Labor Market Discrimination

1. Labor Market Discrimination

2. Labor market discrimination treating two individuals with equal qualifications differently for reasons unrelated to their productivity

3. Feedback effects of labor market discrimination Faced with labor market discrimination that lowers the returns to human capital investments, women have less incentive to undertake them. Women’s economic outcomes are therefore adversely affected both directly and indirectly by labor market discrimination.

4. Feedback Effects Gender Division of Labor in the Family Gender Differences in Labor Market Outcomes

5. Similarities & Differences in Characteristics of Male & Female Full-Time Workers Men and women have similar amounts of education. Men have more full-time experience and women have more part-time experience. Men are more likely to be in blue-collar jobs and to work in mining, construction, or durable manufacturing. Women are more likely to be in clerical or professional jobs and to work in the service industry.

6. The Gender Wage Gap The percentage of the gender wage gap that is attributable to discrimination is usually measured as a residual after productivity factors are taken into consideration. About 30.8% of the gender gap in wages can be explained by differences in labor market experience. Differences in educational attainment only explain about 0.3% of the gender wage gap. About 1.8% of the gender wage gap is explained by differences in the racial composition of the male and female full-time labor force. (Part of the effect of race is due to poorer quality education and part is due to racial discrimination.) Even when differences in occupations and industries and differences in union/non-union status are taken into consideration, 38% of the gender wage gap remains unexplained. (Given some forms of gender discrimination, taking these factors into consideration is questionable.)

7. Female-Male Wage Ratio Women earn on average 72% what men earn. If women had the same education, experience, and race as men, their wages would be 81% of men’s wages. Even if women had the same industrial and occupational distribution, and the same union coverage, their wages would still only be 88% of men’s wages.

8. Measuring discrimination accurately is problematic, partly because it is not possible to take into consideration all the variables than can affect potential productivity. If, for example, men are more motivated, then discrimination will be overestimated due to omitted factors. If women have greater interpersonal skills, then discrimination would be underestimated.

9. Another problem with measuring discrimination occurs when studies control for variables that themselves reflect the direct effects of discrimination. Then, the impact of discrimination on the gender wage gap is underestimated. For example, women may be excluded from some jobs due to discrimination in hiring or promotion. Therefore, controlling for occupation and industry will lead to underestimating discrimination.

10. Some Experimental Studies Male & female pseudo-job seekers were given similar resumes and sent to apply for jobs waiting on tables at the same set of high-priced Philadelphia restaurants. A female applicant’s probability of getting an interview was 40 percentage points lower than a male applicant’s, and her probability of getting an offer was 50 percentage points lower.

11. When a screen was used to conceal the identity of candidates at auditions for musicians for symphony orchestras, the probability that a woman would advance out of the preliminary rounds and be the winner in the final round increased substantially. The switch to blind auditions was found to explain one quarter of the increase in the percentage female in the top five symphony orchestras in the United States, from less than 5% of all musicians in 1970 to 25% in 2000.

12. Other Findings • In a study of small firms, male employers paid higher wages and employed fewer women. • Women’s chances of being hired and promoted were greater when there was a higher proportion of women at the level of the job being filled.

13. Discrimination Models: How does discrimination operate?

14. Becker’s Modelof Taste Discrimination Tastes for discrimination may exist on the part of 1. Employers 2. Employees 3. Customers

15. Employer Taste Discrimination First, consider an employer with no taste for discrimination. The employer hires workers up to the point where the amount that the worker contributes to revenues is equal to the amount the worker adds to costs. That is where marginal revenue product (MRP) equals marginal resource cost (MRC).

16. Marginal Revenue ProductMRP = TR/L Marginal Resource CostMRC = TC/L.

17. Marginal Revenue Product MRP = TR/L = (TR/L)(Q/Q) = (TR/Q)(Q/L) = (MR)(MPP), where MR is the marginal revenue and MPP is the marginal physical product. For firms in perfectly competitive product markets, MR equals the product price P. So MRP would be (P)(MPP) which is the value of the marginal product VMP.

18. For nondiscriminatory firms in perfectly competitive labor markets, the marginal resource cost (MRC = TC/L) is simply the wage.

19. Consider now an employer who has a taste for discrimination against women. He/she acts as if there is a nonpecuniary cost of hiring women. This cost or discrimination coefficient can be called dr. To the discriminatory employer, the cost of employing a man will be his wage wm, but the cost of employing a woman will be wf + dr.

20. The discriminatory employer will hire a woman only if her cost (wf + dr) is no higher than that of a man (wm). The employer will be indifferent between hiring a man and a woman if wf + dr = wm, or wf = wm- dr. Therefore, if men and women are equally productive, and men are paid their marginal revenue product, women are paid less than their productivity.

21. If there are a relatively large number of nondiscriminatory firms or there are relatively few women seeking employment they may all be absorbed by the nondiscriminatory firms. Then there will be no discriminatory pay differential based on gender even though some employers have tastes for discrimination against women.

22. However, if discriminatory tastes are widespread or there are relatively many women seeking employment, some women will have to find jobs at discriminatory firms. If the labor market is competitive, all employers pay the same market wage for workers of a particular gender. In equilibrium, the market wage differential between men and women must be large enough so that all women who are looking for employment obtain it. So the more prevalent and the stronger employers’ discriminatory tastes against women and the larger the number of women seeking employment, the larger will be the market wage gap (wm - wf ) between men and women.

23. Consider two employers, one is a discriminator and one is not. The non-discriminator operates solely to maximize profits, without regard to tastes for different employees. He/she will hire the profit-maximizing amounts of employees of all types. The discriminator, acting as though women are less productive hires fewer women, and is therefore not hiring the profit- maximizing number of workers. So, the non-discriminator will have greater profits than the discriminator. The discriminator is giving up some profits to indulge his/her discriminatory taste.

24. If a discriminatory employer operates in a competitive product market, where long run economic profits are zero (that is, there are only normal accounting profits), the employer will be driven out of business by other firms with no taste or less taste for discrimination.

25. If, however, an employer operates in a product market which is not competitive, the firm will be able to sacrifice some profit in order to discriminate. There have been studies that have found evidence of more discrimination in monopolized product markets.

26. Employee Taste Discrimination If a male employee has tastes for discrimination against women, he will act as if there were nonpecuniary costs of working with women. This cost or discrimination coefficient can be called de. This is the premium he must be paid to induce him to work with women.

27. A discriminatory man, who would receive wm if he did not work with women, would only be willing to work with women if he received at least wm + de. One way that an employer might deal with this situation is to hire a sex-segregated work force. If all employers responded this way (but had no taste for discrimination themselves), male and female workers would work in segregated settings and be paid the same wage rate.

28. If, however, discriminatory employee tastes are widespread or there is a relatively large number of women seeking jobs, some of the women will have to work with discriminating male workers. Those males will require higher compensation to induce them to work with women. The result will be a wage differential between male and female workers, on average, since some males will receive this higher pay, and women may be paid less to compensate.

29. There will be more variation in male workers’ wage rates than would otherwise be the case. Discriminating male workers who do not work with women do not need to be paid a wage premium, nor do nondiscriminatory males, regardless of whether or not they are employed with women.

30. Employee discrimination may also adversely affect the morale and productivity of discriminating male workers who are forced to work with women. This would make employers reluctant to hire women. If employers did hire women under such circumstances, they would pay them less to compensate for the reduction in the productivity of the discriminating male employees. In a sense, a woman’s marginal productivity is lower than a man’s because adding her to the work force causes a decline in the productivity of previously employed male workers. Adding another male causes no such decline in output.

31. Employee discrimination may also reduce the productivity of women in comparison with men, if discriminating male employees are reluctant to teach their new female coworkers important skills. As a result the women would learn less and be less productive.

32. Customer Taste Discrimination If customers have tastes for discrimination against women, they will act as if there were nonpecuniary costs of purchasing a good or service from a women. This cost or discrimination coefficient can be called dc.

33. The discriminating customer behaves as if the full price of the good or service is p + dc, if provided by a woman but only p if sold by a man. Then at the going market price, women will sell less. So customer discrimination can result in potentially equally productive women being less productive (in terms of revenue) than comparable men. Women are therefore less desirable employees and will receive less pay. If such customer discrimination exists in some areas but not in others, occupational segregation may also result.

34. Statistical Discrimination Employers are constantly faced with the need to make decisions under conditions of incomplete information and uncertainty. They never know for certain how individuals will perform on the job or how long they will stay with the firm after being hired. Mistakes can be costly, especially when there are substantial hiring and training costs.

35. Suppose the firm believes that, on average, women are less productive or less stable than men. They realize that some women are more productive or more stable than some men. However, it may be very costly to invest the resources needed to distinguish the more productive or more stable workers. So the firm may only hire men or only hire a woman at lower wages. Thus, statistical discrimination against individual women occurs.

36. Productivity Distributions of Men as Perceived by a Hypothetical Employer Distribution males Productivity avg prod of males

37. Productivity Distributions of Women as Perceived by a Hypothetical Employer Distribution females Productivity avg prod of females

38. Distribution females males Productivity avg prod of femalesavg prod of males Productivity Distributions of Men & Women as Perceived by a Hypothetical Employer

39. Feedback Effects of Statistical Discrimination Suppose a firm believes that women are less stable workers. They, therefore, invest less firm-specific training in the women and assign them to jobs where turnover costs are minimized. Since the women do not receive the benefits of firm-specific training, they have less incentive to stay and are therefore more likely to leave. Since the employers perceptions have been confirmed, they see no reason to change their discriminatory behavior. If the firm had placed the women in positions that rewarded stability, the women might well have been stable workers.

40. Studies indicate that most of the difference in quit rates between men and women is explained by the types of jobs women are in and other individual characteristics. These findings suggest that when women are confronted with the same incentives to remain on the job in terms of wages, advancement opportunities, etc., a woman is no more likely to quit than a comparable male worker.

41. Overcrowding Regardless of the reason for gender segregation (socialization, personal preferences, labor market discrimination, etc.), the consequence may be a male-female pay differential. This will occur if demand (job opportunities) in the female sector is small relative to the supply of workers available for work.

42. Overcrowding Wage Wage Sfo Smo W0 W0 Df Dm Lf0 Labor Lm0 Labor F Occupations M Occupations Suppose that men and women are equally qualified for occupations F and M. Then the wages for those jobs will be the same (W0).

43. Overcrowding Wage Wage Smd Sfo Smo Wmd W0 W0 Df Dm Lf0 Labor Lmd Lm0 Labor F Occupations M Occupations If women are excluded from the M occupations, the reduced supply in those jobs results in higher wages.

44. Wage Sfo Sfd W0 Wfd Df Lf0Lfd Labor F Occupations Overcrowding Wage Smd Smo Wmd W0 Dm Lmd Lm0 Labor M Occupations In the F occupations, where women can get jobs, the supply of workers is increased and the wages fall.

45. Effect of Overcrowding on Productivity In the low-wage F sector, employers substitute labor for capital, producing in more labor-intensive ways. In the higher-wage M sector, employers economize on labor and produce in more capital-intensive ways. Since the workers in the F sector have less capital with which to work, their productivity is lower. Thus, potentially equally productive workers in the two sectors have different wages and different productivity levels.

46. Institutional Models Some firms hire workers from the outside labor market for entry level jobs. The remainder of the jobs are allocated internally by the firm as workers progress along well-defined promotional ladders, by acquiring job-related skills many of which are firm-specific. This situation is called an internal labor market. If it is believed that different groups of people (men/women or whites/blacks) differ in their productivity-related characteristics (such as quit or absenteeism rates), statistical discrimination is likely to result in their being channeled into different jobs.

47. According to the dual labor market model, there are primary jobs and secondary jobs. Primary jobs have high levels of firm-specific skills, and thus pay high wages, have good promotion opportunities, and long-term attachment between workers and firms. Secondary jobs have low levels of firm-specific skills, lower pay, fewer promotion opportunities, and high turnover rates. Men are more likely to be in primary jobs and women in secondary ones.

48. Once men and women are channeled into different types of entry jobs, the normal operation of the firm will lead to gender differences in productivity, promotional opportunities, and pay. This is called institutional discrimination.

49. Government Policy & Labor Market Discrimination • Government policies to combat labor market discrimination can be justified on at least two grounds. • Equity or Fairness • Efficiency

50. Equity Assuring equal treatment for all participants in the labor market regardless of gender, race, ethnicity, etc.