Empirical Micro Seminar

Firms and the racial wage gap: evidence from Brazil

Francois Gerard (Columbia University)
October 17, 2017 | 12:15 - 13:30 | SOF-G21

This paper studies the sources of the racial wage gap in Brazil, where race exerts a powerful influence on labor market outcomes, as in the US and other Latin American countries, and the extent to which firms exacerbate such inequalities. The large unexplained racial wage gap that remains in standard wage regressions, even after controlling for differences in education levels, motivates our analysis. In particular, we exploit an employee-employer dataset that includes information about workers’ race and estimate a two-way fixed effect model to decompose the racial wage gap into a worker-specific component (“ability”) and a firm-specific component (“pay premium”). First, we find that there is a substantial racial gap in workers’ estimated ability that is not accounted for in standard wage regressions, i.e. by differences in education levels. Second, we find that firm-specific pay premiums account for about 25% of the racial pay gap. About half of the firms’ contribution is due to the assortativenes of the matching between workers and firms: high-wage firms tend to hire high-ability workers. This skill-based sorting is a race-blind process through which firms exacerbate inequalities in workers’ ability. However, non-white workers remain under-represented in high-wage firms even if we account for the racial gap in workers’ ability. Moreover, firms tend to pay lower premiums to non-white workers on their payroll. These last two components of firms’ contribution to the racial wage gap are larger in the early period and in high face-time industries, which is consistent with differences in the environment in which firms operate regarding racial discrimination.