Giving Compass' Take:

• Ellora Derenoncourt and Claire Montialoux demonstrate that The Fair Labor Standards Act of 1966 reduced the earnings gap between black and white workers. 

• How can funders work to build on the success of The Fair Labor Standards Act of 1966? How would effective reform be similar or different in 2020? 

• Read a roadmap for addressing economic inequality

One of the most striking dimensions of inequality in the United States is the persistence of large racial economic disparities (Bayer and Charles, 2018; Chetty et al., 2018). A major aspect of these disparities is the earnings difference between black and white workers. There is a 25% gap between the average annual earnings of white and African-American workers today. Over the last 70 years, this gap fell significantly only once, during the late 1960s and early 1970s, when it was reduced by a factor of about two. What made the white-black earnings gap fall? Understanding the factors behind this historical improvement may provide insights for reducing the large racial disparities that still exist today.

A large literature has put forward various explanations for the decline in racial inequality during the 1960s and 1970s, including federal anti-discrimination legislation (Freeman, 1973) and improvements in education.

This paper provides a new explanation for falling racial earnings gaps during this period: the extension of the federal minimum wage to new sectors of the economy. The Fair Labor Standards Act of 1966 introduced the federal minimum wage (as of February 1967) in sectors that were previously uncovered and where black workers were over-represented: agriculture, hotels, restaurants, schools, hospitals, nursing homes, entertainment, and other services. These sectors employed about 20% of the total U.S. workforce and nearly a third of all black workers. Perhaps surprisingly, the role of this major reform in the much studied decline in racial inequality during the Civil Rights Era has not been analyzed before. We show that it had large positive effects on wages for low-wage workers and that the effects were more than twice as large for black workers as for white. Our estimates suggest that the 1967 extension of the minimum wage can explain more than 20% of the decline in the racial earnings gap during the late 1960s and early 1970s. Moreover, we find that this reform did not have detectable adverse employment effects on either black or white workers. The extension of the minimum wage thus not only reduced the racial earnings gap (the difference in earnings for employed individuals) but also the racial income gap (the difference in income between black and white individuals, whether working or not). To our knowledge, our paper provides the first causal evidence on how minimum wage policy affects racial income disparities.