Differences in earnings and employment opportunities may arise even among equally skilled workers em

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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.

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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.

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• 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.

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• Discrimation di , dj ,dk gt 0
• Nepotism di , dj ,dk lt 0
• (????,????)
• ?This quantitative representation of a taste for
  discrimination provides the means for empirically
  estimating the quantitative importance of
  discrimination.

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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 firms output, EW gives 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)
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• Employment in a Discriminatory Firm
• The employer acts as if the black wage is not
  WB, but is instead equal to WB (1d), where d is
  the discrimination coefficient. The decision rule
  for an employer that discriminates against blacks
  is
• Hire only blacks if WB (1d)ltWW
• Hire only whites if WB (1d)gtWW
  (8-3)
• ?As long as black and white workers are prefect
  substitutes, firms have a segregated work force.

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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(1d1)
WB(1d0)
WB
VMPE
VMPE
Employment
EB
EB1
EB0
Employment
EW
(b) Black Firm
(a) White Firm
Figure 1. The Employment Decision of a Prejudiced
Firm
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• Discrimination and Profits
• The relationship between the firms profits
  and the discrimination coefficient is illustrated
  in Figure 2. The most profitable firm has a zero
  discrimination coefficient and has profits of
  pmax 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.

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• 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 (topW 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.

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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
pmax
Black Firms
pW
White Firms
Discrimination Coefficient
dW
Figure 2. Profits and the Discrimination
Coefficient
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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
  workers discrimination coefficient.

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• 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.

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• 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.

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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 (1d),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.

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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 persons
  skills and productivity.

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Statistical discrimination arises
because the information gathered from the resume
and the interview does not predict perfectly the
applicants 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 applicants productivity. As a result,
applicants from high-productivity groups benefit
from their membership in those groups, while
applicants from low-productivity groups do not.
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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)

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• 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 mans
  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)

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• The Oaxaca Decomposition

We can rewrite the raw wage differential as
(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.
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Dollars
Mens Earnings Function
Womens Earnings Function
aM
aF
Schooling
Figure 3. Measuring the Impact of
Discrimination on the Wage