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Social Science and Public Policy

Declining Black Employment

Richard Vedder and Lowell Gallaway

For the last three decades, unemployment amongblack American workers at any given moment has been twice that of white workers. When the white unemployment rate is 6 percent, for example, the rate for African-Americans is typically 12 percent or higher. While it may seem reasonable to explain this differential by the present or past effects of racial discrimination, consider this startling fact: before 1930, the overall unemployment rate for black Ameri- cans differed little from that for whites.

In the era of "separate but equal," of Jim Crow, lynchings, and overt racial prejudice, blacks fared as well as whites in getting jobs. Converting unemploy- ment data to the form used today, we estimate the unemployment rate for black Americans in 1890 to have been 4.07 percent—less than the 4.41 percent rate for whites. As late as 1930, the unemployment rate for blacks was below that for whites. By contrast, in the modern era of affirmative action, civil rights laws, and other efforts aimed at eliminating racial differ- ences, the relative black unemployment rate is far higher than in the old days of intense bigotry and the Ku Klux Klan.

To be sure, early in this century working blacks tended to eam substantially less than whites. They had low paying, menial jobs—30 percent in 1900, for example, were domestic servjints. They faced overt

racial discrimination. But they did Hnd work about as well as whites.

Why was there no race differential in unemploy- ment before the Great Depression, as there has been since? A good part of the answer has to do with changing lifestyles, particularly for black Americans. Early in this century, most blacks lived in rural areas in the South and were engaged in farming. Beginning about the time of the First World War, a massive migration of blacks to jobs in factories and mills in the North took place. In 1910,89 percent of black Ameri- cans lived in the sixteen states constituting the three southem census regions. By 1950 this proportion had fallen to 68 percent, and by 1990 it was 53 percent.

In the early decades of this century, most blacks worked in occupations with traditionally low rates of unemployment, particularly farming. They were seri- ously underrepresented in such high unemployment (but also high paying) areas as manufacturing and mining. By 1980, however, the occupational make-up had chsinged; blacks were no longer overrepresented in agriculture, and they actually had a higher propor- tion of their work population in manufacturing than was true for whites.

Yet the changing mobility of America's black pop- ulation alone cannot explain their lower participation in the contemporary American labor force. Consider

5 8 / S O C I E T Y * JULY/AUGUST 1993

the following facts. In 1954, the year of Brown versus Topeka Board of Education, 58 percent of non-whites (predominantly blacks) over the age of sixteen worked, a figure that exceeded that for whites (55.2 percent). By 1990, however, the situation was reversed. The proportion of working-age whites who were em- ployed showed significant growth, rising to 63.6 percent. By contrast, the non-white proportion had declined, falling to 57.3 percent—well below the level of whites.

This phenomenon is not solely explainable by mo- bility pattems, particularly since a majority of the great northward movement of blacks had already happened by 1954. Rather, in our new book Out of Work: Unem- ployment and Government in Twentieth Century Amer- ica, published for the Independent Institute, based in Oakland, Califomia, we argue that the racial differ- ential was the result of the unintended consequences of govemmental policies, designed ironically to help the poor and disadvantaged. Moreover, this trend toward declining relative job participation for blacks occurred despite passage of elaborate legal protec- tions against discrimination in the employment of minorities.

Imposition of the minimum wage denies the black worker employment

that would otherwise occur.

Consider minimum wage legislation. In 1931, con- cemed about the fact that relatively low paid southem black constmction workers were taking jobs away from whites in his New York district. Representative Robert Bacon introduced legislation that soon became the Davis-Bacon Act, requiring "prevailing wages" (imion scale) to be paid on federally funded construc- tion projects. Later in the same decade, the Fair Labor Standards Act set a federal minimum wage in a large proportion of employment, with the coverage expand- ed in subsequent legislation. This legislation required employers to pay wages above labor market dictates for certain types of unskilled labor. Hiring some work- ers became unprofitable. Rather than doing so, em- ployers hired fewer workers. Since blacks were disproportionately represented among the affected lower skilled workers, they suffered significant unem- ployment effects of wage minimum laws.

Minimum wage laws too allowed employers af- fiicted with racial prejudice to hire according to their

convictions without the negative financial consequences that a color-blind market mechanism would have im- posed. Suppose that there is no minimum wage law, and a bigoted employer has one unskilled job open, which he advertises at $3.50 an hour. He might get one applicant, a black. The employer, needing the work done, reluctantly hires that black worker. Suppose, by contrast, that the federal minimum wage law is in effect, and that the employer is forced to advertise the job at $4.25 per hour, the legal minimum. At the higher wage, suppose the employer gets two equally qualified applicants, one white and one black. He will hire the white.

The imposition of the minimum wage served to deny the black worker employment that otherwise would have occurred. Had the minimum wage not existed, the em- ployer would have had to make a financial sacrifice to exercise his prejudice (paying the white worker $4.25 per hour to do the same job the black would have performed for $3.50). The market, in a sense, punished him financially for indulging in his taste for discrimi- nation. With the minimum wage law, however, there is no financial penalty for preferring the white to the black applicant. In short, minimum wage laws increase incentives to engage in racial discrimination.

In our example, the prejudicial employer is more likely to hire the black worker at $3.50 an hour in the absence of minimum wage legislation despite his dis- like of blacks, simply because his preference for whites is not worth the additional 75 cents an hour ($1,500 a year) that the white worker would cost. The market thus can and does reduce job discrimination, even where prejudicial conduct exists, by imposing a fi- nancial cost on the discriminator—a cost that he cannot afford in a competitive world with modest profit margins.

Some of the deterioration in the employment status of blacks has occurred since the 1950s, however, when minimum wage laws were already well established. Other forms of govemmental intervention have had an impact on black labor force involvement. Of particular importance are the variety of entitlement programs growing out of the Great Society of the 1960s, such as food stamps, Medicaid, WIC (wo- men, infants and children nutritional program), SSI (supplemental security income), and so forth. Total social welfare outlays of American govemments were about 10 percent ofthe total national output in 1960, but approach double that today.

In many states today, a person with a low income pays an implicit but very high "tax" for working. Consider the case of a single mother with two children

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in Califomia. If she does not work, she is eligible for over $600 in Aid to Dependent Children (ACD) cash benefits each month. She is also likely to receive food stamps, a Medicaid card for free medical care, free or reduced cost lunches for children of school age, and federal housing subsidy of some form. These non-cash benefits very likely are worth about another $600 a month. In total, the single mother gets about $1,200 a month in benefits, or $14,400 a year.

Suppose this mother is offered a job paying $6 an hour, well above the minimum wage. Suppose that fringe benefits (mainly social security) are worth an- other dollar an hour, increasing total compensation to $7.00 per hour. Working forty hours a week for fifty weeks a year, she eams $14,000. If she takes the job, however, she will lose (after a lag of a few months in some cases) all or most of those benefits. In taking a $14,000 job, she loses up to $14,400 in benefits. She may, in fact, pay as much as a 100 percent "tax" on work income in the form of welfare benefits foregone if she works.

Given a choice of working or not working, with income roughly the same in the both instances, any human being is likely to choose not to work. The non-worker has more leisure, more time to watch television, converses with friends, play cards, or read. The non-worker also can forego job-related expenses such as transportation, child care, and work-required clothing. Thus the non-working welfare recipient may actually have more discretionary income than the low- skilled full-time worker.

In the language of economics, generous welfare programs raise the "reservation wage" (minimally ac- ceptable compensation) of potential workers. Whereas a person might take a $4-an-hour job in the absence of generous welfare payments, big public assistance pay- ments push that reservation wage to $8 or even $ 10 an hour. Unfortunately, there are few such jobs available for new, unskilled workers. In a sense, then. Great Society welfare programs have priced a large number of low income Americans (including a disproportion- ate number of blacks) out of the labor market. The supply of blacks willing to take $10-an-hour jobs is greater than the demand, so unemployment exists. At $5 an hour, however, the quantity demanded would be greater, so unemployment rates would be lower.

While highly rational, the decision of the welfare mother to receive benefits rather than work is triply tragic. First, workersleam on the job, not only employ- ment skills, but also responsibility and discipline. As they gain experience on the job, they become more productive, leading to promotions and pay increases.

Welfare benefits do not increase with age or "welfare experience," job benefits do.

The average eamings of female high school gradu- ates working full-time year-round in 1990 were $13,825 for women between eighteen and twenty-four years of age, the Census Bureau tells us. By contrast, for wo- men of similar background, aged forty-five to forty- nine, the average eamings were $20,368, nearly half again higher. The older women eam more because they are more productive, have work experience and skills that make them more valuable members of society. For males, who are less likely to have intermptions in work experience over their lifetime, the income gains with age are much greater. The teenage unwed mother who takes welfare rather than a $14,000 job is ahead finan- cially in the short run, but suffers in the long run. She fails to get on the critical first rung of the job ladder, missing out on the productivity and income gains that come from work experience.

The pernicious effects of welfare disincentives spill over into the attitudes

of the children of recipients.

Before the Great Society programs ofthe 1960s, the implicit work tax a low-income worker paid by taking a job was much less. For example, if our mythical welfare mother could eam $600 in ADC payments but none of the other benefits mentioned above (Medicaid, food stamps, and so forth), she very might well take a $6-an-hour job rather than stay on welfare, since her tme income would rise by several thousand dollars a year. Thus the implementation of Great Society pro- grams reduced incentives to work for low income Americans.

A second tragedy of these welfare disincentives is their disproportionately injurious effect on black Ame- ricans and other minorities. Since a larger proportion of blacks have modest amounts of education and work experience, they generally have a lower income (quite apart from the possibility of racial wage discrimina- tion). Blacks are thus disproportionately enticed into the welfare trap.

In 1990, some 48.8 percent of all blacks in the United States received some form of means-tested assistance, whereas for whites the figure was 17.0 percent. Whites are more likely to eam an adequate wage and family income that is higher than what the welfare altemative has to offer. Thus the welfsire work

60 / SOCIETY* JULY/AUGUST 1993

tax is a particularly cruel, regressive tax, one that hits hardest at the poorest, the least skilled members of our population, who also happen to be disproportionately members of minority groups.

The third tragedy of welfare disincentives is that the work ethic associated with employment is not estab- lished in welfare families, so children of public assis- tance adults fail to leam and appreciate the value of work. The pernicious effects of welfare work disincen- tives spill over into the attitudes of the children of recipients. Why, for example, do well in school, if one can live on welfare benefits that are totally unrelated to educational achievement?

Trying to improve the economic status of blacks by increasing transfer

payments is an exercise in futility.

In a recent study, using Ohio ninth grade proficiency test data, statistical findings suggested that in school districts where half the students received ADC pay- ments, the percentage of students passing the tests was typically only about half as great as in school districts where none of the students received ADC control- ling for other differences in the environment, includ- ing income. Welfare's effects are both substantial and multigenerational.

These differential effects help explain the painful persistence of differences in economic status in the United States by race. In 1970, the median (typical) black family eamed slightly over 61 percent the in- come of the median white family. By 1990, that pro- portion had fallen to a bit over 58 percent. A generation of affirmative action, declining job discrimination, and civil rights activism was accompanied by a decline in the relative status of blacks.

For black females the deterioration in economic status is even greater. In 1970, the typical (median) black female eamed only 9 percent less than the typical white; by 1990, that differential had more than dou- bled, to over 19 percent. The reason for this is not growing wage discrimination or a decline in the relative skill/education attributes of black women, it is simply a decline in labor force participation among black compared with white women. Among year-round, full- time workers, the median eamings of black women in 1990 were 91 percent the level of whites: the simi- larities are more striking than the differences. More- over, the data suggest an even more ominous trend.

Among older workers (forty-five to fifty-four years of age), a larger proportion of blacks worked in 1990 than whites.

Among younger women, ages twenty-five to thirty- four, the reverse was the case. A smaller proportion of young black women are reaching that critical first rung on the job experience ladder. But that is not the worst news for blacks. Among the very youngest group for which data are available, fifteen to twenty-four-year olds, evidence shows that their labor force participa- tion rates are dramatically lower than those for whites. This is particularly tme for males. In 1990, only 16 percent of white males between fifteen and twenty- four did not eam some work eamings during the year; for blacks, the proportion was 36 percent—more than double that for whites.

The primary source of income for Americans is work. Economic theory and empirical evidence sug- gest that about 75 percent of what we produce is directly attributable to the efforts of human labor, and the remaining 25 percent represents the productive ef- fects of capital and natural resources. Govemment can engage in income redistribution schemes, taking money from the rich and giving it to the poor. The fact remains, however, that work-related income is the primary deter- minant of the economic status of Americans.

One approach to the problem of stagnating black relative incomes is to increase their transfer payments, for example by increasing welfare payments and intro- ducing new welfare programs. Advocates of this ap- proach also tend to favor govemment intervention in wage determination in labor markets via civil rights legislation, in order to improve the relative economic status of blacks.

For example, it might be determined that if the average pay of blacks working for the XYZ Company was 25 percent lower than whites, this is presumptive evidence of discrimination 2ind corrective measures must be taken by XYZ or it would have to pay criminal and civil penalties. Or, if the proportion of blacks working for XYZ is below their proportion of the area's population, this is a discriminatory policy re- quiring affirmative action. This seems to be the ap- proach favored by many black leaders of civil rights organizations, such as the NAACP or the Urban League, and is the approach of recently enacted civil rights legislation.

Trying to improve the economic status of blacks by increasing transfer payments is an exercise in futility. Indeed, higher payments would merely aggravate the disincentive effects of working. Some advocate train- ing or education programs for those on welfare. While

BLACK EMPLOYMENT / 61

in some cases such programs would prove helpful, giving welfare beneficiaries skills does not overcome the root cause of the problem: the lack of work incen- tives associated with the current system.

A second approach is to try to force employers to pay blacks more, or hire more of them. Trying to force wages above what productivity levels suggest is prof- itable leads to unemployment. Hiring quotas that force firms to hire blacks will similarly have negative con- sequences. If relatively unproductive workers are hired, firms will try to pay them relatively low wages to compensate for their low productivity. If forced both to hire relatively low productivity persons and pay above market level wages, firms likely will abandon lines of work where the problem exists, or transfer production to nations with a more "congenial" labor market environ- ment. More importantly, such rules Impede the overall growth in labor productivity, raise the real cost of labor per unit of output, and force reductions in employment growth and capital formation.

An altemative approach would be to reduce re- straints on private labor market behavior and lower the reservation wage and work tax of minority workers by reforming our income maintenance programs. There are "conservative" and "liberal" ways in which this can be done. The conservative approach would be to do one or more of the following:

1) reduce welfare benefits, thereby lowering the threshold reservation wage where a person would vol- untarily enter the labor force;

2) introduce workfare requirements that make work a prerequisite for receiving benefits;

3) put time limits on welfare eligibility. Elaborating on the last point, we currently stop

unemployment compensation payments after a fixed period (usually six months), regarding it as a tempo- rary helping hand to workers in distress. We could treat the welfare program in much the same way, except for those with long-term disabilities.The liberal approach would allow welfare recipients to continue to receive more benefits after they begin work. Instead of reduc- ing ADC checks by a dollar for each additional dollar eamed, welfare benefits would be cut by, say, 50 cents. Some workers who had become ineligible for welfare would still continue to receive some payments. The same would go for Medicaid benefits. Rather than being cut off completely, they could be partly reduced (by giving working, low-income persons a Medicaid card with some co-payment responsibilities).

The most efficient solution, of course, would be to replace the crazy quilt of federal low-income programs with a single program: a negative income tax. Today,

the ADC program is administered by one agency (ac- tually, fifty states plus a federal agency), the food stamp program by another bureaucracy, and housing subsidies by still another federal department. Why not do away with all of these programs and give every family of three instead 50 cents for each dollar the family income falls below $15,000? A family with an income of $ 10,000 from a $5 an hour job would receive $2,500 a year in negative income tax payments from the govemment. A family with no income would get $7,500 (50 percent of $15,000).

Inequality of income within the black community is much greater than within the white community.

The program would be cheaper than our current system, it would empower recipients to spend money as they see fit, would provide some incentives to work, and would allow doing away with a vast and expensive welfare bureaucracy—which is precisely why such a system is not likely to be adopted. In addition, the sale of public housing to the poor at very low cost would make them property owners and give them a stake in the capitalist system.

While black families typically have about 60 per- cent the income levels of whites, inequality of income within the black community is much greater than it is within the white community. More than one fourth of black families in 1990 eamed more than the median (typical) income for whites, $36,915 a year. They were living moderately prosperous lives with income levels that compare favorably with those for the entire popu- lation. Another 37 percent of black families, however, eamed less than $15,000 a year.

Statisticians measure income inequality by means of an indicator they term the Gini index or Gini coef- ficient. A value of one denotes complete inequality— one person or family has all the income in society. A value of zero indicates perfect equality—all persons or families have precisely the same income. In 1990, the Gini index of .443 for black household income was statistically significantly greater than that for whites (.383) and greater than that for persons of Hispanic origin (.424). Not only do blacks in general eam less, the disparity in income within the black population is also greater. Moreover, black income inequality has risen over time, and faster than the rise for whites.

62/SOCIETY* JULY/AUGUST 1993

In 1990, only 43 percent of black males over the age of fifteen worked in full-time, year-round jobs, com- pared with 54 percent of white males. Almost all black males (94 percent) making over $50,000 a year worked full-time year-round. The proportion for those making less than $15,000 a year (including those with no eamings) was less than 19 percent. The major cause of income differentials between races and within the black population is variation in work involvement.

The evidence supports the view of a dual black economy, a market economy and an entitlement econ- omy. Regarding the latter, there is a significant un- derclass, consisting of perhaps one-third or so of the total black population, that lives primarily off trans- fer payments. They are mostly poor. For example, among fifteen to twenty-four year old blacks with some eamings, some 31 percent received govem- ment transfer payments, more than double the pro- portion of whites.

In trying to promote equality and justice, progressive policymakers simply ignored

basic principles of human behavior.

The low-income black families are predominantly headed by a female without a husband present. In 1990, the number of such families nearly equalled the number of married-couple families. While the me- dian income of black married-couple families was a respectable $33,784, the median for female-headed single parent families ($12,125) was barely one- third as great. To the extent that the welfare system promotes single-parent families (since historically that has been a condition for receiving ADC pay- ments), it contributes importantly to the dual nature of the black economy.

The rest ofthe black population lives almost entirely above the poverty line in the market economy, a large proportion very substantially above the line separating the poor from the non-poor. This group's work effort exceeds that of the white population with comparable incomes (since pay for blacks tends to be lower than that for whites). For example, the average black family with $ 100,000 a year in eamings in 1990 had 2.79 wage eamers, 24 percent more than for comparable white families. The typical black family, where husband and wife both worked, eamed over $40,000 a year in 1990—above the average for the total population.

There is a large, growing, hard working and moder- ately affluent black middle class alongside a large poor segment trapped in the welfare system.

All of this vividly conHrms Charles Murray's Law of Unintended Consequences. The liberal reformers of the New Deal era in the 1930s or ofthe Great Society period in the 1960s did not deliberately set out to stifle the economic progress of black Americans. They did not consciously try to increase inequality within the black community. Their intent was not to reduce job opportunities and retard the entrepreneurial spirit of a group of people whose ancestors had suffered horrible injustice from the institution of slavery, quite the con- trary. Yet, all of these things happened.

In trying to promote equality or to ban injustice through the political process, the progressive policy- makers of the middle third of this vanishing century simply ignored basic principles of human behavior. In promoting minimum wages, they ignored the fact that if labor becomes too expensive, employers will hire less of it. In pushing liberal welfare entitlements, they paid people moderately generously not to work, ignor- ing the disincentive effects they had, not to mention the reality that much leaming and economic worth is de- rived through experience in the world of work. They also probably contributed to the relative demise of the traditional two-parent black family, an institution that had previously withstood the ravages of slavery. Re- construction, Jim Crow, and "separate but equal." They fostered a contempt for work, for leaming, and for the entrepreneurial spirit among a significant subset of the black population.

The market is usually characterized as an im- personal, value-neutral institution that favors the strong over the weak, the rich over the poor. Yet, there are powerful egalitarian tendencies markets tend to foster, tendencies that are consistent with modem liberal ideals.

In 1929, per capita income in South Ceirolina was 23 percent that of New York state. Today, it is above 75 percent. Over two-thirds of the income differential disappeared. Labor markets led poor people to move from the Carolinas to New York (many of them black), and for capital to migrate from New York to South Carolina. The migrants to the North improved their lives and capital migration improved the lot of those who remained in the South. Income was created and income inequality declined, without any prodding from govemment.

Similarly, a color-blind market financially punishes the perpetrators of racial bigotry and prejudice. It leads to a gradual opening of better jobs for blacks, to a

BLACK EMPLOYMENT / 63

decline in the differentials that were a legacy of slavery and discrimination. The Civil War was fought over opening labor markets for black Americans. The Eman- cipation Proclamation was about freeing labor markets from legally protected restrictions on the behavior of buyers and sellers of labor services. As a consequence, the average income of blacks rose from about 25 percent the level of whites in 1860 to about 50 percent two decades later. By letting markets work (blacks to move and employers to bid for their services), the economic status of blacks improved dramatically. Slower, but measurable, improvement could be ob- served from Reconstruction to the civil rights era of the 1960s. Since then the record has been decidedly mixed. Blacks in the market economy have made further gains, while those in the growing entitlement economy have languished.

The lessons of history are clear: markets are friendly to disadvantaged Americans. Let them work by ending the "new slavery," the bondage that traps millions in an entitlement economy that offers little or no hope for economic advancement or personal fulfillment.

READINGS SUGGESTED BY THE AUTHORS: Cogan, John. "The Decline in Black Teenage Employ-

ment: 1950-70." American Economic Review 72 (September 1982) 621-38.

Jaynes, Gerald D. "The Labor Market Status of Black Americans: 1939-1985." The Journal of Economic Perspectives 4 (Fall 1990) 9-24.

Smith, James P. and Finis R. Welch. "Black Economic Progress After Myrdal." Journal of Economic Litera- ture 27 (June 1989) 519-564.

Williams, Walter E. The State Against Blacks. New York: New Press, 1982.

Richard Vedder is Distinguished Professor of Economics at Ohio University and a faculty associate of its Contempo- rary History Institute. He is editor of The American Econ- omy in Historical Perspective.

Lowell Gallaway is Distinguished Professor of Econom- ics at Ohio University and a faculty associate of its Contem- porary History Institute. His many books include Poverty in America.77ie writers have been frequent collaborators and are co-authors o/Out of Work: Unemployment and Gov- emment in Twentieth Century America. Both have served as staff economists for the Joint Economic Committee.

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