Bank Deregulation and Racial Inequality in America

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) theory of racial discrimination, we find that in economies where employers have sufficiently strong racial biases, deregulation-induced improvements in the banking system boosted black workers' relative wages by facilitating the entry of new firms and reducing the manifestation of racial prejudices in labor markets.