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1 Does a Foot in the Door Matter White-Nonwhite Differences in the Wage Return to and Prior Workplace Experience Author(s): Arthur H. Goldsmith, Darrick Hamilton and William Darity Jr. Source: Southern Economic Journal, Vol. 73, No. 2 (Oct., 2006), pp Published by: Southern Economic Association Stable URL: Accessed: :53 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at infoaboutpoliciesterms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Southern Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Southern Economic Journal.

2 Southern Economic Journal 2006, 73(2) Does a Foot in the Door Matter White Nonwhite Differences in the Wage Return to and Prior Workplace Experience Arthur H. Goldsmith,* Darrick Hamilton,f and William Darity, Jr.J The theory of ability misperception posits that employers will offer greater rewards to whites than nonwhites for similar levels of (Proposition 1) but that racialethnic differences in the return to additional tenure or seniority with the current employer will be smaller (Proposition 2). To advance the existing empirical literature, this paper evaluates the validity of these propositions by using data on black, Latino, and white workers drawn from the Multi-City Study of Urban Inequality. The analysis is conducted separately for women and men and controls for a wider range of workplace setting descriptors than was used in previous studies. Our results offer support for Proposition 1 and for Proposition 2. We find that nonwhites, regardless of job setting, receive relatively poor returns to workplace (the lone exception is Latinas). Second, nonwhites typically receive greater wage gains for accumulating additional tenure than whites. JEL Classification: J31, J71 1. Overview There is an extensive literature documenting the lower wages of black and Latino workers relative to white workers in the United States. The explanations for these racial and ethnic wage disparities have ranged from differential accumulation of human capital to labor market discrimination.1 Farmer and Terrell (1996), and more recently Lewis and Terrell (2001), extend this literature by advancing a hypothesis, which we summarize as the theory of ability misperception. This hypothesis explains how group membership may differentially influence the gains associated with workplace, and hence the relative wages of black and Latino workers over the course of their working lifecycle. * Department of Economics, Washington and Lee University, Lexington, VA 24450, USA; GoldsmithA@wlu.edu; corresponding author. f MilanoThe New School of Management and Urban Policy, 72 Fifth Avenue, New York, NY 10011, USA; hamiltod@newschool.edu. % Department of Economics, University of North Carolina at Chapel Hill, Chapel Hill, NC 27514, USA; darity@unc.edu. This work is supported by grant # from the National Science Foundation. We are grateful for suggestions provided by Barry Hirsch and seminar participants at Bond University, Gold Coast, Australia. In addition, we are grateful for comments from Julie Hotchkiss, Co-Editor for this journal, and two anonymous referees. This paper was presented at the 2004 Southern Economic Association Meetings. Received March 2005; accepted March Cain (1986) and Altonji and Blank (1999) provide excellent surveys of the mechanisms through which race may affect wages. Darity and Mason (1998) summarize theories of discrimination and existing evidence on discrimination against black workers. For recent evidence on wage differences between Latino and white workers in the United States and on the importance of immigrant generation, see Trejo (1997). 267

3 268 Goldsmith, Hamilton, and Darity Their basic idea is twofold: First, employers believe non white employees acquired fewer skills on jobs than white workers. Thus, employers will reward additional with employers to a greater extent for white workers than for non white workers. We refer to this hypothesis as Proposition 1. This first proposition falls under the umbrella of statistical discrimination, which explains wage inequality as a result of employers offering nonwhite workers lower wages as a result of employer reliance on their perception that the distribution of skills for nonwhite workers is worse than that of white workers. Second, as employers directly observe nonwhite workers on the job, they come to realize that their perceptions concerning the distribution of skills for nonwhite workers were incorrect and, consequently, they have underrated the ability of nonwhite employees. This learning leads employers to update their assessment of the relative productivity of nonwhite workers. Therefore, racialethnic differences in the return to additional tenure or seniority with the current employer will be smaller than the racialethnic difference in the return to when Proposition 1 holds. This prediction constitutes Proposition 2 of the theory of ability misperception. In addition, we introduce a third proposition (or a strong form of Proposition 2), which suggests that the returns to additional tenure for nonwhite employees will actually exceed that of white employees. Thus, Proposition 2 requires that the difference in returns to additional tenure with the current employer between nonwhite and white workers be smaller than the difference in returns to, while Proposition 3 requires that nonwhite workers actually receive a higher return for tenure. The purpose of this paper is to advance the existing empirical literature aimed at evaluating the validity of the propositions central to the theory of ability misperception using data drawn from the Multi-City Study of Urban Inequality (MCSUI). If Farmer and Terrell (1996) and Lewis and Terrell (2001) are correct that employers underestimate the skills of nonwhite workers before directly observing them at the worksite, then many capable nonwhite applicants will be denied work, and, if employed, will suffer undue economic losses. This form of discriminatory treatment, regardless of its source, may have deleterious labor market effects on nonwhite workers. It may harm incentives to work if wages are not commensurate with worker productivity, and it may lead to job lock. Once nonwhite workers get a proverbial "foot in the door," it will be relatively more costly for them to switch to another job because their talents are likely to be initially undervalued. The theory of ability misperception also has implications for affirmative action policies and stricter enforcement of antidiscrimination laws. Moreover, the theory is at odds with Lazear's (1979) prediction that, in the wake of affirmative action, white worker wage gains for additional seniority will be higher than for nonwhite workers. Lazear assumes that affirmative action leads to the hiring of less-productive nonwhite workers, and that employers adjust for this productivity disparity by offering white workers higher wages with additional years of seniority. Lazear does not address Proposition 1 of the theory of ability misperception (i.e., that employers initially undervalue the of nonwhite workers). Although neither this paper nor Lazear's (1979) provides a direct test of whether affirmative action leads to the hiring of less-productive nonwhite workers, this paper does provide an examination of the relationship between differential wage gains associated with work versus differential wage gains associated with on-the-job (seniority). Moreover, if the theory of ability misperception is accurate, it would suggest that affirmative action and antidiscrimination laws could be used to offset the undervaluation of

4 Wage Returns to and Experience 269 of nonwhite workers. This is somewhat in contrast to Lazear's (1979) proposition that affirmative action leads to the hiring of less-productive nonwhite workers, which in turn leads employers to offer nonwhite workers lower returns to wages for additional years of seniority. Ability misperception may arise from somewhat benign reasons, such as genuine ignorance of the productivity of a newly hired nonwhite worker.2 In addition, some employers may undervalue nonwhite workers for more malevolent reasons, such as a racist inclination to discount evidence of nonwhite competence in order to rationalize not hiring these workers or paying them a lower wage than comparable white workers.3 Those employers who fit into the benign characterization should be expected to voluntarily adjust upward their perception of talent possessed by nonwhite workers in light of evidence at odds with their. Employers who are racist may have an impulse to resist adjusting rewards to nonwhite workers even after these workers prove themselves to be more productive than anticipated. However, there are at least two mechanisms that may induce racist employers to adjust the wages of nonwhite workers once they are employed. First, once employed, it may be easier for workers to observe and prove that they are treated unfairly relative to other workers than it would be for those workers who have not yet been hired. Second, it is theoretically possible that once a worker is hired, workplace norms to offer similar pay for similar work may set in, in part to avoid a hostile work environment, which can harm productivity, leading some employers to adjust the initial undervaluation of nonwhite workers. Therefore, we examine if employers who systematically underestimate the ability of nonwhite workers when they join their firm, regardless of how they come to this position, have a tendency to behave as predicted by Proposition 2 (or Proposition 3) of the theory of ability misperception. Lewis and Terrell (2001), Bratsberg and Terrell (1998), and Wolpin (1992) provide evidence consistent with the theory's predictions by using data on white and black males drawn from the National Longitudinal Survey of Youth (NLSY). However, since the findings of Lewis and Terrell are limited to black males and are not particular to any occupation, their findings are not robust to occupation type and other workplace settings. Moreover, the relative returns to workplace for other subaltern wage-earning groups besides black males have yet to be examined. Thus, the question of whether U.S. data generally support the theory of ability misperception remains unresolved. A shortcoming of the existing studies is that a wide range of workplace setting characteristics expected to affect a worker's wage, including factors such as the racialethnic background of a worker's direct supervisor, number of coworkers, or amount of contact with customers, are not taken into accountcontrols that we include in our studybecause such data are not available in the NLSY. Omitting these workplace descriptors may mar the accuracy of the estimated impact of all the factors influencing a worker's wageincluding 2 See Fiske and Ruscher (1993) for a review of the literature in social psychology on negative stereotyping and minority group status. Fiske et al. (2002) provide empirical evidence that persons tend to hold negative stereotypes based on race and ethnicity. 3 There is perhaps a third alternative for employers to undervalue the of nonwhite workers. Bergmann (1971) asserts that the return to skills obtained by black workers may be underrated as a result of "occupational crowding." She argues that blacks are crowded into low-paying jobs and restricted from high-paying or attractive jobs. However, she suggests that those blacks who are able to ascend to desirable positions are willing to accept a lower wage, given the difficulties for them in finding comparable positions with other firms.

5 270 Goldsmith, Hamilton, and Darity workplace measuresmaking it difficult to determine whether there are racial or ethnic differences in rewards for work. Moreover, it is plausible that the rewards for additional are contingent upon these very same omitted factors. Workplaces may differ in the propensity and extent to which wage setters hold inaccurate perceptions of minority workers' ability and in institutional arrangements that govern wage setting. For instance, white supervisors may be more inclined than nonwhite supervisors to underestimate the talent of nonwhite workers. In addition, in some workplace settings, institutions are in place that may promote comparable gains to work for nonwhite and white workers. For example, larger firms and public sector employers may be more likely to adopt formal codified rules that govern the rewards for workplace. This may reduce managerial discretion in constructing rewards and hence the likelihood of racial and ethnic differences in the returns to and tenure. Thus, to appropriately access the theory of ability misperception, the validity of Proposition 1 and Proposition 2 (or Proposition 3) should be evaluated for particular worksites. Carrying this exercise out for a host of worksites will reveal if the findings are robust.4 Our work is distinguished from earlier empirical work on this topic in four ways. First, the model of wage determination we estimate for white and black male workers controls directly for a wider range of workplace setting descriptors. Second, the analysis is conducted on subsamples based on workplace settings to determine if there is robust support for the theory of ability misperception. Third, we explore whether our findings on racial differences in wage gains associated with tenure and are robust with respect to gender. Finally, using data on Latinos and whites, we explore whether our findings are robust to subaltern ethnic status. Our results offer strong support for Proposition 1 and for Propositions 2 and 3 for males along with clear-cut evidence consistent with these propositions for a subsample composed of white females and black females. The findings are less conclusive when the returns for white females and Latina workers are compared. The remainder of this paper is organized as follows. In section 2, the data and methodology are described. In section 3, we present our main findings examining the theory of ability misperception for black and white workers. In section 4, we present our findings for Latino and Latina workers, in relation to white male and female workers, respectively. Finally, in section 5, we revisit Lazear's proposition with regards to affirmative action and offer some concluding remarks. 2. Data and Methodology Data The MCSUI is an interview-based survey of 8916 persons administered in the cities of Los Angeles, Boston, Atlanta, and Detroit beginning in To acquire more accurate responses, 4 However, there is some evidence to suggest that even large and public sector firms systematically discriminate against workers based on race. For example, Darity and Mason (1998) point out several recent class-action employment discrimination lawsuits of large firms in which settlements have reached as high as $176 million.

6 Wage Returns to and Experience 271 attempts were made to match respondents and interviewers by assigning interviewers of a certain race or ethnicity to respondents with that same racial or ethnic heritage. Data on a rich array of socioeconomic and demographic factors is provided in the MCSUI, including information on a person's seniority with their employer, the age at which they completed their formal schooling, and workplace characteristics at their current job. MCSUI respondents were asked the number of years they had been with their current employer; we use their responses to this question to gauge an individual's level of tenure or seniority with their current employer. Respondents were not asked about the amount of work accumulated in previous positions. In this situation, the standard practice (see Bratsberg and Terrell, 1998, pp. 669) is to use potential (age minus total years of schooling minus 6 [the typical age of grade school entrance] minus years of tenure) as an instrument for actual workplace with previous employers. Assuming measurement with tenure is measured accurately, potential error. as a proxy for actual previous employers may suffer from three sources of inaccuracy First, not all children enter first grade at age six. Second, a not necessarily complete each grade of schooling in a single year. Third, the proxy implicitly assumes that all persons work continuously and at the same intensity (hours per week and weeks per year) once they complete school. This does not occur for a variety of reasons, including being laid off or taking time off for fertility or other family reasons.5 In theory, nonwhite workers are more likely to start school "late," to take additional time to complete a level of schooling, or to work less continuously once they person does or finish their formal schooling. As a result, nonwhite workers will have accumulated less workplace than whites with the same measured amount of potential.6 If employers believe such discrepancies existeven if the reward for an additional unit of actual with previous employers is the same for white and nonwhite workerswhite workers will receive a greater wage return for a one-unit increase in potential. Thus it is possible that studies examining the theory of ability misperception, including the studies by Lewis and Terrell (2001) and Bratsberg and Terrell (1998), might suffer from measurement error.7 Fortunately, MCSUI provides information on the age at which a respondent completed formal schooling. Using this information, we are able to construct an alternative measure of potential with employers: age minus age at which formal schooling was completed minus tenure. This measure is likely to be better than the standard measure of potential, because it avoids the first two types of measurement error (inaccuracy in the age at which a person enters the school system and inaccuracy in the assumption that a person completes a year of schooling during each calendar year throughout the schooling years).8 5 Using data drawn from the National Longitudinal Survey of Youth (NLSY), Bratsberg and Terrell (1998) find that even potential overstates actual for male workers. 6 Bratsberg and Terrell (1998) find that an additional year of potential corresponds to 81% of an additional year of actual for white workers and 73% of an additional year for black employees. 7 We are grateful to Barry Hirsch for pointing out that measurement error associated with using potential to gauge the extent of actual may lead to differential returns to for whites and nonwhites. 8 Altonji and Blank (1999, pp. 3147), using data from the Current Population Survey for March 1996, report that employed nonwhites work fewer weeks per year and fewer hours per week than their white counterparts. Thus, even our measure of potential may overstate the amount of nonwhite workers acquired for each year of work on previous jobs relative to white workers.

7 272 Goldsmith, Hamilton, and Darity We characterize an individual's workplace setting by the individuals with whom they work, the tasks the individual regularly performs, and employer characteristics. The MCSUI survey allows us to identify the raceethnicity of a worker's direct supervisor and the race ethnicity for the majority of their coworkers.9 In addition, respondents indicated whether they have regular contact with customers, are a supervisor, are employed in a large firm (more than 100 employees), are a union member, are a full-time worker, and are a public sector employee. We partition the data into separate subsamples of women and men. We restrict the analysis to persons aged who were working and who were not self-employed. Initially, we further restrict the subsamples to individuals who are identified as either black or white by the surveyor. Later, we analyze subsamples composed of whites and Latinos, again partitioned by gender (see Appendix A). In constructing the hourly wage variable, MCSUI's designers excluded workers whose wage translates to less than $2 or more than $100 per hour. In addition, MCSUI's designers did not include wage earners in Atlanta who earned over $100,000 annually; to make our analysis comparable across cities, we excluded all workers earning more than $100,000. Furthermore, we do not use observations from Detroit because information on key workplace setting variables, including the raceethnicity of coworkers and supervisors, was not collected in this city. Persons also were excluded from our subsamples if they did not report information on the full set of variables used in the wage equation we estimate. Appendix B provides a detailed catalogue of observations lost for each restriction imposed in constructing the white and black subsamples. The subsample of males we analyze (given the restrictions we impose) contains 912 observations, 419 blacks and 493 whites, while the subsample of females we examine includes 1359 observations, of whom 805 are black and 554 are white. Methodology We begin our analysis by estimating a conventional wage equation augmented with a set of workplace setting descriptors for white and black males. We seek to determine if there are racial differences for males in the wage gains associated with the accumulation of additional and current employer (which we refer to as either "tenure" or "seniority") once we control for workplace settings. The models we estimate are specified as follows: lnwf = a + nkw(pexpi) + fkw(pexpi)2 + TiTENt) + Ankw(TENi)2 + xnkw {WPSET t) TO+^ + (1) and ln< = awk + wk(pexpj) + <>wk{pexpi)2 + ywk{teni) + X^{TEN)2 + ^{WPSET',) W) + + ti, where In w is the log of the wage a worker receives on their job and is an individual index. The subscript k identifies a person's gender; k = male (m) or female (). Superscripts indicate if a person is white (w) or nonwhite (nw). on the job is denoted by JZsTVand PEXP represents potential total accumulated labor market with employers. In addition, squared 9 The coworker variable was constructed from the participants' response to the following question: "What (iswas) the race and ethnicity of most of the employees doing the kind of work you (dodid) in this location"

8 Wage Returns to and Experience 273 terms for potential and tenure on the job are included to control for nonlinear effects that may result from diminishing returns. The vector WPSET contains a set of indicator variables that describe a person's work environment. This vector includes measures that capture the typical coworker's raceethnicity, whether the worker supervises other employees, supervisor's raceethnicity, the and whether the worker has regular contact with customers. In addition, this vector also contains a measure of the worker's firm size, union status, whether the job is full time, and whether the position is in the public sector. The vector X contains socioeconomic factors found in traditional wage equations, such as education level, health standing, marital status, family composition, location of residence, and immigrant status, along with a person's occupation.10 Motivation and attitude, which influence academic achievement, are possible sources of unobserved individual specific heterogeneity that are likely to be correlated with tenure and workplace.11 To purge our OLS estimates of this potential source of bias, an indicator of high school performance, high achievementmeasured by an average grade of B or better in high school based on a person's recollectionis included in X12 The expected gain in wages due to an additional year of potential (PEXP) for the average nonwhite worker and the typical white worker are respectively Wixlf) = ^ + 2^^n} and ^^ = fi + 74KPXPI) Proposition 1 of the theory of ability misperception asserts that the average white worker will realize greater returns to then a typical nonwhite worker; therefore the theory predicts k k v - d{pexpnkw) d(pexpwk) {A} < 0. The difference employees is We%7) in the estimated return to greater tenure (TEN) between typical white and nonwhite - 30} = {B} = iyr + WOEFT) - [yl + 2XUTN;)}}. Proposition 2 of the theory of ability misperception posits that, relative to white workers, nonwhite workers will fare better in the wage returns to tenure than in the wage returns to potential that is, {A} - {B} < 0. Employers are presumed to learn through direct observation of 10 Altonji and Shakotko (1987) and Topel (1991) suggested that unobserved individual heterogeneity might correlate with wages, tenure, and, resulting in inconsistent estimates of the parameters if Equations 1 and 2, are estimated by ordinary least squares (OLS). In each study, an instrumental variables estimator was proposed to purge the model of correlation between the error term and both tenure and. However, others have found little variation in results across estimator choice. For example, see the research of Bratsberg and Terrell (1998) and Lewis and Terrell (2001). 11 Goldsmith, Veum, and Darity (2000) offer evidence that motivation is an important determinant of wages using data drawn from the National Longitudinal Survey of Youths. 12 We recognize that this measure of ability is dependent on the respondent's recollection and the rigor of the classes taken at the respondent's high school. Ideally, a more objective and standardized measure of achievement would have been preferred. Nonetheless, information is gained by using the respondents' recollections of their high school performance as a measure of achievement.

9 274 Goldsmith, Hamilton, and Darity performance that they have underestimated the ability of nonwhite workers, and they revise their earlier assessment of nonwhite talent.13 Evidence that both Proposition 1 and Proposition 2 hold provides support for the theory of ability misperception. We extend the literature to include a third proposition, which states that the return to tenure for nonwhite workers actually exceeds that realized by white workers; it is a stronger version of Proposition 2. Proposition 3 is met when the returns to potential are higher for white worker ({A} < 0) as is the case of Proposition 1 while the returns to tenure are higher for nonwhite workers ({B} > 0). Thus, even stronger support for the theory of ability misperception arises if Proposition 3 holds. Of course, if Proposition 3 holds, then Proposition 2 necessarily holds as well. 3. Empirical Results: Race and the Returns to Experience Male Findings White and Black Male Summary Statistics14 Appendix C reports summary statistics for the full subsamples of white male workers and black male employees. These subsamples are separated into high achievers and low achievers, measured by self-reported high school grades for all of the variables used in our analysis. Variable definitions are presented in Appendix D.15 The average black male worker earns $12.76 an hour, has been with their current employer for 5.61 years, and has years of potential. Thirty percent of the black males recalled earning at least a B average in high school. Just over half of the black males ended their formal education with the completion of high school. Twenty-seven percent attended college; with 10% holding a college degree. A quarter of the black male workers were living overseas at 16 years of age, 52% were married, and 59% lived in Los Angeles. In our subsample of black males, 30% had predominantly black coworkers. Thirty-seven percent reported working "mostly" with whites, while 60% indicated they have a white 13 The assumption adopted is that no such revisions occur with. Workers who switch jobs are again subject to assessment based on employers' perceptions of group ability because their individual performance has not been observed by that employer. Thus, nonwhite workers would face a recurring burden of proving themselves should they decide to switch jobs. 14 Note that for all summary statistics, weights are used to generate represented characteristics of the population. 15 Appendix C reveals a somewhat surprising result: A weighted average of 25% of black male respondents in our sample resided abroad at 16 years of age. Many of these respondents were from Boston, which has a substantial Caribbean population and is composed of 38% foreign-born black males. Based on our calculations using the Integrated Public Use Microdata Series of 1990 census data, we find that about 30% of non-hispanic black males between 16 and 65 years of age who reported positive wages in the Boston metropolitan area were foreign-born. Nonetheless, given the presence of foreign-born blacks in our sample, the reader may be concerned that ability to speak English may be an uncontrolled attribute that influences the racial differences in wage returns resulting from and tenure in out sample. However, in both the 1990 census and in our sample, less than 5% of black respondents were unable to speak English fluently. Furthermore, English speaking ability may be of particular concern for black males who are "high achievers" because an estimated 38% of them were living abroad at 16 years of age (i.e., 13 of 86 high achievers). The MCSUI interviewers rated the English speaking ability above good or better for 12 of the 13 high achieving respondents who lived abroad at 16 years of age; six of these individuals had "excellent" English speaking ability. Since only one of the high-achieving respondents who lived abroad was rated as having poor English speaking ability, language ability does not appear to explain the racial gap in rewards to workplace. Had we simply included an additional control for English ability, the lack of variation in the variable would not have allowed us to estimate all parameters in many of our models stratified by workplace settings.

10 Wage Returns to and Experience 275 supervisor and 22% report having a black supervisor. A third of the black males supervised other workers, almost one-third were union members, and 19% were employed part-time. Among the black males in our analysis, 18% were employed in managerial or professional work, one quarter worked in a service occupation, and 18% were public White male workers share many of these characteristics. However, white men sector employees. reported higher wagesan average of $15.95 per hourhad almost an additional year of potential, and had been with their current employer 10-12% longer (measured in years). Moreover, relative to black workers, white workers were twice as likely to have attended college, less likely to have lived outside of the United States at 16 years of age (only 5%), half as likely to be part-time workers, much more likely to hold a managerial or professional position, and less likely to be employed in a service job. White workers were much more likely to be in a white working environment, with 79% having mostly white coworkers and virtually the same percentage reported having a white supervisor.16 Race and the Returns to and Experience: Males Table 1 is a summary table that presents our estimates of the impact of workplace and tenure on wages for the typical black male worker dwi d{tenbn = &+ 2Ahm(TENbm) and for the typical white male worker. The racial difference in the estimated returns to and tenure, and the percentage difference in our estimates of the interracial returnswith whites serving as the reference groupare presented as well. Coefficient estimates for all of the variables included in Equations 1 and 2 are presented in Appendix E for a model that pools black and white workers and for the models with separate estimates for black or white employees. Virtually all of the estimated coefficients have the expected sign and are highly significant at conventional levels. Inspection of Table 1 reveals that an additional year of significantly boosts the wages of white males by about 1%, but has no substantive impact on the wage of black males. This evidence is consistent with Proposition 1. Another year of tenure significantly raises wages of both white and black workers, and the estimated gains are virtually identical at 3.3% for whites and 3.2% for blacks. Thus, we find evidence consistent with Proposition 2, but not for Proposition In our data, a typical high-achieving (i.e., a high school grade point average of B or better) black (white) male earns less than the average low-achieving black (white) male, which may seem surprising. A likely explanation for this is that high achievers have much lower tenure levels, both among blacks (2.92 < 6.79) and among whites ( 2.64 < 7.90) due to greater job mobility or job shopping. The consequence may be lower average wages. Of note, the coefficient for high achievers was found to be positive (although statistically insignificant) for our pooled regression results for the log of wages and our subsamples of blacks and whites. 17 Although our findings are consistent with the theory of ability misperception, it is important to recognize that evidence consistent with Proposition 2 can be explained by worker action as well as by employer updating. For example, the poor return to provides an incentive for black workers to stay on the job, which may lead them to work harder than white workers. Thus, even if employers fail to update erroneous beliefs about racial differences in the productivity gains associated with workplace, there will be a smaller racial gap in the wage return to tenure than for additional. We thank an anonymous referee for pointing this out.

11 Table 1. The Impact of and Prior Experience on Wages for White and Black Males and Panel A: Effect on Wages of Males Full Sample High Achievement Variable Black (n = 419) White (#! = 493) Black - White {% Change) Black in = 86) White (n = 137) Black - White (% Change) B (n 0.032*** *** 0.009*** (-3.0) 0.059*** 0.052*** (13.5) (-77.8) (-146.2) 0.00 Adjusted R Panel B: Effect on Wages of Females Adjusted R2 Black (n = 805) 0.034*** Full Sample High Achievement White (n = 554) 0.030*** Black - White (% Change) (13.3) (-50.0) Black (n = 216) 0.071***.35 White (n = 161) 0.042** Black - White (% Change) (69.0) (-166.7) Source: MCSUI. Coefficient estimates of the total effect of tenure on wage = {witenj y + and the total 2A(TENi)} effect + on 2(f)(PEXPi)} wage are reported. The-values from the F-tests of the total effects are indicated by asterisks (*** <.01, ** <.0 effect minus white total effect relative to the white total effect. If the total effect is zero for any group, the percentage change is assigned regression that includes potential and tenure, along with their squares, as well as controls for schooling level c characteristics, customer contact, city of residence, occupation of employment, racialethnic composition of coworkers, and racialeth covariates and how they are constructed appears in Appendix D. (#i B

12 Wage Returns to and Experience 277 Lewis and Terrell (2001) found results comparable to those we report, but only for workers scoring poorly on the Armed Forces Qualification Test (AFQT) (at the 20th percentile or lower). Using a self-reported average high school grade below B as a measure of low achievement, we further stratify the racial subsamples into achievement groups: high- and low-achievement black males, and high- and low-achievement white males. Then, we evaluate Propositions 1-3 by comparing black male high (low) achievers with white male high (low) achievers. The results of this analysis also are presented in Table 1. Among low-achieving males, we find support for Proposition 1 and Proposition 2. These results are in line with those reported by Lewis and Terrell (2001) for low AFQT workers. We do not find a significant relationship between previous and the wage rate for black or white workers who are high achievers (the sample sizes of black and white high achievers are 86 and 137 observations, respectively). However, the estimated coefficient is much larger for white workers than for black workers, as predicted by Proposition 1. Greater tenure significantly raises the wages of both white and black male workers. The evidence we report is consistent with Proposition 3, since black male workers in the high-achievement group receive a significant 5.9% wage increase when they accumulate an additional year of tenure, while the gain for whites is 5.2%. Male Interracial Differences in the Returns to and Experience: The Role of Workplace Settings We turn next to a formal analysis of whether racial differences in returns to and current workplace are contingent upon workplace settings for black and white males. In phase II of our inquiry, we investigate whether racial differences in returns to tenure and for males are contingent on various job settings to determine whether the theory of ability misperception is applicable across a broad set of work environments. Next, we will describe the empirical strategy we use to conduct this facet of the inquiry. First, we select a particular job setting, such as one where daily customer contact occurs, from those contained in the vector WPSET. Then, we partition the data into two groups according to this variable for each racial group. For example, one partition is between black (white) workers with daily customer contact and black (white) workers without daily customer contact. The next step is to estimate Equations 1 and 2 for each of the subsamples, after eliminating the workplace setting variable used to partition the data while retaining the other workplace setting variables in the model. Finally, we compare the returns to tenure and for white and black workers in comparable job settings. Table 2 provides a summary of our estimates of the impact of potential and tenure on the wages of male workers in each workplace environment and its matched pair in the same form as Table l.18 For instance, at the top of Table 2 we report that among workers who report that their coworkers are mostly white, an additional year of tenure or seniority raised white male workers' wages by 3.2%, while a typical black worker realized 18 The full set of coefficient estimates for each equation estimated is available from the authors upon request.

13 Table 2. The Impact of and Prior Experience on In Wages for White and Black Male Worke Workplace Setting Descriptors Total Change in Wage White Coworkers Variable Black (n = 159) White (n = 374) Black-White (% Change) Black (n = 173) Wh 0.039* *** 0.009*** (21.9) (-44.4) 0.028* White Supervisor Black (n = 206) White (i = 385) Black-White (% Change) Black (n = 123) Wh 0.026*** *** 0.007** (-23.5) (-71.4) 0.040*** Daily Contact with Customers No Daily Black (w = 251) White {n = 284) Black-White (% Change) Black (n = 168) Whit 0.030*** *** 0.006* (-11.8) (-66.7) 0.027*** Total change in wage with respect to: Supervisor Black (ti = 126) White (n = 194) Black-White (% Change) Black (n = 293) Whit 0.017* *** (-41.4) (-12.5) 0.040***

14 Table 2. Continued Total change in wage with respect to: Adjusted R2 Total change in wage with respect to: Total change in wage with respect to: Adjusted R2 Total change in wage with respect to: Large Firm Black (n = 192) White (t = 188) Black-White (% Change) Black (n = 227) Whi 0.034*** *** 0.014*** Union.46 Members (-24.4) (-50.0) 0.027*** Black (72 =111) White (72 = 98) Black-White (% Change) Black (72 = 308) Whi 0.032*** *** 0.014**.35 Government Workers (14.2) (-128.6) *** Black (72 = 93) White (72 = 82) Black-White (% Change) Black (n = 326) Wh 0.034*** *** 0.025**.51 Full-Time Work ( ( 1.0) 92.0) *** N Non-G Black (72 = 380) White (72 = 442) Black-White (% Change) Black (72 = 39) Wh 0.030*** *** 0.009*** ( ( Source: MCSUI. Coefficient estimates of the total effect of tenure on = wage {dwjdteni y + and the 2a(TEN)} = {dwidpexpj on -\-2()(PEXPi)} wage are reported. The-values from the F-tests of the total effects are indicated by asterisks change is black total effect minus white total effect relative to the white total effect. If the total effect is zero for any group, the percentage based on a wage regression that includes potential and tenure, along with their squares, as well as controls for schooling firm characteristics, customer contact, city of residence, occupation of employment, racialethnic composition of coworkers, and racial covarites and how they are constructed appears in Appendix D. 14.3) 66.7)

15 280 Goldsmith, Hamilton, and Darity a 3.9% wage increase. Thus, the percentage wage gain associated with greater tenure was 22% greater for black workers than for white employees. Because so few white employees reported having a black supervisor or having primarily black coworkers, we are unable to determine if racial differences in the returns to workplace depend systematically on this aspect of job settings. Inspection of Table 2 reveals that the estimated wage return to potential for black male workers is less than 1% and is statistically insignificant, ^^ -ft+ *({,) 0. in all 15 of the workplace settings evaluated. However, the return to potential for white workers is always positive and is statistically significant in 10 of the 13 workplace settings evaluated. When it is significant, it ranges in value from 0.6% {Daily Contact with Customers) to 2.5% {Government Worker), with a mean of 1.11%. Table 3 indicates whether each of the propositions is supported by the evidence presented in Table 2 for each workplace setting. Table 3 is a scorecard for the theory of ability misperception in multiple workplace settings. We find evidence consistent with Proposition 1, that the returns to are higher for white than black workers (i.e., d{pexpbm) d{pexpl) in all 13 situations where we are able to estimate returns 19 to potential for both groups. Black male workers obtain a positive and statistically significant wage increase when they accumulate an additional year of seniority or tenure, ^ = {^(^)} in all 15 workplace settings evaluated. The size of the increase, when significant, ranges from 1.7% for black workers who Supervised Others to 4.0% for black workers who were not supervisors and for black workers who had a Black Supervisor. The mean tenure across the various workplace settings for black workers is 3.1%. impact of additional Additional tenure significantly raises the wages of white workers in all of the 13 workplace settings evaluated. In these settings, the magnitude of the wage gain ranges from 4.5% for white workers at large firms with at least 100 employees to 2.4% for white workers at small firms with less than 100 employees. The impact of an additional year of tenure for white workers across the various workplace settings is 3.3%. Table 3 reveals that we find support for Proposition 2that the black-white difference in the rate of return from on-the-job tenure is less than the racial difference from potential in 12 of the 13 workplace settings. Moreover, in four of the workplace settings, we report evidence consistent with Proposition 3: Black workers have a higher rate of return than 19 In all three situations where the estimated return to potential was statistically insignificant for both white males and black males, the estimated coefficient was larger in magnitude for white workers, which is consistent with Proposition 1.

16 Wage Returns to and Experience 281 white workers from additional years on the job, which, along with Proposition 1, is strong evidence in support of the theory of ability misperception.20 We view the evidence presented as overwhelmingly consistent with the predictions of the theory of ability misperception across a wide range of workplace settingsa finding than the initial report by Lewis and Terrell (2001). The strong lesson provided by Table 3 is that regardless of the workplace setting, black men, relative to white men, receive relatively poor returns to workplace, but they return to tenure is considered. more general fare better when the interracial However, it is interesting to note that the wage return to tenure for black male workers is 54% larger when they have a black supervisor than when they have a white supervisor, controlling for the raceethnicity of their coworkers. This result suggests that there may be a greater willingness on the part of black supervisors than white supervisors to update erroneous beliefs about the productivity of black workers as they observe performance. However, if black supervisors are more objective than white supervisors in accessing black workers in the first place, then why is the return to smaller for black workers than white workers even when their supervisor is black This puzzle can be resolved if a worker's direct supervisor has greater influence in setting or making recommendations that influence pay increases than in establishing their initial wage.21 Female Findings: White and Black Female Summary Statistics Appendix F reports summary statistics for the full subsamples of white female workers and black female employees, as well as these subsamples separated into high achievers and low achievers for all of the variables used in our analysis. White female workers were similar to black female employees on almost all of these descriptive characteristics. However, white female workers earned almost $2 more per hour ($12.92 compared with $11.09) than black women. In addition, relative to black female workers, white women were more likely to work part-time, almost twice as likely to be married, and far less likely to be union members. Race and the Returns to and Experience: Females Panel B of Table 1 presents our estimates of the impact of workplace and tenure on wages for black female workers and for white female workers. Coefficient estimates for all of the variables are presented in Appendix E for a model that pools females and for the 20 It is conceivable that part-time workers would receive a lower reward for and current than full-time workers with similar observable characteristics. However, even after removing part-time workers from the pooled sample (leaving only full-time workers), the rewards for workplace and on-the-job tenure were virtually unchanged. It is interesting to note that in workplace settings where management might have greater leeway to assign rewards for additional workplace seniority because of fewer rules (e.g., in small firms or in companies that hire nonunion workers), black males received larger returns to tenure than white workers. Although we are not certain why this pattern emerged, smaller firms and nonunionized firms do provide employers with greater latitude to adjust for previous miscalculations of a worker's talents. The same pattern of interracial differences in the reward to tenure emerges among employees who do not supervise other workers. 21 Unfortunately, we have too few white employees with black supervisors to investigate if the rewards to workplace for white workers is influenced by the race of their direct supervisor. Our findings also reveal that the return to tenure for black males is much smaller when they have black coworkers than when their coworkers are white. It would have been useful if we had information on the skills of the coworkers or degree and quality of worker interaction to explore why this is the case.

17 282 Goldsmith, Hamilton, and Darity Table 3. Summary of Findings on Proposition 1, Proposition 2, and Proposition 3 for Alternative Work Place Settings: Blacks and Whites for Males and Females Males Females Status of a Proposition Status of a Proposition Variables Proposition 1 Proposition 2 Proposition 3 Proposition 1 Proposition 2 Proposition 3 Full sample High achievement Low achievement Black coworkers White coworkers Supervisor black Supervisor white Daily contact with customers No daily contact with customers Supervisor Not a supervisor Large firm Small firm Union member Not a union member Government worker Not a government worker Full-time worker Part-time worker Stratification Insufficient data Insufficient data Insufficient data Results Insufficient Insufficient Share of cases when a proposition holds (yescases evaluated) Source: MCSUI. - = Proposition 1, {dwnkwd(pexpnkw) dwwkd{pexpnkw)} {A}< 0; Proposition 2, {A}< Oand - {d(hp)d{pexi) d(^k)d(pexpwk)} - - {d(w )d(tennkw) d(wwk)d(tenwk)}< 0; Proposi tion 3, {A}< Oand - > 0. {d(wnkw)d(tennkw) d(w^)d(ten^)} Subscripts indicate gender and superscripts in dicate race or ethnicity. The table is based on a wage regression that includes a quartic in tenure and, and controls for schooling level completed, health status, demographics, firm characteristics, city of residence, occupation of employment, racialethnic composition of coworkers, and racialethnic background of supervisor. A full list of covariates and how they are constructed appears in Appendix D. A check for Proposition 1 plus a check for either Proposition 2 or Proposition 3 (even stronger) is evidence consistent with the predictions of the theory of ability misperception. data data female models that are stratified by race. Virtually all of the estimated coefficients have the expected sign and are highly significant at conventional levels. Inspection of Table 1 reveals that an additional year of does not boost the wages of white or black females significantly. However, an additional year of tenure significantly raises the wage of female workers. Moreover, the wage increase is larger for black females (3.4%) than for white females (3.0%). This pattern of similar (and insignificant) returns to along with significant and relatively high returns to tenure for black females also reemerges when we compare the wage benefit of greater tenure and workplace both for high-achieving low-achieving females.

18 Wage Returns to and Experience 283 It is interesting to note that the size of the wage increase for additional tenure is much larger for the high achievers, regardless of race, than for the low achievers. High acheiving black females who gain an additional year of tenure realize a 7.1% wage gain, while the gain is 2.7% for low-achieving black females. For white females, the returns to tenure for high achievers, 4.2%, is not nearly as large as the returns for comparable black females, but it is still much larger than the returns for low achievers, 2.6%. Table 4 is a summary table that presents our estimates of the impact of potential and tenure on the wages of black and white female workers for each workplace setting descriptor and its matched pair.22 The estimated wage return to potential for black females is statistically insignificant in all 16 workplace settings evaluated. However, the return to another year of for white female workers is positive and statistically significant in 5 of the 14 workplace settings evaluated, but when significant the return is relatively small, less than 1%. Table 3 indicates whether each of the propositions is supported by the evidence presented in Table 4 for workplace setting. We find evidence consistent with Proposition 1, dw)_dwf \d(pexpf\ d(pexpf\ = <0, in 9 of the 14 workplace settings where we were able to estimate the return to potential for both black and white females.23 Black female workers obtain a positive and statistically significant wage increase when they accumulate an additional year of seniority or tenure in each of the 16 workplace settings evaluated. The size of the increase ranges from 2.2% {Union Member) to 5.5% {Part-Time Work) and has a mean value of 3.5%. Additional tenure significantly enlarges the wage of white female workers in 12 of the 14 workplace settings evaluated. In these settings, the magnitude of the wage gain ranges from 1.7% {Supervisor) to 4.8% {Part-Time Work), with a mean increase of 3.13%. Interestingly, the return to seniority is 33% larger for black female workers who have a direct supervisor who is black than for those with white supervisors. This result is similar to the situation we detected for black male workers. Inspection of Table 3, a summary of evidence concerning the theory of ability misperception in the various workplace settings, reveals support for Proposition 2 in all nine of the workplace settings where Proposition 1 holds. Moreover, in eight of the nine settings we find strong support (both Propositions 1 and 3 are satisfied) for the theory of ability misperception. The evidence that we report for females is similar to the findings we report for males, and both sets of findings are consistent with the predictions of the theory of ability misperception across workplace settings. In the next section we probe further to determine 22 The full set of coefficient estimates for each equation estimated is available from the authors upon request. As was the case for males, few white female employees reported having a black supervisor or having primarily black coworkers. Therefore, we are unable to compare the returns to workplace that black women obtain in these workplace settings with those of white women. 23 The workplace settings that were not consistent with Proposition 1 were occupations where workers had daily contact with customers, supervised other employees, were employed in a small firm, a union member, or were engaged in public sector employment. We do not detect an obvious pattern why Proposition 1 is not satisfied in these occupations.

19 Table 4. The Impact of and Prior Experience on In Wages for White and Black Female W Workplace Setting Descriptors Total Change in Wage White Coworkers Bl Variable Black (n = 262) White (n = 406) Black-White (% Change) Black (n = 401) Whi 0.035* *** (29.6) (-20.0) 0.032* White Supervisor Bl Black (n = 376) White (n = 426) Black-White (% Change) Black (n = 292) Whit 0.031*** *** 0.005* (3.3) (-60.0) 0.040*** Daily Contact with Customers No Daily C Black (n = 540) White (zi = 361) Black-White (% Change) Black (n = 265) White 0.035*** *** (16.7) (100.0) 0.034*** Supervisor N Black (n = 170) White (n = 167) Black-White (% Change) Black (h = 635) White 0.025*** * (47.1) (40.0) 0.037*** Adjusted R

20 Table 4. Continued Large Firm Black {n = 389) White (n = 228) Black-White (% Change) Black (ti = 416) White *** 0.026*** 0.008** (7.7) (-125.0) 0.045*** Union Members Nonu Black (n = 191) White {n = 87) Black-White (% Change) Black (n = 614) White 0.022*** (120.0) (0.0) 0.039*** Government Workers Non-Gov Black (n = 214) White (n = 98) Black-White (% Change) Black (n = 591) White 0.032*** (113.3) (128.6) 0.035*** Full-Time Work Pa Black (n = 713) White (n = 455) Black-White (% Change) Black (n = 92) Whit 0.031*** *** 0.004* (6.9) (-50.0) Source: MCSUI. Coefficient estimates of the total effect of tenure on = wage {dwidten y + and the total effect 2X(TENi)) + on 2<$>(PEXPi)} wage are reported. The-values from the F-tests of the total effects are indicated by asterisks (*** <.01, ** <.05, white total effect relative to the white total effect. If the total effect is zero for any group, the percentage change is assigned a value of 10 includes potential and tenure, along with their squares, as well as controls for schooling level completed, health status, contact, city of residence, occupation of employment, racialethnic composition of coworkers, and racialethnic background of superviso constructed appears in Appendix D **.35 -

21 286 Goldsmith, Hamilton, and Darity whether data from another group of nonwhite workers, Latinos, conforms to the predictions of the theory of ability misperception. 4. Latino Ethnicity and the Returns to Experience Findings Latino and Latina Summary Statistics Appendix G reports summary statistics for full subsamples of Latino male and female workers and, again, for subsamples partitioned between high achievers and low achievers. The subsample of males we analyze (given the restrictions we impose) contains 987 observations (494 Latinos and 493 whites), while the subsample of females we examine includes 1068 observations (514 are Latina and 554 are white).24 For brevity, we highlight the major differences between these workers and their white counterparts. The average Latino worker earned $9.08 an hour, which was substantially less than the typical white male employee (w^ = 15.95). Latinos, relative to white males, were three times as likely to have lived abroad at age 16, half as likely to be a manager or professional worker, and far more likely to reside in Los Angeles. The most striking difference lies in the ethnic configuration of the worksite. Over 70% of Latinos had coworkers who were mostly Latino(a), and almost 39% had a direct supervisor who was Latino(a). Only 14% of white male employees reported having mostly Latino(a) coworkers, and a mere 6% have a direct supervisor who is Latino(a). A similar pattern exists for Latina workers. Seventy percent of them lived outside the U.S. when they were 16 years old. The wage of a typical Latina employee was $7.56, well below the wage of a typical white female worker {wj = $12.92). Almost half of the Latina workers had not completed high school. They also tended to work for a direct supervisor who is Latino(a) (40%), and 70% are employed at a worksite where most of the individuals doing similar work are Latino(a). Latinos: Returns to and Experience Panel A of Table 5 presents our estimates of the impact of workplace and tenure on wages for Latino workers and for white male workers. Coefficient estimates for all of the variables are presented in Appendix H for a model that pools white and Latino workers and for models stratified by ethnicity. Virtually all of the estimated coefficients have the expected sign and are highly significant at conventional levels. Inspection of Table 5 reveals that greater time on the job with the current employer or with previous employers significantly raises the wage of male workers who are Latino or white. However, examination of Table 6 reveals that for most of the 12 worksite environments evaluated, the wage return to tenure is substantially larger while white males obtain a larger gain for additional. for Latinos than for white males, 24 Appendix A provides Latino) white and Latino(a) subsamples. a detailed catalog of observations lost for each restriction imposed in constructing the (non

22 Table 5. The Impact of and Prior Experience on Wages for White, Latino and Latina Wo Panel A: Effect on Wages of Males Model Adjusted specification R2 Latino (n = 494) Full Sample White (n = 493) Latino-White (% Change) Latino (n = 128) High Achievement White (n = 137) Latino-White (% Change) 0.054*** 0.033*** 0.021(63.6) 0.046*** 0.052*** (-11.5) * *** (-55.6) Panel B: Effect on Wages of Females L (n (-76.9) Prior Experience Latina (n = 514) Full Sample High Achievement White (n = 554) Latina-White (% Change) Latina (n = 150) White (n = 161) Latina-White (% Change) 0.041*** 0.030*** 0.011(36.7) 0.046** 0.042** 0.004(9.5) ** (150.0) (n (-233.3) Source: MCSUI. Coefficient estimates of the total effect of tenure on = wage {dwidteni y + and the 2X{TEN)} = {dwjdpexpi on +2()(PEXPi)} wage are reported. The rvalues from the F-tests of the total effects are indicated by asterisks change is Latino total effect minus white total effect relative to the white total effect. If the total effect is zero for any group, the percentage based on a wage regression that includes potential and tenure, along with their squares, as well as controls for schooling firm characteristics, customer contact, city of residence, occupation of employment, racialethnic composition of coworkers, and raciale covariates and how they are constructed appears in Appendix D. L

23 288 Goldsmith, Hamilton, and Darity Table 6. The Impact of and Prior Experience on In Wages for White Male and Latino Workers: For Subsets of Data Defined by Workplace Setting Descriptors Males White Coworkers Latinoa Coworkers Adjusted R2 Latino White Latino-White Latino White Latino-White (ti = 104) (n = 374) (% Change) (n = 343) (n = 41) (% Change) 0.049*** 0.032*** 0.017(53.1) 0.057*** *** 0.002(22.2) 0.005* White Supervisor Latinoa Supervisor Adjusted R2 Adjusted R2 Latino White Latino-White Latino White Latino-White (n = 218) (n = 385) (% Change) (n = 173) (n = 20) (% Change) 0.054*** 0.034*** 0.020(58.8) 0.055*** ** (-57.1) Daily Contact with Customers No Daily Contact with Customers Latino White Latino-White Latino White Latino-White (n = 192) (n = 284) (% Change) (n = 302) (n = 209) (% Change) 0.058*** 0.034*** (70.6) 0.046*** 0.032*** (43.8) 0.011** 0.006* 0.006(83.3) ** (-90.0) Supervisor Non Supervisor Latino White Latino-White Latino White Latino-White (n = 117) (n = 194) (% Change) (n = 377) (n = 299) (% Change) 0.041*** 0.029*** 0.012(41.4) 0.049*** 0.033*** 0.016(48.5) 0.011* (37.5) (-50.0) Large Firm Small Firm Latino White Latino-White Latino White Latino-White (n = 128) (n = 188) (% Change) (n = 366) (n = 305) (% Change) 0.043*** 0.045*** (4.4) 0.057*** 0.024*** (137.5) *** (-78.6) (-60.0)

24 Wage Returns to and Experience 289 Table 6. Continued Union Members Nonunion Members Latino White Latino-White Latino White Latino-White (n = 109) (n = 98) (% Change) (n = 385) (n = 395) (% Change) Adjusted R * *** 0.014** (14.3) 0.064*** (-64.3) *** 0.009** (106.5) (66.7) Government Workers Non-Government Workers Latino White Latino-White Latino White Latino-White (n = 26) (n = 82) (% Change) {n = 468) ( = 411) (% Change) 0.037* 0.054*** 0.032*** (68.8) 0.025** ** (-62.5) Full-Time Work Part-Time Work Latino (n = 429) 0.053* White in = 442) 0.035* 0.009***.40 Latino-White (% Change) Latino (n = 65) (51.4) 0.053* (-55.6) White (n = 51) Latino-White (% Change) Source: MCSUI. Coefficient estimates of the total effect of tenure on = wage {dwdteni y + and 2(TENj)} the total effect of = potential {dwdpexpi + on 2<$>{PEXPi)} wage are reported. The ^-values from the F-tests of the total effects are indicated by asterisks (*** <.01, ** <.05, * <.1). The percentage change is Latino total effect minus white total effect relative to the white total effect. If the total effect is zero for any group, the percentage change is assigned a value of 100. The table is based on a wage regression that includes potential and tenure, along with their squares, as well as controls for schooling level completed, health status, demographics, firm characteristics, customer contact, city of residence, occupation of employment, racialethnic composition of coworkers, and racialethnic background of supervisor. A full list of covariates and how they are constructed appears in Appendix D. The estimated wage return to potential for Latino males is statistically significant in only 3 of the 15 workplace settings (too few Latinos were in public sector positions to estimate the return to in that setting). However, the wage gain associated with greater tenure is statistically significant in each of the 15 workplace environments examined. In three Direct workplace settings (i.e., Latino (a) Coworkers, a Latino (a) Supervisor, Part-Time Work), there were too few white males to estimate the returns to workplace. Thus, we are able to compare inter-ethnic (white vs. Latino) differences in the returns to tenure and for males in 12 workplace settings. Table 7 summarizes our findings with respect to Propositions 1-3 for white males relative to Latinos. In nine of these 12 settings we find evidence consistent with Proposition 1. Proposition 2 holds for every one of the nine worksite environment where Proposition 1 holds, and for seven of the nine settings Proposition 3 holds. This evidence, like our racial findings for both gender groups, is in line with the predictions of the theory of ability misperception5 We turn now to our results for female Hispanics, Latinas, relative to female white workers. 25 Among Latino males, the wage return to tenure is 13% smaller when their direct supervisor is Latino rather than white (which differs from our finding of a substantially larger return to black males when their supervisor is black), and the return is slightly larger when their coworkers are mostly white rather than mostly Latino.

25 Table 7. Summary of Findings on Proposition 1, Proposition 2, and Proposition 3 for Alternative Workplace S Males Status of a Proposition S Variables Proposition 1 Proposition 2 Proposition 3 Proposition 1 Full sample High achievement Low achievement Coworkers Latinoa Coworkers white Supervisor Latinoa Supervisor white Daily contact with customers No daily contact with customers Supervisor Not a supervisor Large firm Small firm Union member Not a union member Government worker Not a government worker Full-time worker Part-time worker Yes No (for 912 Insufficient data Insufficient data Insufficient data Insufficient data 99 Stratification 79 Results stratifications) - Source: MCSUI. = Proposition 1, {dw"kwd(pexp"kw) dw^d(pexpnkw)} {A}< 0; Proposition 2, {A} < Oand - { {d(wnkw)d{tennkw) d(wl)d{tenwk)}< 0; Proposition 3, {A}< Oand - > 0. {d(wnkw)d(tennkw) d(wl)d(tenwk)} Subscripts or ethnicity. The table is based on a wage regression that includes a quartic in tenure and, and controls for schooling leve characteristics, city of residence, occupation of employment, racialethnic composition of coworkers, and racialethnic background of sup are constructed appears in Appendix D. A check for Proposition 1 plus a check for either Proposition 2 or Proposition 3 (even stronger) i theory of ability misperception. 514

26 Wage Returns to and Experience 291 Latinas: Returns to and Experience Panel B of Table 5 presents our estimates of the impact of workplace and tenure on wages for Latina and white female workers while coefficient estimates for all of the variables are presented in Appendix H. Inspection of Table 5 reveals that is significantly related to the wages for females who are Latina for the full sample of Latino women and for those in the low-achievement subsample, while the wages of white women are not significantly affected by increased work. Greater seniority with the current employer significantly raises the wage of white female workers, and this is true also for female workers who are Latino. Moreover, wage returns to tenure are substantially larger for the average Latina employee (4.1%) than for the typical white female worker (3.0%). The estimated wage return to potential for Latinas is statistically significant in nine of the 16 workplace settings, while the wage gain associated with greater tenure is statistically significant in 13 of the 16 workplace environments (see Table 8). In two job settings {Latino (a) Coworkers and Latino (a) Supervisor), there are too few white females to estimate the returns to. Thus, we can compare inter-ethnic (white differences in returns to tenure and for females in 14 workplace settings. Inspection of Table 7 reveals that in only five of these 14 settings do we find evidence consistent with Proposition 1. However, whenever Proposition 1 holds, the evidence is also consistent with Proposition 3, which we consider strong support for the theory of ability misperception. vs. Latino) 5. Lazear Revisited and Some Concluding Remarks Lazear Revisited: The Effectiveness of Affirmative Action in Lowering the Black! White Wage Gap Our findings do not support Lazear's (1979) prediction that the wage gain for additional senior ity will be greater for white workers than for nonwhite workers following the introduction of fed eral affirmative action legislation. Lazear (1979, pp. 556) assumes that future earnings power at a point in time is lower for nonwhite workers than for white workers. However, he is vague on whether the source of this disparity is less human capital accumulation, the acquisition of less productive human capital, or lower ability. According to Lazear, the presumed lower productivity of nonwhite workers leads employers to pay them less than comparable white workers over a period of time. Moreover, it can be deduced from Lazear that government affirmative action programs help nonwhite workers get a foot in the door and make it more difficult for firms to engage in entry-level wage differences. Thus, he expects firms to respond to affirmative action by paying equivalent wages to entry-level white and nonwhite workers, but also by providing nonwhite employees fewer opportunities to acquire skills on the job. This ultimately re-establishes the racial or ethnic wage gap that existed to the legislation (Lazear 1979, pp. 553). Therefore, he predicts the wage growth fostered by greater tenure will be smaller for nonwhite employees than for white workers and offers evidence in line with this viewpoint. Whenever Mw _ <K ] = m > 0 \d(tennkw) d(ten%)j x *

27 292 Goldsmith, Hamilton, and Darity Table 8. The Impact of and Prior Experience on In Wages for White Female and Latina Workers: For Subsets of Data Defined by Workplace Setting Descriptors Females White Coworkers Latinoa Coworkers Latina White Latina-White Latina White Latina-White (n = 107) (ti = 406) (% Change) (n = 333) (n = 40) (% Change) 0.048*** 0.027*** (77.8) 0.035*** (-80.0) 0.008*** White Supervisor Latinoa Supervisor Adjusted R2 Adjusted R2 Latina White Latina-White Latina White Latina-White (ii = 212) (n = 426) (% Change) (n = 164) (n = 23) (% Change) 0.037*** 0.030*** 0.007(23.3) 0.032* * (-40.0) 0.013*** Daily Contact with Customers No Daily Contact with Customers Latina White Latina-White Latina White Latina-White (n = 223) (n = 361) (% Change) (n = 291) (n = 193) (% Change) 0.042*** 0.030*** (40.0) 0.049* (200.0) 0.006** Supervisor 0.029*** (69.0) (200.0).36 Nonsupervisor Latina White Latina-White Latina White Latina-White (n = 69) (n = 167) (% Change) (n = 445) (n = 387) (% Change) * 0.012(70.6) 0.041*** 0.034*** 0.007(20.6) (320.0) 0.005* Large Firm (150.0).36 Small Firm Latina White Latina-White Latina White Latina-White (n = 177) in = 228) (% Change) (n = 337) (n = 326) (% Change) 0.039*** 0.026*** (50.0) 0.044*** 0.035*** (25.7) ** (-62.5) 0.007** (250.0).34

28 Wage Returns to and Experience 293 Table 8. Continued Union Members Nonunion Members Latina White Latina-White Latina White Latina-White {n = 88) (n = 87) (% Change) (n = 426) (#i = 467) (% Change) (10.0) 0.049*** 0.034*** (44.1) 0.018** (1700.0) Adjusted Government Workers Non-Government 0.005* (-60.0).35 Workers Latina White Latina-White Latina White Latina-White (n = 63) (n = 98) (% Change) (n = 451) (n = 456) (% Change) 0.058** (286.7) 0.040*** 0.037*** (8.1) 0.019* (371.4) 0.005* Latina (n = 450) 0.040* 0.005**.44 Full-Time Work Part-Time Work White (n = 455) Latina-White (% Change) Latina 0.029*** (37.9) *.44 (n = 64) (25.0) White (7i = 99) 0.048* (-28.6) Latina-White (% Change) (27.0) (266.7) Source: MCSUL Coefficient estimates of the total effect of tenure on = wage {dwtteni y + and 2X{TEN)} the total effect of = potential {dwjdpexpi + on 20[PEXP)} wage are reported. The ^-values from the F-tests of the total effects are indicated by asterisks (*** <.01, ** <.05, * <.1). The percentage change is Latina total effect minus white total effect relative to the white total effect. If the total effect is zero for any group, the percentage change is assigned a value of 100. The table is based on a wage regression that includes potential and tenure, along with their squares, as well as controls for schooling level completed, health status, demographics, firm characteristics, customer contact, city of residence, occupation of employment, racialethnic composition of coworkers, and racialethnic background of supervisor. A full list of covariates and how they are constructed appears in Appendix D. our findings are at odds with Lazear's hypothesis. Our comparison of the wage gain associated with additional tenure provides evidence that {B} > 0 for white female workers relative to black females in 12 of the 14 workplace environments examined.26 We report similar results for Latino males compared to white males: {B} > 0 in 10 of the 12 workplace environments examined. However, when comparing white and black male workers evidence of {B} > 0 only emerges in four of the 13 workplace setting evaluated. Nevertheless, taken as a whole, our findings cast doubt on Lazear's (1979) claim that affirmative action gives rise to relatively low wage gains due to additional time on the current job for nonwhite workers. Some Concluding Remarks The theory of ability misperception (Farmer and Terrell 1996; Lewis and Terrell 2001) is a view of the labor market which promotes two ideas: that nonwhite workers face employers We evaluate whether {B} > 0 in all worksite environments, not solely those where Proposition 1 holds.

29 294 Goldsmith, Hamilton, and Darity who systematically discriminate against them by undervaluing their skills acquired "on the job" with previous employers (Proposition 1) during the initial phase of employment. As nonwhite workers demonstrate their ability to perform while gaining seniority, the application of negative treatment towards them will diminish, leading to less disparity in interracial and inter-ethnic returns to tenure than for (Proposition 2). In addition, we examine another possibilitythat as tenure advances, the wage gain actually will be greater for nonwhite than for white workers (Proposition 3) even though white workers receive a greater return to. We evaluated each of these propositions using data on black, Latino, and white workers, separately for women and men, drawn from the MCSUI. The lessons from our empirical exploration are twofold. First, nonwhites, regardless of job setting, receive relatively poor returns to workplace (the lone exception is Latinas, for whom this is only true in a quarter of the worksites examined). Second, nonwhites typically receive greater wage gains for accumulating additional tenure than whites. Thus, our findings are largely consistent with Proposition 1, Proposition 2, and Proposition 3, and hence for the theory of ability misperception. Our findings are supportive of affirmative action programs that enable nonwhite workers to at least get "a foot in the door," and, hence, afford employers the opportunities to adjust their erroneous perceptions of nonwhite productivity held to observing them in the workplace. Appendix A Sample Creation: Respondents Coded by Interviewer Latino, Latina, or White Latino and Latina {n = 1639) Males Females Source of Data Deletion (n = 655) (n = 984) Detroit residents 0 0 Older than 64 years of age Self-employed Retired or out of labor force for past five years Refused to provide, don't know, or missing earnings data Earn more than $100,000 per year 0 0 Refused to provide, don't know, or missing hours worked per week 0 1 Worked more than 95 hours per week 1 2 Hourly wage greater than $100 or less than $2 512 Missinginvalid data on any human capital (including tenure) variable 10 8 Missinginvalid data on any work place setting variable 821 Missinginvalid data on any occupation code 14 4 Missinginvalid data on any coworker ethnicity variable 35 Total respondents remaining Source: MCSUI. Detroit participants were not asked questions about coworker ethnicity, a control variable in regressions. Persons earning more than $100,000 in Atlanta were eliminated by the data collectors.

30 Wage Returns to and Experience 295 Appendix B Sample Creation: Respondents Coded by Interviewer as Black or White Males (i = 2372) Females (n = 3681) Source of Data Deletion Detroit Older residents than 64 years of age Self-employed Retired or out of labor force for past five years Refused to provide, don't know, or missing earnings data Earn more than $100,000 per year Refused to provide, don't know, or missing hours worked per week Worked more than 95 hours per week Hourly wage greater than $100 or less than $2 Missinginvalid data on any human capital (including tenure) variable Missinginvalid data on any work place setting variable Missinginvalid data on any occupation code Missinginvalid data on any coworker ethnicity variable Total respondents remaining Black White Black White (n = 1084) (n = 1288) (n = 2092) (n = 1289) Source: MCSUI. Detroit participants were not asked questions about coworker ethnicity, a control variable in regressions. Persons earning more than $100,000 in Atlanta were eliminated by the data collectors. Appendix C Summary Statistics for Variables Used in the Econometric Analysis: Black and White Males Blacks Whites Variable Full Sample (ti = 419) High Achievement in = 86) Low Achievement (n = 333) Full Sample in = 493) High Low Achievement Achievement in = 137) in = 356) Hourly wage High school dropout High school graduate Community college graduate Attended college College graduate High school achievement Self-esteem Married Number of dependents Disability Foreign resident at 16 years of age Atlanta resident (6.22)11.42 (5.05) (6.59) (7.79) (5.51) (8.45) (8.45) 5.19 (4.26) 5.61 (6.57) 2.92 (2.46) 0.07 (0.25) 0.02 (0.15) 0.54 (0.50) 0.59 (0.49) 0.14(0.34) 0.17(0.37) 0.17 (0.37) 0.18 (0.39) 0.10(0.29) 0.04(0.19) 0.30 (0.46) 3.31 (1.26) 3.58 (0.55) 0.52 (0.50) 0.38 (0.49) 0.84(1.25) 0.69(1.13) 0.14(0.35) 0.17(0.38) 0.25 (0.44) 0.38 (0.49) 0.28 (0.45) 0.25 (0.44) (9.01) 6.79 (7.41) 0.08 (0.28) 0.51 (0.50) 0.12 (0.33) 0.16 (0.37) 0.12(0.33) 3.19(1.45) 0.58 (0.49) 0.91 (1.29) 0.13 (0.34) 0.20 (0.40) 0.29 (0.45) 11.62(10.01) 6.28 (7.46) 0.03 (0.16) 0.36 (0.48) 0.15 (0.36) 0.31 (0.46) 0.16 (0.37) 0.31 (0.46) 3.35 (1.35) 0.61 (0.49) 0.61 (0.95) 0.12 (0.33) 0.05 (0.22) 0.13 (0.34) 4.61 (4.86)14.17(10.17) 2.64(2.78) 7.90(8.29) 0.00(0.06) 0.04(0.19) 0.24 (0.43) 0.41 (0.49) 0.13 (0.34) 0.16(0.37) 0.48 (0.50) 0.23 (0.42) 0.15 (0.36) 0.17 (0.38) 3.75(0.78) 3.17(1.51) 0.45 (0.50) 0.69 (0.46) 0.33 (0.78) 0.75 (1.00) 0.06 (0.24) 0.15 (0.36) 0.02(0.13) 0.06(0.24) 0.13 (0.34) 0.13 (0.34)

31 296 Goldsmith, Hamilton, and Darity Appendix Continued C Blacks Whites Variable Boston resident Los Angeles resident Union member Work part-time Firm size Supervise others Customer contact daily Manager or professional Craft Services Production Laborers Government White coworkers Black coworkers Hispanic coworkers Asian coworkers Coworkers of other races Low High High Low Full Sample Achievement Achievement Full Sample Achievement Achievement in = 419) (n = 86) ( = 333) (n = 493) (#i = 137) (n = 356) 0.13(0.34)0.12(0.33) 0.14(0.34) 0.38(0.49) 0.42(0.49) 0.37(0.48) 0.59 (0.49) 0.63 (0.49) 0.30(0.46) 0.24(0.43) 0.19 (0.39) 0.45 (0.50) 0.54(1.25) 0.59(0.98) 0.33 (0.47) 0.17 (0.38) 0.57 (0.50) 0.33 (0.47) 0.07 (0.26) 0.52(1.35) 0.40 (0.49) 0.48 ( ( ( ( ( (0.49) 0.73 (0.44) 0.59 (0.50) 0.53 ( (.38) 0.33 (0.47) 0.26 (0.44) 0.07 (0.26) 0.15 (0.36) 0.18 (0.39) 0.37 (0.48) 0.30 (0.46) 0.21 (.41) 0.46 (0.50) 0.26 (0.44) 0.02 (0.16) 0.04 (0.19) 0.14(0.35) 0.29 (0.46) 0.19(0.40) 0.14(0.34) 0.14(0.34) 0.00(0.07) 0.00(0.04) 0.16 (.37) 0.28 (0.45) 0.26 (0.44) 0.09 (0.29) 0.20 (0.40) 0.20 (0.40) 0.40 (0.49) 0.35 (0.48) 0.14(0.34) 0.01 (0.07) 0.19 (0.39) 0.38 (0.49) 0.11 (0.32) 0.60 (0.49) 0.68 (0.49) 0.57 (0.50) 0.22(0.42) 0.18(0.39) 0.24(0.43) 0.42 (.49) 0.25 ( ( ( ( ( ( ( ( ( ( ( (0.18; 0.45 (0.50) 0.12(0.33) 0.09 (0.29) 0.24 (0.65) 0.20 (0.40) 0.51 (0.50) 0.29 (0.45) 0.09 (0.29) 0.70(1.72) 0.43 (0.50) 0.46(0.50) 0.56(0.50) 0.48 (.50) 0.35 (0.48) 0.06 (0.24) 0.07 (0.25) 0.05 (0.21) 0.17(0.38) 0.83 (0.38) 0.05 (0.22) 0.07 (0.25) 0.01 (0.12) 0.04 (0.19) 0.81 (0.40) 0.04 (0.20) 0.40 (.49) 0.20 (.40) 0.10 (0.31) 0.15 (0.36) 0.14(0.34) 0.19 (0.40) 0.77 (0.42) 0.03 (0.18) 0.08 (0.27) (0.08) 0.11 (0.31) 0.80 (0.40) 0.03 (0.17) Supervisor white Supervisor black Supervisor Hispanic 0.06 (0.23) 0.03 (0.16) 0.07 (0.25) 0.03 ( (0.11) 0.04(0.19) Supervisor Asian (0.09)0.003 (0.06) 0.01 (0.10) 0.03 (0.16; 0.05 (0.22) 0.02(0.12) Supervisor of other race _0.04(0.19)0.10(0.30) 0.01(0.10) 0.01(0.10) 0.00(0.04) 0.01(0.12) Source: MCSUI. Weighted means are reported with their standard errors in parentheses. Appendix D Definition of Variables Used in the Econometric Analysis and Associated Summary Statistics Variable Variable Definition Hourly High High wage Community graduate Attended College school dropout school graduate college college graduate Respondents hourly wage at survey date Number of years employed by current employer at survey date Age at last year of schooling (out of school at least 15 continuous months) 1 if respondent failed to complete high school, 0 otherwise 1 if respondents highest level of schooling is completion of high school, 0 otherwise 1 if respondents highest level of schooling is completion of community college, 0 otherwise 1 if respondents highest level of schooling was attended college, 0 otherwise 1 if respondent completed college, 0 otherwise