Racial Inequality and Minimum Wages in Frictional Labor Markets

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Abstract

We examine how the racial patchwork of federal and state minimum wage changes between 1990 and 2019 has affected racial wage gaps, with specific attention to effects on labor market frictions. Black workers on average are less likely to live in high-wage states that have raised their wage floors. The effect of state minimum wages on the national racial wage gap is thus not self-evident.

Using five different causal specifications, including the “bunching” estimator of Cengiz et al. (2019), and data from the CPS and the QWI, we find that minimum wage changes since 1990 did reduce the 2019 racial wage gaps, by 12 percent among all workers and 60 percent among less-educated workers. The reductions are greater among black women and among black prime age workers. The gains for black workers are concentrated well above the new minimum wage, beyond the usual spillover estimates. Earnings of all race/ethnic/gender groups grew, with larger effects among black workers. We do not find disemployment effects for any group.

Surprisingly, racial differences in initial wages do not explain the reduction in the racial wage gap. Rather, minimum wages expand job opportunities for black workers more than for white workers. We present a model in which minimum wages assist the job search of workers who do not own automobiles and who live farther from jobs. Our causal results using the ACS show that minimum wages increase commuting via automobile among black workers, supporting our model. Minimum wages also reduce racial gaps in separations and hires, further suggesting the policies especially enhance job opportunities for black workers.

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