What Explains the Racial Gaps in Task Assignment and Pay Over the Life-Cycle?

The black-white pay gap increases substantially over the life-cycle. We document that white workers are assigned initially to occupations with higher complex task requirements. The accumulated earnings gap grows from $30K after 5 years to $143K after 15 years. The growth in the total earrings gap are large even for workers with the same education and AFQT scores. During these years, the gap in the degree of task complexity grows substantially. To understand the source of these long run pay gaps and to analyze their link to occupational sorting and experience, we develop a dynamic Roy model of employment and occupation choice and learning which nests discrimination and accounts for the dynamic selection of workers into occupations over time. We then develop a two-step estimation method to recover the model’s structural parameters, and use them to simulate counterfactual exercises that allows us to decompose the different factors affecting these gaps. About 27% of the total pay gap after 15 years is explained by higher entry costs of black workers into complex-task occupation. In addition, equating the initial pre-market skills and the initial mean differences in beliefs (which reflect differences in initial unobserved skills) explain about half of the total earnings after 15 years. This reflects the importance of sorting of workers into jobs over time in explaining the long-term earnings gaps, and the role of mismatch of workers to occupation in explaining the long-run racial pay gaps. Our estimates indicate that the variance of beliefs is increasing substantially more for white workers. This is consistent with statistical discrimination (Phelps 1972) and also reflecting unobserved promotion gaps and training gaps. While the pre-market skill gaps (observed and unobserved) between black and white workers are clearly an important factor in the labor market outcome gaps, frictions and discrimination are important determinants of the life-cycle labor market outcome gaps.