In my critique of Harford’s chapter on statistical discrimination, I wrote:

But is it really true that the market fails to reward blacks for getting more education? Is it even true that the market rewards them less? I tested these claims using one of the world’s best labor data sets, the NLSY. The results directly contradict Tim’s self-fulfilling prophesy story. Blacks actually get a substantially larger return to education than non-blacks! The same goes for experience, though the result is not statistically significant. The real lesson of the data is that if you are young, gifted, and black, you should get a ton of education, because it has an exceptionally large pay-off.

Here’s an introduction to the kinds of regressions I ran using the NLSY. (The data comes from 1992, the most recent year on my CD-ROM that asks everyone about their annual labor income).

I start out with a simple benchmark regression of the logarithm of annual labor income on Black (=1 if the respondent is black, and 0 otherwise), AFQT (percentile on an IQ-type test), and Grade (number of years of education completed). The results are pretty standard: Blacks earn about 13% less than comparable non-blacks, and each year of education raises income by about 8%. (You can make the black-white gap completely disappear if you add family status control variables, but that’s not the focus here).

harfordreg1.jpg

Note that the baseline specification assumes that blacks and non-blacks get the same payoff for each year of education. Harford’s chapter predicts that blacks get less. To adjudicate between these two views, all we have to do is add Grade*Black as a control variable. If Grade*Black=0, blacks and whites get the same percentage increase in earnings from a year of education. If Grade*Black0, education actually pays blacks more.

The results are striking:

harfordreg2.jpg

Yes, in this specification, education pays blacks more than twice as much as it pays non-blacks. At the same time, adding this control variable makes the coefficient on Black much more negative. The upshot is that at low levels of education, blacks earn much less than non-blacks; but at high levels of education, they earn more. This result remains even if you add a lot of other control variables, but I suspect that two regressions have already tried most readers’ patience.

Incidentally, the cut-point in this equation is roughly at 15 years of education. This means that blacks with fewer than 15 years earn less than comparable non-blacks; blacks with more than 15 earn more than comparable non-blacks. (Adding more control variables pushes the cut-point down to 13 years).

If this were a journal article, I’d look for a more recent version of the NLSY, and run more robustness checks. But still, it’s striking that one of the best labor data sets in the world decisively rejects the view that statistical discrimination reduces blacks’ incentive to try to better their lot. Instead, the data strongly support the diametrically opposed view that acquiring education is a great way for a black worker to credibly tell employers, “No matter what you think about the average black, I’ve got the right stuff.”