Labor Market Discrimination Chapter 14 Labor Market Discrimination McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

1. Gender and Racial Differences 6/15/2018 1. Gender and Racial Differences 14-2

Ratio of Female to Male Hourly Earnings 6/15/2018 Ratio of Female to Male Hourly Earnings The ratio of female to male hourly earnings rose substantially from the late 1970s to the early 1990s and has leveled off since then. The wage gap has decreased because the skills of women have risen, the industrial and occupational distributions have shifted in favor of women, the decline in unionism has decreased male wages more than female wages, and discrimination has declined. 14-3

Ratio of African-American to White Weekly Earnings 6/15/2018 Ratio of African-American to White Weekly Earnings The ratio of African-American to white hourly earnings has not changed much over the past 4 decades. 14-4

6/15/2018 Unemployment Rate The unemployment rate difference between white female and white males has narrowed over time. African-Americans have an unemployment rate that is consistently twice as great of those of whites. 14-5

Occupational Distribution by Gender, 2011 6/15/2018 Occupational Distribution by Gender, 2011 Women are 47 percent of the employed labor force. Women are over-represented in lower paying occupations such secretaries and elementary school teachers. Women have made significant gains in recent decades into higher paying occupations. 14-6

Occupational Distribution by Race, 2011 6/15/2018 Occupational Distribution by Race, 2011 African Americans are 11 percent of the employed labor force. African Americans are over-represented in lower paying occupations such janitors, cleaners, nursing aides, and orderlies. 14-7

Educational Attainment, 20010 6/15/2018 Educational Attainment, 20010 White males are more likely to have a college education than females and African-Americans among persons 25 and older. The quality of education received by African-Americans has generally been inferior to that acquired by whites. 14-8

Earnings by Education, Race, and Sex, 2010 6/15/2018 Earnings by Education, Race, and Sex, 2010 Full-time women and black workers earn less than white males at each educational level. Black males tend to earn more than black and white females. 14-9

Non-Discrimination Factors 6/15/2018 Non-Discrimination Factors Raw racial and gender differentials on earnings, occupational distribution, and unemployment data must be interpreted with caution. Factors other than discrimination such as individual choice may play a role. 14-10

2. Discrimination and Its Dimensions 6/15/2018 2. Discrimination and Its Dimensions 14-11

6/15/2018 Discrimination Discrimination exists when female or minority workers—who have the same abilities, education, training, and experience as white male workers—are accorded inferior treatment with respect to hiring, occupational access, promotion, wage rate, or working conditions. 14-12

Types of Discrimination 6/15/2018 Types of Discrimination Wage discrimination Female or black workers are paid less than male (white) workers for doing the same work. Employment discrimination Blacks and women bear a disproportionate share of unemployment. Occupational job discrimination Blacks and women are arbitrarily restricted from entering some occupations, even though they are as capable as male (white) workers. 14-13

Types of Discrimination 6/15/2018 Human capital discrimination Blacks and women have less access to productivity-increasing opportunities such as formal schooling or on-the-job training. Post-market discrimination Occurs after a person has entered the labor market Wage discrimination Employment discrimination Occupational job discrimination Pre-market discrimination Occurs before a person has entered the labor market 14-14

3. Taste for Discrimination Model 6/15/2018 3. Taste for Discrimination Model 14-15

Taste for Discrimination 6/15/2018 Taste for Discrimination Becker’s taste for discrimination assumes that discrimination is a “taste” for which a discriminator is willing to pay. Society’s taste for discrimination implies that it is willing to forego output and profits as the price of discrimination. Tastes for discrimination arise from sources: Employers Consumers Employees 14-16

Discrimination Coefficient 6/15/2018 Discrimination Coefficient If black and white workers are equally productive, a non-discriminatory employer will randomly hire black and white workers if the wages are the same. The strength of a employer’s prejudice against black workers is measured by the discrimination coefficient--d. For prejudiced employers, the cost of hiring a black worker is the worker’s wage (Wb) plus the psychic cost of hiring a black worker (d). 14-17

Firm’s maximization Problem  

Market demand  

Outcomes of the model  

Discrimination Coefficient 6/15/2018 Discrimination Coefficient Prejudiced employers will be indifferent between white and black workers when: Ww = Wb + d A given employer will hire black workers, if the market white-black wage gap is greater than d. 14-21

Wage Discrimination in the Labor Market 6/15/2018 Wage Discrimination in the Labor Market Quantity of Black Workers Wb/ Ww The demand for black workers is formed by arraying employers from lowest for highest discrimination coefficients. Sb The horizontal portion of the demand curve is composed of non-discriminating employers. 1.00 Db 0.8 Q The downward sloping portion consists of discriminating employers. The quantity supply of black workers supplied rises as the black-white wage ratio rises. The intersection of the supply and demand for black workers determines the black-white ratio and the number of black workers employed. 14-22

Generalizations 6/15/2018 A change in the shape or location of the demand curve will alter the black-white wage ratio. A decrease in discrimination will lengthen the horizontal portion of the demand curve and reduce the slope of the downward sloping portion. This will raise the black-white wage ratio. The size of the black-wage gap varies directly with the supply of black labor. If the supply of black labor is small that it intersected the horizontal portion on the demand curve, then no wage gap would exist. 14-23

6/15/2018 Winners and Losers White workers gain since they are protected from competition from black workers. Black workers lose since they receive lower wages. Employers that discriminate lose since they incur higher wage costs than if they did not discriminate. Competition will decrease discrimination as lower cost non-discriminating firms will drive discriminating firms out of business. 14-24

Worker and Customer Discrimination Assume some workers of a group are discriminating against b group and require a premium to work with them. Similar to the case above and leads to segregation. Assume customer discriminate against b workers and get lower utility for the services they receive from b workers. In this case no arbitrage because customers bear the cost of discrimination.

4. Theory of Statistical Discrimination 6/15/2018 4. Theory of Statistical Discrimination 14-26

Statistical Discrimination 6/15/2018 Statistical Discrimination Statistical discrimination exists when employers base decisions upon the average characteristics of the group to which they belong. Ex: Young males pay higher insurance rates since they have more accidents on average. Employers base hiring decisions on imperfect predictors of productivity. Age, education, and experience provide some information about productivity. 14-27

Statistical Discrimination 6/15/2018 Statistical Discrimination Employers may use race and gender as well since they also provide information. Gender may provide information on job commitment since women on average have higher turnover rates. Race may provide some information about schooling quality since blacks on average go to inferior schools than whites. 14-28

6/15/2018 Implications Employers are not harmed when they practice statistical discrimination. They gain since they minimize hiring costs. Employers are not being malicious in practicing this type of discrimination. The problem is that workers who have characteristics different from the average are harmed. Statistical discrimination will diminish if the average characteristics of the groups converge over time. Male-female turnover rates are converging. 14-29

6/15/2018 Question for Thought 1. Explain the following statement: “In the taste-for-discrimination model, discrimination is practiced even though it is costly to do so. But in the statistical discrimination model, it is clear that discrimination pays.” 14-30

5. The Crowding Model: Occupational Segregation 6/15/2018 5. The Crowding Model: Occupational Segregation 14-31

Occupation Crowding Dm Q2 Wm Q1 We Df Q1 We Q2 Wf 6/15/2018 Quantity of Labor Wage rate Dm Q2 Wm Q1 We Male Occs Df Quantity of Labor Wage rate Q1 We Female Occs Q2 Wf By crowding women into a narrow set of “female” occupations, men will receive high wage rates of Wm in male occupations, while women will receive low wage rates of Wf in female occupations. Employers may practice job segregation if male (white) workers don’t like to work with female (black) workers. 14-32

Ending Discrimination 6/15/2018 Ending Discrimination Ending occupational crowding would enable females to enter male occupations. Raise the wage rates of women and lower the wage rates of men There would be a net gain to society as domestic output and efficiency would increase. 14-33

Index of Occupational Segregation by Gender 6/15/2018 Index of Occupational Segregation by Gender The index of segregation shows the percentage of women (men) who would have to change occupations for women to be distributed among occupations in the same proportions as men. The index of segregation by gender has fallen moderately over time. 14-34

Index of Occupational Segregation by Race 6/15/2018 Index of Occupational Segregation by Race The index of segregation by race has fallen moderately over time. 14-35

6. Cause and Effect: Nondiscriminatory Factors 6/15/2018 6. Cause and Effect: Nondiscriminatory Factors 14-36

6/15/2018 Rational Choice Some economists argue that part of the gender wage gap is the result of rational choices made by women. Women tend to have interrupted work careers due to childbearing. Due to their shorter work careers, it is rational for women to invest less in education and training. Their stock of human capital will deteriorate while they are out of the labor force. Occupational segregation may be due to women choosing occupations, such as nursing and teaching, with skills that are useful in home production. 14-37

6/15/2018 Rational Choice The wage gap may be the result of compensating wage differentials. Women may prefer safer jobs, less effort-intensive jobs, and shorter commute times. Women work fewer hours than men. More likely work part-time Full-time women work fewer hours than full-time men. 14-38

Discrimination as a Cause 6/15/2018 Discrimination as a Cause Some argue that women invest less in human capital because of discrimination. Women stay out of the labor force because of the low pay in the labor market. If discrimination declined, then more women may decide to remain single or childless. Sexual harassment may cause women to drop out of the labor force. 14-39

Evidence Male-female pay gap 6/15/2018 Evidence Male-female pay gap Researchers decompose the pay gap into the portion explained by differences in productivity characteristics and the portion unexplained (discrimination). Blau-Kahn find that two-thirds of the pay gap can be explained by differences in experience, industry, occupation, etc. Pay gap has been falling equally due to a rise in relative productivity characteristics of women and a decline in the unexplained gap. 14-40

Evidence Black-white pay gap 6/15/2018 Evidence Black-white pay gap Blau-Kahn find that 89 percent of the pay gap can be explained by differences in productivity characteristics. The pay gap has not changed much over time. The black-white difference in education has diminished and thus shrunk the gap. The payoff to education has risen which has expanded the gap. 14-41

6/15/2018 Controversy Economists differ on whether the unexplained portion over or understates the amount of discrimination. Economists differ on whether unobserved productivity characteristics favor men or women. Do the observed productivity characteristics (such as occupation) reflect discrimination? 14-42

6/15/2018 Question for Thought 1. “Wage differences between men and women do not reflect discrimination but rather differences in job continuity and rational decisions with respect to education and on-the-job training.” Explain why you agree or disagree. 14-43

7. Antidiscrimination Policies and Issues 6/15/2018 7. Antidiscrimination Policies and Issues 14-44

6/15/2018 Equal Pay Act of 1963 The Equal Pay Act of 1963 requires that men and women doing the same job be paid the same. Firms could avoid the law’s requirements by conducting employment discrimination (e.g., not hiring females for jobs held by males) . 14-45

6/15/2018 Civil Rights Act of 1964 The Civil Rights Act of 1964 outlaws both wage discrimination and employment discrimination. Applies to race, gender, color, religion, and national origin Applies to private employers, labor unions, and governments 14-46

6/15/2018 Executive Orders Executive orders in 1965 and 1968 attempted to eliminate discrimination by businesses holding government contracts. Firms with more than $50,000 of government contracts must develop affirmative-action programs. Firms must develop a plan to hire more women and minorities if the firm has a smaller of proportion of women and minorities than in the available labor force. These programs have been under legal and political attack. 14-47

Controversy Interventionist view 6/15/2018 Controversy Interventionist view The market has failed to eliminate discrimination. Minorities and women have been discriminated against in the acquisition of human capital. Current legislation against discrimination does not correct for the effects of past discrimination. More than equal opportunity must be given to close the current gap. 14-48

Have Anti-Discrimination Policies Worked? 6/15/2018 Have Anti-Discrimination Policies Worked? The empirical evidence on whether government policies have narrowed the gender and racial pay gaps is mixed. It is difficult to separate the effects of the laws from other factors that are changing. The affirmative-action laws did appear to have improved the employment opportunities for women and minorities in the 1970s but this progress ended in the 1980s. 14-49