Being In The Minority Can Cost You And Your Company

The racial wage gap in the United States – the gap in salary between whites and blacks with similar levels of education and experience – is shaped by geography, according to new social science research.

The larger the city, the larger the racial wage gap, according to researchers Elizabeth Ananat, Shihe Fu and Stephen L. Ross, whose findings were recently published by the National Bureau of Economic Research.

“The average racial gap in metropolitan areas of around one million people – and you can think of a place like Tulsa, Okla. – is about 20 percent smaller than the gap in the nation’s largest metro areas of Chicago, L.A. and New York,” said Ananat in an interview.

Ananat’s research suggests that the racial gap is not directly the result of prejudice or, at least, prejudice conventionally defined. Rather it has to do with patterns of social interactions that are shaped by race – and a phenomenon that economists call spillovers.

Economists have long noted that multiple companies in an industry often congregate in an area – think of movie companies in Hollywood or investment bankers on Wall Street – and observed that these firms become more profitable. Indeed, this may be one reason why an up-and-coming tech company would want to locate in Silicon Valley, rather than in Tennessee, where costs are far cheaper.

But why do companies that congregate become more profitable? It has to do, Ananat said, with the fact that when a number of companies involved in similar work are concentrated in one area, they effectively create an ecosystem where ideas and refinements can spread easily from one company to the next, and increase productivity overall.

“It’s stuff in the ether — you know, these tips that get communicated,” Ananat said. “For any job it’s going to be specific to that job. That’s why they are so hard to identify and so valuable. We say, ‘oh, you’re not doing that quite right. Do it just this way instead.'”

What does all of this have to do with the racial wage gap? Much of this valuable information that gets transmitted and shared in the ecosystem happens in informal or social settings – over lunch, or a beer after work, or even at church on Sunday. Those social settings tend to be segregated, with whites tending to spend time with whites and blacks with blacks. (The next time you are in an office cafeteria, notice who sits next to whom at lunch.) In a world where ethnic groups cluster together, those in the minority are less likely to share and benefit from spillover effects in the ecosystem, and are therefore less likely to learn early on about important company developments or technological innovations.

“People of the same race are much more likely to have conversations where they share ideas,” she said. “The fact is you just talk more about everything with people who you feel more comfortable with than with people you feel less comfortable with. And we know that one of the big predictors of who you feel comfortable with is whether you are of the same ethnicity.”

Ananat explained the findings with a hypothetical example: “Say there are 1000 black engineers in Silicon Valley, compared to 20 in Topeka, and there are 10,000 total engineers in Silicon Valley, compared to 500 in Topeka. Then blacks make up 10 percent of engineers in Silicon Valley, compared to 4 percent in Topeka.”

“A black engineer in Silicon Valley has 980 more black engineers to get spillovers from than does a black engineer in Topeka,” she continued in an email. “Meanwhile, a white engineer in Silicon Valley has 8,500 more white engineers to benefit from than a white engineer in Topeka. Thus, while both white and black engineers’ wages will be higher in Silicon Valley than in Topeka, the white engineer’s wages will increase more than the black engineer’s do—in effect, the white engineer is living in a much bigger city (of engineers) than the black engineer is, if only people within one’s own race matter for urban spillovers.”

Obviously, in the real world, social encounters are not totally segregated and other factors – including out-and-out prejudice – could play a role. But what seems to be happening, Ananat said, is that minority groups often miss out on the valuable tips and mentoring that make these ecosystems so productive and profitable. The same thing happens with other ethnic minorities, and even with whites – when they are in a minority.

Companies that want to take full advantage of spillover effects would do well to find ways to encourage employees to share information, set up mentoring programs, and generally encourage employees to connect informally and socially, Ananat said.

Social scientists, she added, have long talked about the value of “code-switchers” – people adept at talking across differences and who relate well to those from other groups. Companies with more code-switchers are likely to spread the wealth of spillover effects more equitably.

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