with no more than a high school degree is only slightly higher than that for Black workers with a college degree. Apart from those who did not graduate high school, the wage gap for workers of the same education level has actually increased since 1979!
Figure 6 Wages by education and race. The top panel shows the annual average unemployment by race and education in 2017. The bottom panel shows the Black–White wage ratio by different education levels, for the years 1979 and 2017.
Valerie Wilson. 2018. “50 years after the riots: continued economic inequality for African Americans”. Economic Policy Institute.
Figure 6 suggests the presence of labor market discrimination. Black workers will on average have more difficulty finding employment than similarly educated White workers, and those with at least some college education will also likely have a tougher time finding work than slightly less-educated White workers. Also, the inequality between similarly educated Black and White workers means that policies directed only at equalizing educational levels are insufficient to eliminate racial wage and employment gaps.
In the box below, you can learn more about how social scientists have used field experiments to show the existence and extent of racial discrimination in the labor market. One recent study found that the extent of anti-Black discrimination has not changed at all since 1989. While it is impossible for individuals to randomize their own racial identity while seeking jobs, these experiments try to approximate, using trained testers and fake resumes, what might happen if we could. By holding other relevant factors constant, such as education, work history, and ability, researchers can better narrow in on the specific effect of race in a given market or interaction.
How economists learn from facts Using field experiments to detect discrimination
- audit study
- A type of field experiment in which trained individuals called auditors pretend to apply for a service or enter a marketplace to test for discrimination. To do this they pretend to have matching characteristics, except for the one being tested. Audit studies can also be done without trained auditors by using fictitious applications submitted online or via the mail.
An audit study in the labor market is a study where an experimenter sends out equally qualified candidates, who differ only in their category or group membership, to look for a job and record the results. Similar studies have been used to examine discrimination in a variety of contexts, including housing markets, credit markets, and eBay auctions.
One example of this approach is a study published in 2004 by the economists Marianne Bertrand and Sendhil Mullainathan.1 They sent out 5,000 fake resumes to 1,300 job postings in Chicago and Boston. The resumes were either “high-quality” (more job experience and education) or “low-quality,” with all the resumes in each group being otherwise the same. Each resume was randomly assigned either a “White-sounding” name, such as Brad or Laurie, or a “Black-sounding” name, such as Keisha or Tremayne. The authors found that a “low-quality” resume with a White-sounding name was more likely to get a callback from the employer than a “high-quality” resume with a Black-sounding name. Furthermore, raising the education level on the resume generated more callbacks for White-sounding names, but not for Black-sounding names.
The sociologist Devah Pager and her colleagues ran a similar set of studies. She and her team trained auditors to go out on the streets of Milwaukee and New York City to hand out resumes and fill out applications. In this case, everyone had the same resume, and the only differences were the race of the person physically handing in the application and whether or not they had a criminal record. Figure 7 shows the results of the experiment in each city. A White man with a criminal record is more likely to get called back or offered a job than a Latino or Black man without one, despite their resumes being otherwise identical.
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Figure 7 Audit study results from Milwaukee (left) and New York City (right) showing notable discrimination against Black applicants with a criminal record. (Note: “positive response” means that the applicant was either offered the job or called back for a second interview, depending on the hiring process for that job).
Left: Devah Pager. 2008. Marked: Race, crime, and finding work in an era of mass incarceration. Chicago, IL: University of Chicago Press. Right: Devah Pager, Bart Bonikowski, and Bruce Western. 2009. “Discrimination in a low-wage labor market: A field experiment”. American Sociological Review, 74 (5): pp. 777–799.
Economics Nobel Laureate James Heckman provides a critical assessment of audit studies and other measures of discrimination.
More recently, Patrick Kline, Evan Rose, and Chris Walters ran an audit study on a very large scale, sending out over 80,000 applications to more than 100 of the largest American companies, before, during, and after the Black Lives Matter (BLM) protests of 2020. The large set of applications means that the researchers obtained precise estimates of firm-specific discrimination. While the BLM protests led to slightly less racial discrimination while the protests were happening, there was little persistent impact on differences in callback rates by race. The authors also found that there is considerable variation in discrimination across firms and industries. These findings can help anti-discrimination efforts, including legal prosecution to better target firms and practices.
Exercise 1 Analyzing audit studies
Read pages 114–117 of this paper by the sociologist Devah Pager, in which she responds to some of James Heckman’s criticisms of audit studies. (You may find it helpful to read Heckman’s assessment of audit studies.)
- Briefly summarize her response. Do you find her response persuasive? Why or why not?
- Can you think of any other limitations or problems with audit studies that are not mentioned but that you think are important?
Exercise 2 Creating an audit study
Design a hypothetical audit study to measure racial discrimination in a particular market that’s interesting to you. In your description, make sure to address the following points:
- How would you make sure that the information people receive about race is randomized in the study?
- How would you ensure that the information about race was not communicating some other important information?
- What would you measure as outcomes?
Labor market discrimination is not just about whether a person does or does not get a job, but also about what kind of job they are offered, how much they are paid, and how they are treated once they are employed. An important finding from audit studies is that Black workers are more likely to be recruited into lower-paying work than they applied for, whereas the opposite is the case for White workers.2 Similarly, Black workers are more likely than their White counterparts to be fired or demoted for the same mistake and are generally more surveilled than their White counterparts. Discrimination in promotions also tends to get stronger as one moves up the firm hierarchy, so Black–White disparities are higher in the front office than the shop floor.
- disparate impact
- Occurs when policies, practices, or other institutions that appear to be broadly neutral nonetheless have a disproportionate impact on a group or groups, specifically groups that have historically been oppressed, marginalized, or heavily discriminated against.
Another form of discrimination which occurs in labor markets is disparate impact, which occurs when policies, practices, rules, or other institutions that appear to be racially neutral result in a disproportionate impact on some racial groups. It was first recognized as a form of discrimination in the 1971 Supreme Court decision Griggs v Duke Power Company. Duke Power Company required that applicants to certain positions—ones reserved for White employees prior to the Civil Rights Movement—must have a high school diploma or pass certain exams. These requirements did not mention race, but nonetheless affected Black workers disproportionately given the unequal educational opportunities in that region. The Supreme Court found this requirement to be discriminatory in intent and illegal because it had little relationship to an applicant’s ability to do the job.
Exercise 3 Labor discipline model and discrimination
- Using the labor discipline model from Unit 6 of The Economy 1.0, show how you think the existence of racial discrimination affects the best response curve for Black workers as compared to White workers. How does it affect their reservation wages and their levels of effort?
- How might firm owners benefit from engaging in discrimination? How might they benefit from racial divisions or animus among workers, or even benefit from encouraging these divisions?
Credit market discrimination
- collateral
- An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset.
Imagine that a White and a Black entrepreneur with similar skills, education levels, and wealth had similar ideas for a small business. Both were able to secure a loan to start their businesses, but the Black entrepreneur had to pay a higher interest rate on the loan than the White one. Despite the added financial burden, the loan was manageable for a while. However, when a recession hit, both businesses needed a new round of loans to stay afloat. The White business got their loans, survived, and was able to expand after the recession passed. The Black business was unable to secure a loan and consequently failed, the owner going bankrupt. The White business continued to succeed, and the owner was able to pass on some of that wealth to their equally entrepreneurial child. With this wealth, their child was easily able to secure a loan for their own business and become even more successful than their parents. The Black owner, however, was left with little to no wealth to pass on to their child, who, despite also being entrepreneurial, lacked the collateral to secure the necessary loan. (See Unit 10 of The Economy 1.0 for the role of collateral in a person’s ability to borrow to fund a risky project.)
Stories like this play out on a regular basis in the credit market and highlight how the consequences of credit market discrimination, in the form of accumulated wealth and the ability to take on risky projects, can endure well past one’s lifetime, thus becoming an intergenerational process.
Racial discrimination is pervasive in the credit market.
- Black people are less likely to be approved for a credit card and more likely to have a lower limit on their cards compared to similar White borrowers.3
- A 2017 audit study of car loans found that 62.5% of the time non-White consumers with above-average loan qualifications were nonetheless offered more costly loans.4
- Black-owned firms are more likely to be denied loans, given insufficient loans, or given higher interest rates than equivalent White firms.5 For example, Black-owned firms received loans that were 50% smaller on average than similar White-owned firms in the allocation of funds from the Paycheck Protection Program, which was created to aid businesses suffering from the economic consequences of the COVID-19 pandemic.6
- Black people are less likely than White people to be approved for bankruptcy and thus find it harder to escape debts. A study of bankruptcy filings nationwide found that “for people residing in majority Black zip codes who file for bankruptcy, the odds of having their cases dismissed … were more than twice as high as those of debtors living in mostly White zip codes,” even after controlling for income and assets.7
Figure 8 Vicious circles of credit constraint and exclusion.
Figure 8 shows how racial gaps in income and wealth are both cause and consequence of credit market discrimination and cumulate across generations. It shows that eliminating discrimination in the credit market alone would not have lasting long-term effects. As long as racism continues to characterize other institutions, the relatively lower levels of income and wealth for Black people would hamper access to credit and reinforce racial stereotypes, resulting in the re-emergence of racial discrimination in the credit market.
Housing market discrimination
In the first quarter of 2021, Black homeownership was around 45%, compared to 74% for White homeownership. Since homeownership is the most important source of wealth-building for most Americans, differences in the level of homeownership and the racially unequal manner in which homes are valued are important components of racial wealth gaps today, particularly among the middle class.
The end of legal discrimination in the mortgage and housing markets did not mean the end of discrimination or exclusionary policies. One recent study found that racial gaps in lending costs and mortgage loan denials have remained virtually unchanged over the past 40 years.8 In place of racially restrictive covenants, zoning laws (for example restrictions on the kinds of houses that can be built in particular areas) are often used to maintain current patterns of segregation.
Non-Black homebuyers are still reluctant to purchase (or stay in) a home in a predominantly Black neighborhood, which has a depressing effect on prices. A study by the Brookings Institute found that the average home in a majority Black neighborhood is undervalued by $48,000, which is equal to about 33% of the average net wealth for Black households.9 Black homebuyers are also sometimes understandably resistant to buying or searching for a home in a wealthier White neighborhood out of fear of how they will be treated by its residents or the realtor, highlighting the way that expectations of discrimination can be as important as discrimination itself in sustaining housing segregation.
Discrimination is also widespread in the rental market, with one recent study finding that managers of rental properties were on average more than 30% less likely to respond to inquiries from Black renters compared to White renters. That average, however, masks a lot of variation, as anti-Black discrimination is a more serious problem in cities with higher levels of racial segregation.10
- redlining
- The practice of denying housing loans, or only offering unduly expensive loans, for houses in certain neighborhoods, regardless of how creditworthy the borrowers are.
Exercise 4 Redlining and contemporary integration
As explained in the previous section the process of excluding whole neighborhoods from affordable home financing options due to their racial composition is known as redlining.
The website Mapping Inequality has made available all the HOLC redlining maps from around the country. Pick a major American city and click on it. You will be able to examine a detailed HOLC map. (For the curious, you can click on individual neighborhoods to see why they were given the color they were.) In another tab on your browser, open up the Racial Dot Map for that same city.
- Do a side-by-side comparison between the redlining map and the current racial composition of the city. Are areas that were redlined on the HOLC map still largely inhabited by Black or other non-White groups? Are the areas that received high (green or blue) ratings still mostly White?
- Using the website Rich Blocks Poor Blocks in conjunction with the other maps, how are home-buying loans, income, education, and owner-occupancy correlated with race and a history of redlining?
- What do your answers above suggest about the lingering or long-term effects of discriminatory lending policies?
Question 2 Choose the correct answer(s)
Using the information in Figure 6, read the following statements about Black and White differences in wages and unemployment and select the correct one(s).
- If you determine the Black–White unemployment ratio for each level of income, they are all relatively close to two.
- For both Black and White workers, unemployment rates decrease as they gain more education.
- The small increase in the ratio for those with no high degrees is outweighed by the substantial decrease in every other category.
- The unemployment rate for Black college graduates was 4.1% whereas the unemployment rate for White people with no more than a high school degree was 4.5%.
Question 3 Choose the correct answer(s)
Read the following statements about housing and the housing market in America and select the correct one(s).
- As stated in this section, Black homes are undervalued on average by around $50,000.
- The redlining practiced by the FHA did not create racial segregation, but rather ensured its continuation, especially with respect to the new housing being created in the suburbs.
- There was much racial discrimination toward both Black and Hispanic borrowers in the booming market for high-interest mortgages (subprime market) prior to the 2008 crash.
- Although it is true that many White families do have a relatively strong preference for living close to other White people, a similar preference for racial homogeneity is not shared by other races. And as we’ve seen, segregation is largely due to the effects of discriminatory policies both in the housing markets and elsewhere.
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Marianne Bertrand and Sendhil Mullainathan. 2004. “Are Emily and Greg More Employable Than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination”. American Economic Review 94(4): pp. 991–1013. ↩
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Devah Pager, Bart Bonikowski, and Bruce Western. 2009. “Discrimination in a low-wage labor market: A field experiment”. American Sociological Review 74(5): pp. 777–799. ↩
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Ethan Cohen-Cole. 2011. “Credit card redlining”. Review of Economics and Statistics 93(2): pp. 700–713.
Andrea Freeman. 2016. “Racism in the credit card industry”. North Carolina Law Review. 95: p. 1071. ↩
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Lisa Rice and Erich Schwartz Jr. 2018. “Discrimination when buying a car”. National Fair Housing Association. ↩
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Henderson, Loren, Cedric Herring, Hayward Derrick Horton, and Melvin Thomas. 2015. “Credit where credit is due?: Race, gender, and discrimination in the credit scores of business startups”. The Review of Black Political Economy 42(4): pp. 459–479.
David G. Blanchflower, Phillip B. Levine, and David J. Zimmerman. 2003. “Discrimination in the small-business credit market”. Review of Economics and Statistics 85(4): pp. 930–943. ↩
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Rachel Atkins, Lisa D. Cook, and Robert Seamans. 2022. “Discrimination in Lending? Evidence from the Paycheck Protection Program”. Small Business Economics 58: pp. 843–865. ↩
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Paul Kiel and Annie Waldman. 2015. “The Color of Debt: How Collection Suits Squeeze Black Neighborhoods”. ProPublica. Updated 8 October 2015. ↩
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Lincoln Quillian, John J. Lee, and Brandon Honoré. 2020. “Racial discrimination in the US housing and mortgage lending markets: a quantitative review of trends, 1976–2016”. Race and Social Problems 12 (1): pp. 13–28. ↩
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Andre M. Perry, Jonathan Rothwell, and David Harshbarger. 2018. “The devaluation of assets in black neighborhoods”. Brookings. Updated 27 November 2018. ↩
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Peter Christensen, Ignacio Sarmiento-Barbieri, and Christopher Timmins. 2021. “Racial discrimination and housing outcomes in the United States rental market”. NBER Working Paper No. w29516. ↩