Bank Deregulation and Racial Inequality in America

Nice paper by Ross Levine, Alexey Levkov, and Yona Rubinstein.

It makes case for bank deregulation looking at a different perspective altogether. They show bank dereg had led to lower racial inequality in US:

We use the cross-state, cross-time variation in bank deregulation across the U.S. states to assess how improvements in banking systems affected the labor market opportunities of black workers. Bank deregulation from the 1970s through the 1990s improved bank efficiency, lowered entry barriers facing nonfinancial firms, and intensified competition for labor throughout the economy. Consistent with Becker’s (1957) seminal theory of racial discrimination, we find that deregulation-induced improvements in the banking system boosted blacks’relative wages by facilitating the entry of new firms and reducing the manifestation of racial prejudices in labor markets.

 So they link a couple of economic ideas – financial regulation, racial economics, labor markets etc.

In this paper, we contribute to research on how finance shapes economic opportunities by evaluating the impact of a deregulation-induced improvement in the U.S.  banking system on racial inequality. Research documents that black workers earn less than their white counterparts after controlling for di§erences in education and experience. Yet, researchers have neither determined the degree to which this racial wage gap reáects di§erences in unobserved skills or racial discrimination, whereby blacks are paid less than identically productive whites, nor have researchers examined the role of financial sector policies in influencing racial wage inequality. We provide the first assessment of how the financial system a§ects the racial wage gap; and, in conducting this assessment we provide novel evidence on the role of racial discrimination in influencing blacks relative wages.

Our research strategy is structured by Becker’s (1957) seminal theory of racial discrimination, which holds that (1) taste-based discrimination, the disutility that white employers attach to hiring black workers, can produce an enduring racial wage gap and (2) lowering barriers that impede the entry of new firms can reduce this racial wage gap between identically productive workers. Becker argues that with lower entry barriers, firms with less of a taste for discrimination can enter the market and initiate profitable operations by hiring equally productive black workers at lower wage rates than their white counterparts, boosting the relative demand for black workers and reducing the racial wage gap. Becker did not argue that new Örms would reduce racial prejudices. Rather, he argued that lower entry barriers would erode the manifestation of racial prejudices on labor market outcomes. Accordingly, Becker’s (1957) model predicts that lower entry barriers will reduce the racial wage gap but only if racial prejudices had been contributing to the black-white wage differential. If racial attitudes  were not depressing blacks’ relative wages, then reducing entry barriers will not reduce the manifestation of those prejudices on the racial wage gap within the context of Becker’s taste-based theory of discrimination.

Findings:

We find that bank deregulation across the U.S. states boosted blacks relative wages by lowering barriers to the entry of new firms but only in states with a high degree of racial bias. In reduced form specifications, bank deregulation that lowered entry barriers facing non financial firms reduced the racial wage gap. In 2SLS, we use bank deregulation to identify an exogenous lowering of entry barriers. We find that the resultant increase in new incorporations eliminated more than one-fifth of the preexisting black-white wage differential in high racial bias states over a five-year period.

The paper emphasizes the powerful role of finance in shaping the economic opportunities of an historically oppressed group in the United States. Banking sector policies that facilitated competition materially enhanced blacks relative wages. Our research shows that these improvements materialized through indirect channels: bank deregulation enhanced the functioning of labor markets throughout the economy, reducing racial inequality and boosting the economic opportunities of African Americans.

Nice stuff..

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