Principal investigator: Bruno Benevit
Original title: Minimum Wages and Racial Inequality
Authors: Ellora Derenoncourt and Claire Montialoux
Location of the Intervention: United States
Sample Size: 490.000 workers per year
Sector: Jobs
Primary Variable of Interest: Income
Type of Intervention: Minimum wage
Methodology: DID, TD
Summary
The wage gap between whites and blacks underscores a historical social problem in the United States. However, during the Civil Rights era, this gap significantly decreased between the late 1960s and early 1970s. The aim of this article was to estimate the impacts of... Fair Labor Standards Act Implemented in the 1960s, this led to the adoption of a minimum wage for various productive sectors where the majority of the Black population was employed. Using the difference-in-differences methodology, the authors demonstrated that the affected sectors experienced increases in workers' wages, with greater impacts on Black workers, and no effect on the level of employment among workers.
- Policy Problem
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 income gap between Black and white workers. The average annual income difference between these two groups is currently 25%.
Over the past 70 years, this difference has only decreased significantly once, during the late 1960s and early 1970s, when it was reduced by approximately half. This 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 various sectors representative of the economically active black population.
In this sense, understanding the factors that contributed to this historical improvement can offer relevant information for the adoption of policies that reduce racial disparities that still persist today.
- Policy Implementation Context
Several anti-discrimination policies were adopted in the United States during the 1960s, known as the era of the Black rights movements. These policies involved institutional improvements in education, income, and political rights for the African American population.
Within this context, the 1966 Federal Labor Service Act (FLSA) introduced a 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. The sectors affected by the FLSA represented 20% of the total United States workforce, and one-third of African American workers. While the 1938 FLSA covered only 54% of the American workforce, the 1966 FLSA reform introduced a federal minimum wage for another 21% of the workforce, representing one-third of the entire African American workforce (compared to 18% of white workers).
- Evaluation and Policy Details
The introduction of a minimum wage for several new sectors occurred in 1967 and was initially below the federal minimum wage, converging to the federal minimum wage level by 1971, with the exception of the agricultural sector (which equaled it in 1977). As observed in the sectors covered by the 1938 FLSA, the ratio between the federal minimum wage and the average wage reached between 40% and 50% during the 1970s.
This study used four databases to assess the impact of the 1966 FLSA: (i) industry wage reports published by Bureau of Labor Statistics (BLS); (ii) microdata from 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 collective residences, 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 covered by the 1938 FLSA were considered as controls (sectors incorporated in other reforms were disregarded). All wages were converted to 2017 dollars.
- Method
This study presents several analyses to verify the impacts of the 1966 FLSA on wages starting in February 1967. To this end, the authors examine the impacts of the adoption of the minimum wage on the affected sectors of the American economy using various databases. Demographic, labor, and regional characteristics were used as covariates, in addition to fixed-effects variables related to industry and time.
The first analysis in this article considered CPS data. The difference-in-differences (DID) method was used to assess the impact of the 1966 FLSA on the wages of workers treated after 1966 (the minimum wage came into effect in 1967) compared to workers in the control group. The logarithm of the workers' wages 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 proportion 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, effects were estimated considering education (up to 11 years of schooling and more than 11 years of schooling), race (white and black), and the quartile of the workers' wage distribution.
In the third strategy, BLS data were considered to estimate the impact of minimum wage implementation 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 verifies the combined 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 on separate subsamples for 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 fixed state effects or the interaction between years and states. The authors also conducted an analysis to verify the policy's effect on wages in states without minimum wage laws in January 1966.
Finally, the authors conducted several analyses to verify the impact of the 1966 FLSA on other indicators. Thus, 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 computed counterfactual scenarios to assess the impact of the policy on the employment-wage elasticity and the wage gap between white and black workers.
- Main results
The results indicated a significant increase in the wages of workers in sectors affected by the implementation of the minimum wage starting in 1967. Considering the DID analysis with CPS data, the 1966 FLSA resulted in a 5,3% increase in the wages of these workers compared 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 a 5,4% effect for all workers in the industries studied, close to the coefficient of the DID analysis. The results using BLS data were similar.
Regarding the heterogeneity of the treatment effect, the results indicate that the 1966 FLSA affected workers with lower education levels more strongly (10,1% compared to 2,5%) and those in the lowest quartile of the wage distribution (+7%). Black workers were the most affected, experiencing an increase almost twice as high (9,5%) compared to white workers (5,4%).
Using the TD method and BLS data, the authors found higher impacts (7,5%) in southern US states, a region with a higher concentration of Black workers. Additionally, treaty states without 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 the supply and demand dynamics in the labor market. Observing the period before and after the reform, the authors identified effects of the reform on the elasticity of labor supply. Furthermore, no significant effects were identified on the probability of being employed.
- Lessons in Public Policy
In this article, the authors evaluated the impacts of the 1966 FLSA labor reform, which established a minimum wage for various sectors of the economy that concentrated a large portion of Black workers in the United States. Through a robust methodology, the authors demonstrated that this policy caused a large increase in the wages of the most socioeconomically vulnerable workers without affecting the employability of the sectors covered.
Since the reform had large positive effects on wages but small effects on employment, it reduced not only the racial gap in earnings among employed individuals but also the racial gap in income overall. Therefore, this study provided compelling information for policymakers, demonstrating the potential of the minimum wage to reduce social inequalities and presenting evidence related to possible unintended 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, v. 135, n. 2, p. 711–783, 1 May 2020.
