Chapter 9 Labor Market Discrimination

Why is there wage dispersion?Different jobs (compensating wage

differentials)DiscriminationDifferent characteristics of workers:

AbilityRSchoolingChoices about work and leisure

Discrimination

What is discrimination?When workers earn different amounts even

if they do the same job and have the same ability.

Borjas: “where the costs and benefits of an economic exchange depend on the race and/or gender of the person involved in the exchange.”

White Black Hispanic

Male Female Male Female Male Female

% HS grad or more 85.3 87.1 81.9 82.5 58.2 62.5

% bachelor’s degree or more 29.9 28.3 18.0 19.0 11.8 13.7

LFPR 76.3 60.1 71.2 64.0 84.7 58.8

Unemployment Rate 3.7 3.6 7.9 6.7 4.6 5.5

Annual Earnings (in $1,000) 55.9 35.1 39.5 31.8 35.4 26.3

Annual earnings (among workers employed full-time, year-round) (in $1,000)

65.8 43.6 44.5 37.6 38.8 32.1

Table 9-1: various measures of human capital and labor market outcomes in the US labor market.

What is interesting about table 9-1?Difference in earning are due in part to

differences in labor supply: white man 59% more than white woman but if we compare only those who work full time the gap is 51%

Differences in earnings are due in part to differences in educational attaiment: 15% of white men do not have a HS diploma, 20% of black men and > 40% of hispanic men.

Look at college diplomas. If rate of return to schooling is between 7

and 9%, this could generate substantial wage differentials

Country 1979-1981 1994-1998

Australia 0.800 0.868

Canada 0.633 0.698

Finland 0.734 0.799

France 0.799 0.899

Germany 0.717 0.755

Ireland 0.745

Italy 0.833

Japan 0.587 0.636

New Zealand 0.734 0.814

Spain 0.711

Sweden 0.838 0.835

United Kingdom 0.626 0.749

United States 0.625 0.763

Table 9-2: international differences in Female/Male Wage ratios

DiscriminationSo, the truth is, we can’t explain all of the

differences in wages between men and women and across races.

So, maybe there is discrimination in the labor market.

There are several models of discrimination and ways to measure it. That’s what this chapter is about.

Models of discriminationThe perfectly competitive marketGary Becker’s theory of discriminationStatistical discriminationCore and Periphery jobs

Neoclassical Model of DiscriminationIf a market is perfectly competitive,

discrimination cannot exist for long.

ProblemThere is evidence of discrimination.Explore the EEOC webpage sometime.Hundreds of legal cases.Hundreds of stories:

The movie “North Country”Wal Mart

Gary Becker’s Taste for DiscriminationSo, Becker wants to explain why we might

see discrimination in a market, even if it is a competitive one.

He comes up with the notion of a “taste for discrimination” among:EmployersEmployeesCustomers

Taste for DiscriminationSuppose there are two types of workers in the

labor market: white workers and black workers.A competitive employer faces constant prices for

these inputs:Ww = wage rate for white workersWb = wage rate for black workersIf the employer is prejudiced against blacks, the

employer gets a disutility from hiring black workers.Employer will ACT as though the cost of a black

worker is:Wb(1+d) dollars.

d is the “discrimination coefficient”

ExampleSuppose that Wb = $10 per hourd = 0.5The employer will then act as if hiring a

black worker costs $15 per hour, a 50% increase in the cost.

The greater the prejudice, the greater the disutility from hiring blacks and the greater the discrimination coefficient.

NepotismSome employers (maybe black-owned

firms) might have a different type of prejudice: they PREFER to hire blacks

Think OprahThis type of behavior is called nepotismIt implies that an employer’s utility-

adjusted cost of hiring a favored worker equals Wb(1-n) dollars

They will act as if hiring a black worker is actually cheaper than it really is.

Employer DiscriminationAssume black and white workers are

perfect substitutes, so a firm’s production function looks like this:

q = f(Ew + Eb)The firm needs to decide which combination

of inputs to hire. Ew is number of white workers hired and Eb is number of black workers hired. The firm’s output just depends on the total number of workers hired. Not their race.

Any differences that arise in the economic status of the two groups cannot be attributed to skill differencences.

Assume first: No PrejudiceBoth black and white workers have same

VMPWw = wage of white worker and Wb =

wage of black workerProfit maximization? Hire the cheapest

worker. If Wb < Ww, hire black workers until Wb =

VMPe

See figure 9-1.

Assume Prejudicial FirmEmployer acts as if the black wage is not Wb but

is Wb(1+d).

Now firm hires the worker with the lowest utility-adjusted price.

Decision rule:

Hire only black workers if Wb(1+d) < WwHire only white workers if Wb(1+d) > Ww

Big Implication: Segregated Workforce even under competitive conditions!

Consequences of Employer DiscriminationSee Figure 9-2.

“white firms” pay more and hire less“black firms” who are still discriminatory, hire

fewer black workers depending on size of d

Labor Market EquilibriumSee figure 9-4Initially assume Wb > Ww: no firm will hire

black workersWb falls.Note: even where Wb = Ww demand is

zero. Why?R is a “threshold” where some firms have a

low enough d to begin to hire black workers.

Note that the equilibrium black-white wage ratio (Wb/Ww)* occurs BELOW the point where the black white wage ratio = 1. Employer discrimination generates a gap between equally skilled black and white workers.

Employee DiscriminationSuppose that whites dislike working alongside blacks and

blacks are indifferent about the race of their coworkers.These white workers will act as if their wage (Ww) is only

Ww(1-d) where d is the white worker’s discrimination coefficient.

Example: Ww = $15/hour. In a discriminating worker’s view, an integrated firm’s wage is less than $15/hour so that firm will have to pay more to get white workers to work there.

But it does not pay to do this if you are a color-blind firm… Thus this model implies a segregated workforce as well.

Note however, that a race wage gap is NOT generated by this behavior.

Why? Explain.

Customer DiscriminationIf customers have a taste for

discrimination, their purchasing decisions are not based on the actual price of a good, p, but on the utility-adjusted price or p(1+d), where d is the discrimination coefficient.

If whites dislike purchasing from black sellers, customer discrimination reduces the demand for goods and services sold by minorities.

Can you think of a case in which you have “customer discrimination”?

Customer Discrimination and the wage gapAdverse effect on black wages when the

firm cannot easily hide its black workers from public view.

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.

The wage of black workers will then fall because black workers have to compensate the employer for the loss in profits.

Empirical StudyRecent survey tried to get at how the interaction

between the customers’ racial background and the extent of the contact between workers and customers alters the hiring decisions of firms.

Table 9.3: 58% of newly hired workers are black in contact firms where most customers are black.

9% of newly hired workers are black in contact firms where most customers are white.

Difference between the two suggests that customer discrimination reduces the fraction of blacks among newly hired workers by 49.0 percentage points.

Need to compare to a control groupImportant to note that the black employment gap

between these two types of firms may be attributable to other factors. What if contact firms with mainly black customers are in black parts of a city… they’d be more likely to hire black workers.

Firms in survey where workers don’t have much contact can serve as a control group.

Fraction of newly hired workers who are black falls from 46.6 percent to 12.2 percent as the customer base shifts from black to white. … this is a 34.4 percentage point difference.

Because we can’t blame this on customers, this is what we’d expect to happen even if we didn’t have customer discrimination.

Diff in Diff ExampleOver ½ of Firm’s Customers are Black

Over 75% of Firm’s Customers are White

Difference

Type of Firm

Contact between customers and workers

58.0% 9.0% 49.0%

No contact between customers and workers

46.6% 12.2% 34.4%

Difference-in-differences

-- -- 14.6

Model 3: Statistical DiscriminationRacial and gender differences can arise in

perfectly competitive situations even in the absence of prejudice when membership in a particular group carries information about a person’s skills and productivity.

Job searches are expensive, employers use all info available to them. Statistical averages are part of that.

Example: statistical averages about women and maternity leaves etc.

Illegal to apply this information unless it is a BFOQ

Experimental Evidence on DiscriminationHiring audits:

Experiments are cleverly designed to induce employers to reveal preferences about hiring women and minorities.

Sent out about 5,000 fake resumes in response to about 1,300 job ads that actually appeared in Boston and Chicago newspapers.

Included black sounding and white sounding names

Holding skills in the resume constant, the applicants with white-sounding names got about 1 callback for every 10 resumes sent whereas the black-sounding names got 1 callback for every 15 resumes sent.

Measuring Discrimination∆W = Wm – Wf where W indicates the average

This definition is not great because it compares apples to oranges.

There are many factors, other than discrimination that generate wage differentials between groups. Number of hours worked in the workplace, for example is one simple measure.

Other factors in the gender wage gap?

Better measureWe would like to adjust the “raw” wage differential given

above for differences in skills (and even choices to the extent that we can measure them) between men and women.

Do this by estimating regressions that relate the earnings of men or women to a wide array of socioeconomic and skill characteristics:

Male earnings function: Wm = αm + βmSmFemale earnings function: Wf = αf + βfSf

α tells us how much an employer values men/women with 0 years of schooling

β tells us by how much a man’s or woman’s wage increases if he/she gets one more year of schooling

If employers value the education acquired by men and women equally, the coefficients should be equal

Wage differential ∆W = αm + βmSm - αf - βfSf

Oaxaca DecompositionWhat we would like to do is be able to tell

how much of the differences in wages is due to differences in skills between men and women and the portion of the “wage gap” that is due to discrimination.

We can “decompose” the above equation into two parts (using a little algebra and a little trick –add and subtract the term βm x Sf):

∆W = (αm – αf) + (βm – βf)Sf + βm(Sm – Sf)

What does that mean???∆W = (αm – αf) + (βm – βf)Sf + βm(Sm – Sf)

(αm – αf) + (βm – βf)Sf : portion due to discriminationthis term will be positive if either employers value a

man’s schooling more than they value a woman’s schooling (βm – βf), or if employers just pay men more than women for any level of schooling (αm – αf)

βm(Sm – Sf): portion due to differences in skillsthis term is zero of men and women have the same

average schooling.

See figure 9-6

Validity of OaxacaDepends largely on whether we have

controlled for ALL of the dimensions in which the skills of the two groups differ…

Wage equations tend to get to be like the “kitchen sink” and even then we have unknowns…

What CAN we control for?Schooling, years of labor market experience,

sex, race, region, union status, occupation, industry, hours worked…? Number of children? Age of first birth? Marital status.

WHAT CAN’T we control for?Effort. Motivation. Quality of schooling. Major?

Section 9-11: Determinants of the Female-Male Wage Ratio

Controls for Differences in Education, Age, Sex and Region of Residence

Controls for Differences in Education, Age, Sex, Region of Residence, and Occupation and Industry

Raw log wage differential

-0.286 -0.286

Due to difference in skills

-0.008 -0.076

Due to discrimination

-0.279 -0.211

Table 9-6Women earned about 28.6 percent less than men in

1995Difference in education, age, and region of residence

generate only a trivial wage gap between men and women, about 0.8 percent

Even after adjusting for occupation and industry, differences in observable socioeconomic characteristics between the two groups generate only a 7.6 percent wage gap.

What is this Oaxaca decomposition missing? Labor market experience. Women tend to have kids and drop out of the labor market. By the late 1980s, the typical woman worked only 71 percent of her potential years whereas men worked 93 percent.

Labor market attachmentIf drop out of labor market, lower payoff to human

capital investmentLower gain in wages due to experienceHuman capital depreciationStudy of University of Michigan law school classes of

1973 and 1975.Fifteen years after graduation, male attorneys earned

$141,000 annually as compared to $86,000 for female attorneys.

2/3 of this wage gap is due to differences in work histories.

If a female attorney worked part-time for 3 years her earnings were reduced by 17% over her lifetime.

Which came first? And what should we do?Low wages due to less LM attachment or Less LM attachment due to low wages?

Are family friendly policies the answer? Are they politically feasible?

Last Discrimination Model: Bergman’s Occupational CrowdingOccupational Segregation

Blue tribe v. Red tribe and the hunt for berries

Economics of SpecializationBecker – household economics.Specialize in what you’re good at, then

trade.If women earn less, they should work at

home while men work for a wage in the market.

Conclusion and the Extra Hour AssignmentOne of my papersOne of John’s papersOne of our coauthored papers

Choose one, read it, discuss it.