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Efficiency wage

The Quarterly Journal of Economics

The earnings difference between white and black workers fell dramatically in the United States in the late 1960s and early 1970s. This article shows that the expansion of the minimum wage played a critical role in this decline. The 1966 Fair Labor Standards Act extended federal minimum wage coverage to agriculture, restaurants, nursing homes, and other services that were previously uncovered and where nearly a third of black workers were employed. We digitize over 1,000 hourly wage distributions from Bureau of Labor Statistics industry wage reports and use CPS microdata to investigate the effects of this reform on wages, employment, and racial inequality. Using a cross-industry difference-in-differences design, we show that earnings rose sharply for workers in the newly covered industries. The impact was nearly twice as large for black workers as for white workers. Within treated industries, the racial gap adjusted for observables fell from 25 log points prereform to 0 afterward. We can rule out significant disemployment effects for black workers. Using a bunching design, we find no aggregate effect of the reform on employment. The 1967 extension of the minimum wage can explain more than 20% of the reduction in the racial earnings and income gap during the civil rights era. Our findings shed new light on the dynamics of labor market inequality in the United States and suggest that minimum wage policy can play a critical role in reducing racial economic disparities.

Minimum Wages and Racial Inequality*