How Do Economists Think About and Study Discrimination?

1. How Do Economists Think About and Study Discrimination? David Neumark

2. Why do economists study discrimination? • Motivated by persistent differences between economic outcomes for different groups • Wage, employment, and unemployment differences by race • Wage and employment differences by sex • Longer unemployment durations of older workers

3. Example of disparities in economic outcomes: race differences in unemployment • Go to http://www.bls.gov/cps/home.htm • Click on “Most Requested Statistics” • Select “Labor Force Statistics from the Current Population Survey” • Select “Unemployment Rate – White” and “Unemployment Rate – Black or African American” • For January 2008, we get the following

4. Example of disparities in economic outcomes: sex differences in earnings • Go to http://www.bls.gov/cps/home.htm • Click on “Most Requested Statistics” • Select “Weekly and hourly earnings data from the Current Population Survey” Select “Median wkly earnings, Emp FT, Wage & sal wrkrs, White, Men” and “Median wkly earnings, Emp FT, Wage & sal wrkrs, White, Women” • For 4th quarter of 2007, we get the following

5. Other examples of disparities in economic outcomes • From same website, with further exploration, can find the following

6. Differences in economic outcomes are impetus for broad research agenda on discrimination • These empirical regularities lead to goal of understanding contribution of discrimination to these differences • Definition of “discrimination” • People rewarded differently based on demographic characteristics independent of their actual productivity • Helps parse differences into those driven by treatment in labor market and those driven by pre-market factors • This, in turn, tells us where policies can most effectively intervene to try to reduce differences in economic outcomes

7. Numerous policy questions also arise • Of course policy questions go quite a bit deeper • If there is discrimination, then what is the appropriate policy response? • Have the policies in place reduced discrimination, and do they continue to do so? In what ways do they fail to be effective? • Do they create other problems or even lead to unintended consequences and harm the groups they are trying to help?

8. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

9. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

10. “Workhorse” model: discrimination reflects tastes • Economics differs from other social sciences in not trying to explain tastes, but to understand how they play out in markets • Becker’s models • “Employer discrimination” • Employers dislike interacting with workers in some group, and therefore act “as if” they are less productive • “Employee discrimination” • Some workers dislike working with other workers, and need to be compensated (like bad working condition) • “Customer discrimination” • Customers dislike interacting with workers from some group, which effectively lowers their productivity

11. Implications of taste-based discrimination models • Employer discrimination • Lower wages for groups suffering discrimination, controlling (accounting) for actual productivity differences • Lower employment/less hiring for groups suffering discrimination, accounting for other differences • Especially when we have laws regulating wages • Competition might root out such discrimination, but only under some conditions • Employee discrimination: segregated workplaces, lower employment/less hiring • Customer discrimination: wage differences, lower employment/less hiring • Implications for how economists test for discrimination in labor markets

12. Past discrimination and public policy response • Little debate about whether there was discrimination in the past • Jim Crow (into 1950s or 60s) • Marriage bars through the 1950, extensive through early 1940s • Most school districts barred married women from teaching, and many large firms barred them from clerical jobs • Earlier prohibitions on training women as doctors or lawyers • Fun fact: Only outlawed in Japan in 1985 • Explicit age limits in job advertisements (1950s and 60s) • Considerably more debate about how pervasive labor market discrimination remains today, and more generally in post-Civil Rights period

13. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

14. Overview of anti-discrimination policies (I) • Equal Pay Act of 1963 • Requires equal pay for equal work • Title VII of Civil Rights Act of 1964 • Made it illegal to use race, sex, ethnicity as basis for labor market decisions regarding hiring, pay, conditions, etc. • Part of larger Act covering voters’ rights, public accommodations, school desegregation, sex discrimination in education

15. Overview of anti-discrimination policies (II) • Affirmative Action • Not established by legislation, but by Executive Orders regulating companies doing business with federal gov’t • Affirmative Action in university admissions is something schools have chosen to do; policy question is whether to ban it • Age Discrimination in Employment Act of 1967 • Lower profile, but likely to becoming very important with population aging

16. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

17. Did anti-discrimination policies improve outcomes for “protected groups”? (I) ‘64 • Most of this research focuses on effects of Title VII on black-white differences (e.g., Freeman, 1973) • Hard to determine effect of federal legislation from single time-series • If we pass a law covering everyone, and then we see a change in behavior, how do we know it was the effect of the law rather than something else changing • Valuable lesson regarding drawing policy conclusions from data

18. Did anti-discrimination policies improve outcomes for “protected groups”? (II) • Research tends to conclude that federal laws led to a “break in the trend” and faster improvement of blacks’ relative economic position • Similar conclusion from other studies that try to better establish “causal effects” of policy using richer variation • Earlier state laws implemented at different times • Interaction of state and federal laws that led to different businesses becoming bound by anti-discrimination laws at different times • One important exception • Laws protecting women focused on equal pay, which pushed up cost without affording other protection • “Unintended consequence” of lowering their employment

19. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

20. Is discrimination still with us? • Motivated by alternative views • Anti-discrimination policies have acted to remove prejudices that led to discrimination in the past, so policies are no longer needed • Discrimination still exists and we still need policies to root it out • Even if laws effective, we wouldn’t expect laws prohibiting discrimination to be completely effective

21. Bulk of research literature focuses on wage discrimination • Building on Becker employer discrimination model, is there evidence that blacks or women are paid less “controlling” for productivity differences that might also explain pay differences? • What do we mean when we say “controlling for”? • If higher paid group also has higher skills, then in estimating labor market discrimination, we want to net out the effect of higher skills

22. What do we mean by “controlling for”? Wages Avg. W Avg. W Prod. Avg. S Avg. S

23. What do we mean by “controlling for”? Wages Prod.

24. What do we mean by “controlling for”? “Raw” wage difference Wages Wage difference between blacks and whites at the same educational level, or “controlling for education” Prod.

25. Testing for wage discrimination (I) • In general some share of the lower wages of blacks or women (or lower employment) is explained by other factors, but some share also remains unexplained after controlling for differences in proxies for productivity • Limitation faced by most research is we don’t have actual productivity measures • Economists typically have access to data on “proxies” for productivity • Schooling, experience, job tenure, training • Other personal characteristics that might or might not be productivity related

26. Testing for wage discrimination (I)

27. Testing for wage discrimination (II) • Debate over this study helped to clarify that what economists are studying is discrimination in the labor market • Still present, at least for men, based on this evidence • But large part of problem may also be differences formed before different groups get to the labor market, which may reflect discrimination of other varieties • Without actual productivity measures, left with endless arguments about whether regressions like these capture productivity-related differences, or whether remaining gaps by sex, race, etc., reflect unmeasured differences • E.g., allocation of effort, school quality • Conclusions therefore closer to religion than science—answers depend more on beliefs than evidence

28. Testing for wage discrimination (III) • There are contexts where we can get somewhat further • Prime example is statistical analysis of company level data sets, most often in court cases • These data sets often contain performance or productivity measures, and they are the ones the company uses in its own personnel decisions

29. Alternative tests for discrimination • Special contexts in which we can’t measure individual productivity, but can estimate productivity differences across groups, and compare with wage differences • Research with Hellerstein and others, for the manufacturing sector, finds that women are a bit less productive than men, but the pay gap is much bigger, suggesting wage discrimination • Alternative is to be more “experimental,” creating fake job applicants that are identical except with respect to race or sex • “Audit” or “correspondence” studies • These studies generally provide evidence of discrimination—but these studies focus mainly on hiring, not pay

30. Evidence from audit studies, example • In 1996 study, we tested for hiring discrimination against women in very expensive restaurants in Philadelphia (joint project with undergrads)

31. Evidence from audit studies, example

32. Evidence from audit studies, example

33. What about age discrimination? • I’ve said a lot less, because there is less evidence • The prima facie case is weaker than for race or sex, since older workers on average earn more, rather than less, than reference group, and also have high employment rates • I did, though, note longer unemployment durations for older individuals, pointing to more difficulty in finding new jobs • Yet if we look at enforcement activity, we might conclude that age discrimination is extensive

34. What about age discrimination? (Charges filed with EEOC)

35. What about age discrimination? (EEOC litigation)

36. Evidence on age discrimination • My work finds that much of the problem in past decades was discharge of older workers, breaking of what economists call “implicit contracts” that ask for long-term commitment from workers, with higher pay at older ages as reward • Consistent with large share of discharge/layoff cases • But the EEOC litigation statistics also point to age discrimination in hiring • Harder to establish with audit studies, but evidence points to hiring discrimination • Likely to become increasing problem as share of population aged 65+ increases, and many look for part-time or new jobs after leaving long-term career

37. Outline • How do economists think about labor market discrimination? • What have been the policy responses? • Did the anti-discrimination laws help reduce discrimination? • Is discrimination still with us? • What are the contemporaneous effects of anti-discrimination policies?

38. Contemporaneous debates about anti-discrimination policies • Discussion of age discrimination in hiring, and our quick look at statistics on enforcement activity, is a good segue into brief discussion of current anti-discrimination policy • Two issues prominent in debate • Discharge/termination vs. hiring • Affirmative Action

39. Discharge/termination vs. hiring • Do anti-discrimination policies mainly provide protection against discharge, and fail to remedy discrimination in hiring? • May be inadvertent consequence of legal structure (proof, damages, relief) • Consequence could be deterrence of hiring of protected groups • Some research on age discrimination in hiring suggests that in states where laws are stronger, there is less hiring of older workers • Not convinced by evidence, but it is true that evidence of beneficial effects of age discrimination laws does not extend to hiring

40. Affirmative action (I) • Many components of this debate • Benefits of diversity, stigmatization of beneficiaries, hiring/promotion of unqualified minorities or women (and efficiency consequences) • Useful to think in terms of two prevailing views of AA, and public’s perception of them • Special training and other programs that help disadvantaged groups advance (supported in opinion polls) • Preferential treatment (opposed)

41. Affirmative action (II) • Evidence on effects of AA from data on companies, hiring procedures, and hires • Use of more recruiting methods, less reliance on informal networks • More women and minority applicants • More intensive screening of applicants • More willingness to hire applicants on welfare, with criminal records, etc. • More hiring of women and minorities • Minority applicants less qualified in terms of educational requirements • More training and evaluation of hires under AA • Little or no evidence of performance differences

42. Affirmative Action (III) • Evidence from my research consistent with “benign” view of AA • AA results in firms “casting a wider net” in searching for employees • Encourages companies to rely less on easily observable signals like education, criminal record, etc., that are strongly correlated with race but don’t tell us everything about a worker • Also encourages some remediation and training • End result is that, while costs may be somewhat higher, result is most consistent with equally qualified but more diverse workforce emerging • Big unanswered question is what, precisely, are the benefits of diversity? • Could be asked in educational context as well

43. Summing up • Economists focus on what happens in the labor market (as opposed to before people get to the labor market), exploring how discriminatory tastes can affect market transactions and generate these disadvantages • Socioeconomic disadvantages of some groups persist today, consistent with continuing discrimination • Critical to account for other influences, and not attribute all observed differences to discrimination • However, most evidence suggests that discrimination plays some role with respect to race, sex, and also age • Public policy has helped to lessen discrimination, while avoiding the more severe problems that critics sometimes allege • But public policies need continuing reevaluation

44. Public policy and economics education • On issues related to discrimination, and many other topics, new arguments continually arise in policy discussions • Economics educators are front-line of battle to increase economic literacy, helping public to sort out the good arguments from the bad ones • Key elements • Get the basic facts right • Economic reasoning • Grasp of basic statistical concepts • Understanding how public policy works (and don’t forget about unintended consequences) • Access existing research, but not uncritically • And in some cases, see if students can do their own research • No single formula for teaching students how to think about public policy issues, but I hope this “road map” of how economists think about and study discrimination is a useful model