The role of location in evaluating racial wage disparity

A standard object of empirical analysis in labor economics is a modified Mincer wage function in which an individual’s log wage is a function of education, experience, and race. We analyze this approach in a context where individuals live and work in different locations (thus facing different housing prices and wages). Our model justifies the traditional approach, but with the important caveat that the regression should include location-specific fixed effects. Empirical analysis of men in U.S. labor markets demonstrates that failure to condition on location causes us to significantly overstate the decline in black-white wage disparity over the past 60 years.