A standard object of empirical analysis in labor economics is a modified Mincer wage function in which an individual's log wage is specified to be a function of education, experience, and an indicator variable identifying race. We analyze this approach in a context in which individuals live and work in different locations (and thus face different housing prices and wages). Our model provides a justification for the traditional approach, but with the important caveat that the regression should include location-specific fixed effects. Empirical analyses of men in U.S. labor markets demonstrate that failure to condition on location causes us to (i) overstate the decline in black-white wage disparity over the past 60 years, and (ii) understate racial and ethnic wage gaps that remain after taking into account measured cognitive skill differences that emerge when workers are young.
Keywords: racial wage disparity; theory of local labor markets; wage regressions.