Lecture 8: Labor Market Discrimination

1. Lecture 8: Labor Market Discrimination Differences in earnings and employment opportunities may arise even among equally skilled workers employed in the same job simply because of the workers’ race, gender, national origin, sexual orientation, and other seemingly irrelevant characteristics. These differences are often attributed to labor market discrimination.

2. 1. The Discrimination Coefficient • Money, commonly used as a measuring rod, will also serve as a measure of discrimination. →If an individual has a " taste for discrimination," he must act as if he were willing to pay something, either directly or in the form of a reduced income, to be associated with some persons instead of others. →By using the concept of a discrimination coefficient (DC), it is possible to give a definition of a " taste for discrimination." It is parallel for different factors of productions, employers, and consumers.

3. A DC represent a nonpecuniary element in certain kinds of transactions, and it is positive or negative, depending on whether the nonpecuniary element is considered "good" or "bad". →Discrimination is commonly associated with disutility caused by contract with some individuals.

4. Discrimation : di , dj ,dk > 0 Nepotism : di , dj ,dk < 0 (親戚主義，裙帶關係) →This quantitative representation of a taste for discrimination provides the means for empirically estimating the quantitative importance of discrimination.

5. 2. Employer Discrimination There are two types of workers in the labor market: white workers and black workers. We assume that black and white workers are perfect substitutes in production, so that the production function can be written as: (8-1) Where q is the firm’s output, EWgives the number of white workers hired, and EB gives the number of black workers hired. A firm that does not discriminate will hire black workers up to the point where the black wage equals the value of their marginal product, or: (8-2)

6. Employment in a Discriminatory Firm The employer acts as if the black wage is not WB, but is instead equal to WB×(1+d), where d is the discrimination coefficient. The decision rule for an employer that discriminates against blacks is: Hire only blacks if WB×(1+d)<WW Hire only whites if WB×(1+d)>WW(8-3) →As long as black and white workers are prefect substitutes, firms have a segregated work force.

7. There are, therefore, two types of firms: “white firms,” and “black firms.” Employers who have small discrimination coefficients will hire only blacks; employers with large discrimination coefficients will hire only whites. Dollars Dollars WW WB(1+d1) WB(1+d0) WB VMPE VMPE Employment EB1 EB0 EB* Employment EW* (b) Black Firm (a) White Firm Figure 1. The Employment Decision of a Prejudiced Firm

8. Discrimination and Profits The relationship between the firm’s profits and the discrimination coefficient is illustrated in Figure 2. The most profitable firm has a zero discrimination coefficient and has profits of πmax dollars. This color-blind firm hires an all-black work force and EB* workers. Firms with slightly positive discrimination coefficients still have an all-black work force, but employ fewer black workers and earn lower profits.

9. At some threshold level of prejudice, given by the discrimination coefficient dW, the utility loss of hiring blacks is too large and the firm hires only whites. As a result, profits take a dramatic plunge (toπW dollars) because the firm is paying a much higher wage than it needs to. Because all white firms hire the same number of white workers (or EW*) regardless of their discrimination coefficient, all white firms earn the same profits.

10. Firms that discriminate lose on two counts: They are hiring the “wrong color” of workers and/or they are hiring the wrong number of workers. Dollars πmax Black Firms πW White Firms Discrimination Coefficient dW Figure 2. Profits and the Discrimination Coefficient

11. 3. Employee Discrimination The source of discrimination in the labor market need not be the employer, but might instead be fellow workers. Suppose that whites dislike working alongside blacks and that blacks are indifferent about the race of their coworkers. As we seen, white workers who receive a wage of WW dollars will act as if their wage rate is only Ww ×(1-d), where d is the white worker’s discrimination coefficient.

12. A color-blind profit-maximizing employer would never have an integrated work place. The employer would not hire both black and white workers because white workers have to be paid a compensating wage differential, yet they have the same value of marginal product as black. Hence, the employer will hire only whites if the white wage is below the black wage, and will hire only blacks if the black wage is below the white wage.

13. Unlike employer discrimination, however, employee discrimination does not generate a wage differential between equally skilled black and white workers. Color-blind employers hire whichever labor is cheaper. Note that employee discrimination does not affect the profitability of firms. Because all firms pay the same price for an hour of labor, and because black and white workers are perfect substitutes, there is no advantage to being either a black or a white firm.

14. 4. Consumer Discrimination If consumers have a taste for discrimination, their purchasing decisions are not based on the actual price of the good, p, but on the utility-adjusted price, or p ×(1+d),where d is the discrimination coefficient. As long as a firm can allocate a particular worker to one of many different positions within the firm, consumer discrimination may not matter much. If the firm cannot easily hide black workers from public view, however, consumer discrimination can have an adverse impact on black wages. A firm employing a black worker in a sales position will have to lower the price of the product so as to compensate white buyers for their disutility.

15. 5. Statistical Discrimination The concept of taste discrimination helps us understand how differences between equally skilled blacks and whites (or men and women) can arise in the labor market. It turns out that racial and gender differences will arise even in the absence of prejudice when membership in a particular group (for example, being a black woman) carries information about a person’s skills and productivity.

16. Statistical discrimination arises because the information gathered from the resume and the interview does not predict perfectly the applicant’s true productivity. The uncertainty encourages the employer to use statistics about the average performance of the group (hence the name statistical discrimination) to predict a particular applicant’s productivity. As a result, applicants from high-productivity groups benefit from their membership in those groups, while applicants from low-productivity groups do not.

17. 6. Measuring Discrimination How economists measure discrimination in the labor market. Suppose that we have two groups of workers, say, male and female. The average male wage is given by , while the average female wage is given by . One possible definition of discrimination is given by the difference in mean wages, or: (8-4)

18. A more appropriate definition of labor market discrimination compares the wages of equally skilled workers. To simplify the exposition, suppose that only one variable, schooling (which we denote by s), affects earnings. The earnings functions for each of the two groups can then be written as: Male earnings function: Female earnings function: (8-5) • The coefficient tell us by how much a man’s earnings increase if he gets 1 more year of schooling, while the coefficient gives the same statistic for a woman. The regression model implies that the raw wage differential can be written as: (8-6)

19. We can rewrite the raw wage differential as: • The Oaxaca Decomposition (8-7) Differential due to discrimination Differential due to difference in skills the second term in the equation arises because the two groups differ in their skills. The first term in the equation arises because of this differential treatment of men and women which is typically defined as discrimination. →The raw wage differential can be decomposed into a portion due to differences in characteristics between the two groups, and a portion that remains unexplained and that we call discrimination.

20. Dollars Men’s Earnings Function Women’s Earnings Function αM αF Schooling Figure 3. Measuring the Impact of Discrimination on the Wage