1. 1 Theories of Discrimination

2. 2 What do we generally mean by “discrimination”?

3. 3 Theories of Discrimination Difficulties in defining discrimination. What is Lang’s illustrative example with respect to cosmetic sales? Firm A: Firm B: Firm C: Firm D:

4. 4 Theories of Discrimination Preference or Prejudiced Based Discrimination What is basic argument? Why might employer based preference discrimination have trouble persisting in a competitive economy?

5. 5 Theories of Discrimination Preference or Prejudiced Based Discrimination (cont.) Customer Based Discrimination

6. 6 Theories of Discrimination Other Types of Discrimination Often in discussions of discrimination and racism people will bring up the thought exercise of how you would react to seeing different people when you are walking down the street by yourself late at night.

7. 7 Theories of Discrimination

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9. 9 Statistical Discrimination Race is correlated with a different trait that is not directly observable, and therefore people use race a signal of that trait. Individual’s political affiliation is not directly observable, but is correlated with having long hair. People’s career goals are not directly observable, but are correlated with which of the 5 C’s they attend. People’s “intelligence” is unobservable, but is correlated with the prestige of the college they attend.

10. 10 Theories of Discrimination Statistical Discrimination In Labor Market Some aspect of workers’ skills are unobservable by employers. Workers of different races (genders, nationalities, etc.) differ on average on some dimension of this unobservable skill. Non-racist employers use race as a signal regarding some aspect of unobservable skill, which results in discrimination. Such discrimination may be able to persist in a competitive economy because it is profit maximizing given imperfect information.

11. 11 Theories of Discrimination Statistical Discrimination (cont.) Example 1 (Difference in skills distributions between races) Suppose there are two skill types of workers: H-types and L-types. The value of output produced is: $20K for H-types $10K for L-types Worker type and output is unobservable to employers. However, employers know: Whites: 50% are H-types, 50% are L-types. Blacks: 25% are H-types, 75% are L-types. If labor market is competitive, what will black workers be paid in equilibrium? How about white workers? So what is racial wage gap? What if we can condition on their skill type?

12. 12 Theories of Discrimination Statistical Discrimination (cont.) Example 2 (Difference in ability to signal skills between races) Again suppose there are two types of workers: H-types and L-types. 50% of each race are H-types (i.e., groups have identical skill distributions). Two kinds of jobs: Skilled and Unskilled. Value of output produced: Unskilled job is $10K for all types. Skilled job is $20K for H-types, but $0 for L-types. Employers cannot observe worker type, but rather a “signal” of type (G, B). Whites: H-types emit a good signal w/ prob 1, bad signal w/ prob. 0. L-types emit a good signal w/ prob 0, bad signal w/ prob. 1. Blacks: H-types emit a good signal w/ prob 0.75, bad signal w/ prob. 0.25. L-types emit a good signal w/ prob 0.25, bad signal w/ prob. 0.75. Employers must decide which job to assign each worker to and how much to pay him based on race and signal.

13. 13 Theories of Discrimination Statistical Discrimination (cont.) Example 2 (Difference in ability to signal skills between races, cont.) What will equilibrium look like if labor market is competitive? What is the expected output of those emitting bad signal sat Unskilled job? Good signals at Unskilled job? Difference by race? What is the expected output of those emitting good signal at Skilled job? White? Black? What is the expected output of those emitting bad signal at Skilled job? White? Black? Who gets “promoted” to skilled job from each race? What will each racial group get paid at each job? What will be average pay for each race? Is this discriminatory?

14. 14 Theories of Discrimination Statistical Discrimination (cont.) Example 3 (Self-Confirming Expectations) Again suppose there are two types of workers: H-types and L-types. Two kinds of jobs: Skilled and Unskilled. Value of output produced: Unskilled job is $10K for all types. Skilled job is $20K for H-types but $0 for L-types. However, suppose type is not exogenous. All workers start out at L-types, but can invest in training to become an H-type at a utility cost equivalent to $5K. Employers cannot observe worker type, but rather a “signal” of type (G, M, B). H-types emit signal: G w/ prob 0.4, M w/ prob. 0.6, B w/ prob. 0. L-types emit signal: G w/ prob 0, M w/ prob. 0.4, B w/ prob. 0.6. What will be equilibrium behavior of workers and firms if labor market is competitive?

15. 15 Theories of Discrimination Statistical Discrimination (cont.) Example 3 (Self-Confirming Expectations cont.) If firms believes everyone is H-type, what will they do? Given this behavior, what will workers do? Can such beliefs and behavior then be maintained in equilibrium? Is this only equilibrium? Suppose firms all believe everyone is L-type, what will they do? Given this behavior, what will workers do? Can such beliefs and behavior then be maintained in equilibrium? How does all this relate to discrimination?

16. 16 Theories of Discrimination Summary: Employer Preference Based Discrimination Key: Must be constraints in competitive market or substantial “search” costs. Customer Preference Based Discrimination Key: Customers must care a good deal about race of who they buy from. Statistical Based Discrimination Key: Worker skill and output must be unobservable, at least to some extent, well into each worker’s career. How realistic are key assumptions? Where might they hold? Where/When might they not? Is one type of discrimination “worse” than others?