1 Labor Market Discrimination

2 This discrimination would occur if two equally qualified individuals were treated differently based solely on the basis of gender, (or race, or religion,…). A study results are below CharacteristicsHuman cap onlyAll variables Ed. Attainment Labor force experience Race Occupation-7.8 Industry-22.6 Union Status-3.8 Unexplained Total Wage differential

3 On the previous screen we have the results of two types of studies. In the first column we see that the wage differential is nearly 28%. Of this difference, 0.3, or less than 1% can be explained by educational differences. 30.8% can be explained by differences in labor force experience, and 1.8% can be explained by differences in race. So 67.1% of the differences in wages can not be explained by the three variables included. So we could attribute the difference to discrimination. The second column includes additional variables that are thought to impact the difference. Let’s see that next.

4 Of this difference in wages, 0.3, or less than 1% can be explained by educational differences. 26.2% can be explained by differences in labor force experience, and 1.2% can be explained by differences in race. Occupation accounts for 7.8%, Industry accounts for 22.6%, and Union Status accounts for 3.8%. NOW, 38% of the differences in wages can not be explained by the six variables included. So we could attribute the difference to discrimination. Another way to say this is that the ratio of female to male pay is.724. But, when you incorporate the 3 variables form the first column, the ratio rises to.805. In other words, when you look at women with equal characteristics to men, the ratio rises, although is still not 1. When you look at the 6 variables in the 2 nd column the ratio rises to.882.

5 So, with the 6 variables there is still a pay difference. We would say there is discrimination. BUT, maybe there are other variables. If so, then the measure of discrimination we have here is overestimated. In other words, by adding more variables we would lower the measured discrimination. Underestimating discrimination may be at work as well. Women in the past have been discriminated against in certain occupations. So they quit going into those occupations in the numbers they normally would have. The numbers in the second column before would reflect only those women currently there.

6 Models of Discrimination

7 An economist, Gary Becker, suggested a model to explain discrimination in the economy. He suggested people have a taste for discrimination. In his model, employers, employees and customers may all have discriminatory tastes. Examples: Employers will hire women as secretaries, but not as pipe fitters, men will work with women in subordinate positions, but not as equals, and customers will buy clothes from a female sales associate, but not hire female lawyers. Becker postulated individuals with tastes for discrimination act as if nonpecuniary costs are associated with interaction. Pecuniary refers to money. Thus, nonpecuniary costs refer to costs that are not monetary in nature.

8 You may have heard my story of why you do not see one person eat the whole bowl of chips at a party, even when the chips are free in terms of money. Most of us would feel the “social” cost of eating the whole bowl. We would not want to have others see us do this. This is an example of nonpecuniary costs. Again, Becker postulated that folks have a discriminatory “taste” and in a model he suggested we would have a measure of this taste with a discriminatory coefficient d. d is a monetary equivalent to the degree of cost the individual feels in the situation. Thinking about the chips example again, there is likely to be a price per chip that would have the individual stop at the same number of chips they take when feeling the social stigma.

9 Employer Discrimination For the employer, d r is the monetary value of the nonpecuniary cost if hiring a women. The cost of hiring a man would be w m and the cost of hiring a women would be w f + d r, or Cost of hiringa mana women w m w f + d r We are assuming here that men and women have the same productivity. A while back we saw that employers basically hire workers up to the point where the productivity of the worker is equal to the cost to the employer. So, a man and a woman would be equally employable if w m = w f + d r. This implies the wage to the women would have to be lower than the wage to the man and thus the woman is paid less than her productivity value.

10 Implications of Becker’s Idea If an employer has a discrimination coefficient of 0 (meaning nondiscriminatory), men and women would be paid the same. If there is a relatively large number of nondiscriminatory firms, or relatively few women in the market, maybe all the nondiscriminatory firms would hire the women. We would see no pay differential. When there are relatively many discriminatory firms, women will have to accept jobs at the lower pay. This seems to be the case.

11 Monopsony power – when you have a single or large buyer (in % terms) for labor in an area – may be a vehicle to keep pay differences between men and women. Here is the logic. The family moves to an area because of the man’s career. When the woman wants to work, employers know their main option is to work in town. But, they also know they do not have to pay them as much because they do not have as many options. More and more couples live in different towns to get past this, but is the alternative we want in our world?

12 More Discrimination Models

13 Employee Discrimination If a male employee has a taste for discrimination against women, then he would need a premium in pay to work with a woman. If w m is the male wage needed to work without women, then w m + d e is the pay needed to work when women are present. The employers response to this might be to have separate work sites and avoid paying the premium d e. But if this is too costly, firms would resort to a wage differential.

14 Customer Discrimination If customers have a taste for discrimination then they will perceive the cost of goods as p when sold by men, but as p + d c when sold by women. So women will sell less and appear less productive, or will sell at a lower price and have less dollar volume of sales. This makes it look as though females are less productive.

15 The Overcrowding Model Wage QL DfDf S fd S fo DmDm S mo S md F jobs M jobs W md W o W fd

16 In the overcrowding model, say there is a demand for jobs that have traditionally been done by females and there is a demand for jobs that have traditionally been done by males. If women are segregated from men in jobs, then we would expect women to supply labor in the F market and say the supply is S fd. The wage there would be W fd. Men would go to market M and say the supply is S md with wage W md. You then see the differential in the wage. The law of one wage If segregation were eliminated and people were able to work in either market, then the wage would move toward Wo in both markets (we really wouldn’t have two markets then.) Why? (next screen)

17 The folks in the F market see the lower wage and now some leave F and move toward M. The reduction in the supply in the F market raises the wage there and the increase in supply in the M market will lower the wage there. Only when the wages are the same in both markets will there be no incentive for folks to move toward the other market. So why is this called the overcrowding model? With segregation, women do not have as many options and therefore overcrowd in the F market. This depresses their wages.