Analyses of ethnic and racial wage differentials neglect the fact that minorities cluster in urban and in more deprived areas. This paper estimates ethnic wage differentials by comparing minorities to the majority in the same local labour market and therefore facing similar socio-economic conditions. Location is important: in the UK ethnic wage differentials and their variation across areas are partly explained by job characteristics and especially occupation. Since minorities in some areas are worse off compared to minorities in other areas, there may be scope for policy to incentivise mobility of specific groups.