THE DECREASING INFLUENCE OF DOMESTIC MARKET STRUCTURE ON RACIAL EARNINGS DIFFERENTIALS: 1984 TO 1996

I. INTRODUCTION Earnings discrimination occurs when racial groups of equal productivity receive different returns to human capital attributes. Theories of discretionary power suggest that noncompetitive market structure provides a particularly fruitful arena for such discrimination to flourish (Becker 1971). Profit in noncompetitive industries allows employers more latitude to discriminate relative to employers in more competitive industries--where fierce competition mandates that employers be more efficient and racially equitable in the distribution of wage payments. This article examines the evolution of the relationship between market concentration and earnings discrimination in the United States over the period 1984-96. Such an analysis is warranted for both policy-oriented reasons and reasons pertaining to the measurement of market concentration. Indeed, recent U.S. industrial policy has emphasized increased product market competition as a means to allocate resources more efficiently. Examples include the deregulation of transportation industries and telecommunications and the privatization of intercity busing. Economic theory suggests that product and labor market outcomes reflect the current trend of government policies. Competition-inducing policy therefore should decrease employers' ability to engage in earnings discrimination. Another reason this article is important stems from the traditional utilization of the four-firm market concentration of domestic industries as a measure of market power. Profit in noncompetitive industries provides employers the opportunity to discriminate. However, economists have long known that there is a tenuous link between firm profitability and market concentration (Ravenscraft 1983)--thus concentration has never been an ideal measure of firms' market power and, therefore, firms' ability to engage in market structure-driven discrimination. However, concentration may be an increasingly ineffective gauge. Indeed, recent empirical studies of the influence of international competition highlight the increased importance of global competition in determining domestic labor market outcomes (Borjas and Ramey 1995; Macpherson and Stewart 1990). Moreover, as the importance of global competition increases, implicitly the importance of domestic competition may decline. Thus market concentration may provide less information regarding firms' market power than it once did and, as a result, may be a less effective measure of firms' latitude to discriminate. This analysis uses individual data on male manufacturing workers from 1984 to 1996 to examine the progression of the market structure/earnings discrimination relationship. (1) The impact of market concentration on earnings reveals a natural partition into two time periods, 1984-90 and 1991-96. The authors estimate earnings equations for each period and measure the impact of monopolistic market structure on the racial wage gap for union and nonunion workers. Furthermore, the authors estimate Oaxaca/Blinder decompositions of the racial earnings differential in each period separately by market structure (monopolistic or competitive) and union membership. Thus the portion of the wage gap that is due to differences in returns to attributes (the residual wage gap) provides an alternative measure of earnings discrimination for union and nonunion workers under each market structure. The findings for nonunion workers in the first period (1984-90) provide support for the notion that competition reduces earnings discrimination. Indeed, the authors find that the racial earnings gap and the residual portion of the gap (discrimination) are both smaller in fiercely competitive industries relative to inefficient, monopolistic industries. In the second period, the authors find modest evidence of greater discrimination in monopolistic markets (relative to competitive markets) for nonunion workers. Additionally, the racial earnings gap and the residual portion of the gap (discrimination) increased under each market structure from the first to the second period for this group. …