Review of Industrial Organization 21: 251–270, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Privatization, City Residency, and Black-White
Earnings Differentials: Evidence from the Public
JAMES PEOPLES, JR.
and WAYNE K. TALLEY
Department of Economics, University of Wisconsin-Milwaukee, Milwaukee, Wisconsin 53201,
Department of Economics, Old Dominion University, Norfolk, Virginia 23529, U.S.A.
Abstract. Becker’s theory on the economics of discrimination suggests that enhanced competition
creates a business environment that discourages employers from paying racial earnings differences.
This study tests this hypothesis by examining black-white earnings differentials for public transit bus
drivers for pre- and post-privatization periods. The ﬁndings reveal an erosion of the racial earnings
differential in the post-privatization period which is consistent with the Becker hypothesis. Public
transit black union drivers earned more than their white counterparts prior to privatization. City
residency accounts for 36 percent of this premium. However, the city-residency earnings advantage
and the black-white union premium declined appreciably in the post-privatization period.
Key words: Black-white earnings, city residency, privatization, public transit.
Prior to 1960 the typical U.S. transit ﬁrm was privately owned. Today it is publicly-
owned. However, cost inefﬁciencies in the transit industry have accompanied
Under the belief that the private sector can provide transit
services at lower cost, the federal government addressed cost inefﬁciencies in the
public transit industry by introducing contracting-out privatization as opposed to
asset-transfer privatization. The former is the provision by private providers of
public services formally provided by (but still under the control of) public ﬁrms.
The latter is the transfer of ownership (or sale) of assets of public ﬁrms to private
providers for provision of services. Under contracting-out privatization, private
providers are generally selected by competitive bidding. The public ﬁrm enters into
a contract, giving the private provider the exclusive right to provide the service, but
retains control of the service.
Contracting-out privatization has been hypothesized to reduce public transit
costs via direct and indirect cost-saving effects. Direct cost savings arise when
Corresponding author: E-mail: firstname.lastname@example.org
Evidence of cost inefﬁciency in public transit ﬁrms is found in studies by Viton (1986, pp.
499–513), Good (1992, pp. 195–215), and Kitchen (1992, pp. 114–128).