Economics of Discrimination Order of Presentation I. Definition - Market discrimination, Pre-market discrimination II. Measurement of Wage discrimination III. Theory of market discrimination - Taste-based discrimination - Statistical discrimination - Noncompetitive models IV. Empirical evidence - Methodological issues - Analytical evidence V. Policy Implications

I. Definition Unequal treatment for equal work Equal treatment for unequal work  ‘work?’ Working definition of market wage discrimination  Prices paid by employers for given productive characteristics are different between genders the unit “price” of education the unit “price” of tenure  No wage discrimination in the labor market if is the same between demographic groups for all i.  Otherwise, wage discrimination exists  Testing for wage discrimination??? wage

 Limitations - Equal education vs equal work - Pre-market discrimination; does not explain why minorities have lower value of X (education or tenure etc.) Occupational discrimination  Occupational segregation if occupational distribution is different across different demographic groups. <Table 12.3>  What does occupational segregation reflect? - Discrimination if occupational choices are directly limited or the segregation results from pre-market discrimination. - Non-discrimination if the segregation results from gender differences in preferences or comparative advantage.

II. Measurement Residual method for wage discrimination  Graphical presentation: a single variable, in class  Mathematical presentation: multiple variables, in class  Limitations To what extent are premarket choice variables affected by discrimination? e.g.) Should we control for occupational choices as pre-market variables? Yes if gender-related occupational differences reflect premarket preferences. No if occupational choices are constrained by discrimination. If we did, the size of wage discrimination would be understated.

(2) Omitted variables e.g.) Gender differences in unobserved productive characteristics or preferences (3) Identification problem e.g.) Ferber and Greene (1982), a sample of university professors, 2% based on the male and 70% based on the female non-discriminatory wage structure ; Neumark(1988) derived the non-discriminatory wage function based on a pooled sample; more weights on men???

III. Theories of Market Discrimination 1. Personal Prejudice Model  Assumptions  Either employers, customers, or employees have “prejudicial tastes.”  Otherwise, firms are wage takers.  Equal productivity between demographic groups. ; want to analyze the wage and employment effects of these prejudicial tastes. ; want to know how each type of discrimination can ‘survive’ the competitive market. ; want to understand why we object discrimination.

1) Employer Discrimination Model  Suppose that white male employers are prejudiced against women and minorities  devaluate their productivity subjectively  pay lower wages  Formal discussion (textbook)  MRP = same for all workers  d = the extent to which this productivity is subjectively devaluated for minorities and women.  Market equilibrium for white males: MRP = WM  Market equilibrium for women and minorities : MRP - d = WF or MRP = WF + d  WM - WF = d: wage gap due to discrimination

More formal discussion (Becker, 1971)  The employer discrimination model implies that discriminators want to satisfy their prejudicial preferences instead of profits.  Utility maximization  Justifies the residual method for wage discrimination

Model Implications  Profits are lower for a discriminator than for a non-discriminator. <Figure 12.2> ; BFG amount of profits is socially wasted by discrimination.  The number of women and minorities hired is smaller for a discriminator than non-discriminator.

Figure 12.2 Equilibrium Employment of Women or Minorities in Firms That Discriminate A discriminatory employer faced with wage of WF will hire less minority/women workers at N0 where MRP = WF + d with the wage bill and profit given by areas 0EFN0 and AEFB, respectively. The wage bill and profit for nondiscriminatory profit-maximizing employers will be given by areas 0WFGN1 and AEG, respectively.

How can discriminators survive in the competitive market when they maximizing utility?  Becker (1971); market forces will cause discrimination to disappear in the long run.  Under perfect competition, competition will eliminate discrimination when there are sufficient non-discriminators.  Under imperfect competition, discrimination will be competed away if some entry is possible, if there are non-decreasing returns to scale, and if there is at least one non-discriminator.    The opportunity to indulge in discrimination is particularly strong among monopolists facing government regulation.   - Incentive to hide excess profits from the public - To satisfy their discriminatory tastes  pay higher wages to white males.

2) Customer Discrimination Some customers like to be served by white-male  jobs requiring major responsibility; physician, pilot, lawyer  Equally qualified white males are more valuable (productive) to employers because of customers’ preferences.  Employers pay higher wages to white males  Consequences  Occupational segregation  White-male-intensive jobs; physician, pilot, lawyer  Minority-intensive; receptionist, flight attendant  lower wages or more qualification for minorities

How can discriminatory customers survive?  Employers who hire white males  pay higher wages to white males,  charge higher prices to customers,  maintain profits  Discriminatory customers maximize utility  pay higher prices  enjoy their prejudicial preferences  but, the monetary cost from discrimination constitutes a small fraction of total expenditure. Empirical Study  Focus on the self-employed who have great customer contact  In 1980, 19% of earnings gap between blacks and whites, other things equal  compared with the 11% gap between blacks and whites among salaried workers.

3) Employee Discrimination Some white male workers dislike working with minorities.  Employers would have to pay white males a wage premium  “compensating” wage differential How can employee discrimination survive?  Why don’t employers hire only equally qualified minorities?  Not enough labor force only with women and minorities

2. Statistical Discrimination Statistical discrimination can result, when employers use group characteristics in hiring decision.  Prediction of workers’ productivity is important at the time of hiring because of large hiring and training costs borne by firms  Employers’ concern  Who will be more productive after hiring and training?  Who will stay with the job longer?  Method of prediction  Individual characteristics; education, experience, .....  Group characteristics; race, gender, age, ..... ; easy to obtain, represent average productivity

The use of group characteristics in screening leads to statistical discrimination. Why discrimination?  Employers evaluate individual characteristics differently depending on group affiliation  Even if such predictions are valid in the “average” sense, they are inaccurate for individuals.  Certain women are willing to stay with their job longer than the average men e.g.) Distribution of job tenure by gender; different means and equal variance

Statistical discrimination may arise even if male and female workers have equal productivity on average.  Two conditions  Women’s greater variance in productive characteristics  Risk averse employers e.g.) Distribution of job tenure by gender; equal mean and greater variance for women   A vicious cycle of discrimination  Avoiding female workers because of uncertainty  Makes the productivity of female workers more uncertain

3. Noncompetitive Models Restrictions on mobility Dual labor markets  The labor market is divided into two non-competing sectors: a primary and a secondary sector.  Primary sector: high-wage, stable employment, well-developed internal labor market, good working conditions, high rate of return to education and experience - Secondary sector: low-wage, unstable dead-end jobs, no job ladder, low rate of return to education and experience  Women and minorities are confined to the secondary sector and job mobility to the primary sector is restricted.  Explain how discrimination can persist.  Does not explain why noncompeting sectors arose and why women and minorities are shunted into the secondary sector.

Research-related monopsony  Also based on restricted mobility.  Women’s higher mobility cost is explained by existence of some employers who have prejudicial tastes against women and minorities.  Given that some employers have prejudicial tastes against women and minorities, it takes longer time and higher cost for a typical woman to draw the same number of job offers as a comparable man does.  Firms’ labor supply curves are steeper for women than for men.  The gap between MRPL and wages is greater for women.  With equal MRPL, women’s wages are lower. <Figure 12.7>

IV. Empirical Evidence V. Policy Implications Evidence from individual data - Estimation strategy - Limitations Evidence from establishment data (PRESENTATION) Estimation strategy Limitations V. Policy Implications Federal Programs Changing discriminators’ preferences for the interests of others