Both unequal and unfair treatment Lack of equal opportunity Pre-market discrimination –unequal opportunity to develop talents and abilities prior to employment (inferior schools, poor health services, gender gaps in college education)
Market Discrimination Equal capabilities given unequal: –job assignments –promotion –pay 3 areas of mkt discrimination: –prejudice –mkt power –imperfect information
Prejudice by Employers Taste for discrimination (Gary Becker) Willing to pay or to forgo income in order to avoid minority group Two groups, some employers discriminate against one of the groups. Implies minority group receives lower wages
Employers (cont.) Discriminators pay a higher wage to majority group Discriminating employers forgo profits (price of discrimination) Non-discriminating employers hire less expensive sources of labor
Implications Segregation of workers Competition should drive discriminators out of the market (if perfectly competitive industry or if competition for investment funds) If non-perfect competition, employers may continue to discriminate
Prejudice by Employees Employees prejudiced against other employees based on race/ ethnicity/ gender Implicitly erodes productivity of minority workers Minority managers under-perform because majority workers slack on the job Potentially a bigger problem than employer discrimination because profit and market forces do not help to fix this prejudice!
Prejudice by Consumers Suppose that consumers prefer to buy from majority (or like) group If this is true then firms with more employees matching consumer ethnicity/ race/ gender perform better in terms of sales or profits Again, firm profit incentives work towards re-enforcing discrimination!
Profits as a Deterrent to Discrimination Prejudice by Employers –Mkt forces drive out discrimination in some cases –Difficult to regulate (ex. Referral Hiring) Prejudice by Employees –Mkt forces create discrimination –More difficult to regulate Prejudice by Consumers –Mkt forces create discrimination –Even more difficult to regulate
Discrimination by Market Power Discrimination is profitable Monopsonistic Discrimination (Joan Robinson proceeds Becker) Minority workers may earn less if the supply of minority labor is more inelastic even if productivity is identical! Minorities work at lower wages.
Discrimination by Market Power (cont) Unions –Craft unions and other licensing organizations limit opportunities for entry into the market. –Can be segregation of labor market entry because of lack of entry opportunities
Imperfect Information (Statistical Discrimination) Productivity/ skill/ training are not perfectly observable Firms try to infer individual characteristics from years of education, degrees earned, GPA, and other observable variables Graduating from Fordham tells an employer something about you; partly inferred from experience with other Fordham graduates
Statistical Discrimination, Ex #1 Suppose that you have two identical workers except that one has a Fordham degree and one has a Harvard degree. If the firms experience tells them that the average productivity of a Harvard worker is greater than the average productivity of a Fordham worker who should the firm hire?
Statistical Discrimination, Ex #2 If black workers are (rightly or wrongly) believed to be less productive than white workers should the firm place more employment ads in white neighborhoods or black neighborhoods?
Statistical Discrimination, Ex #3 Suppose equal average productivity between two groups. But group A has a larger variance in productivity than group B. If firms are risk averse, should they target group A or group B workers?
Women and Statistical Discrimination Is this a form of statistical discrimination? Two wage plans are discussed with a potential new woman employee who is 25 years old: –Low initial pay but a big raise in 15 years –High initial salary but very slow wage growth –The firm only hires women who prefer the first option
Where do firms get their information? Experience –Limited data set of past experiences –Their inference from the data may be right or wrong Stereotypes –Can cause firms to look for examples –If you monitor one group more closely than another you are likely to find more examples –If you stop only black drivers for speeding in order to look for drugs then you are likely to find that only black speeders use drugs!
Performance Equilibria If statistical discrimination occurs it can be a best response for the minority group to invest less in activities like education The marginal benefit of education for minority groups is lower in the presence of discrimination Even if firm beliefs are initially wrong the response of the discriminated group can make the beliefs self-fulfilling!