CH. 12: GENDER, RACE, AND ETHNICITY IN THE LABOR MARKET Chapter objectives:  Document levels and trends in earnings differentials by gender and race.  Provide economic theories of wage discrimination.  Review evidence on whether earnings differentials are due to discrimination

Source: 2000 Economic Report of the President

2000 Economic Report of the President: A recent study using longitudinal data from the late 1980s found that about one-third of the pay gap was explained by differences in the skills and experience that women bring to the labor market. about 28 percent of the gap was due to differences in the industries and occupations in which men and women worked and in their union status. Accounting for these differences raises the ratio of female to male median wages for the late 1980s from about 72 percent to about 88 percent, leaving around 12 percent unexplained.

2000 Economic Report of the President: Even as several beneficial trends have tended to boost women’s wages relative to men’s and helped narrow the male-female wage gap, two major trends have worked simultaneously to widen it. increases in the pay premium for high skills (education/experience) Rising disparity in earnings across occupations (wages in “male” occupations are rising faster).

2000 Economic Report of the President:

Economic Theories of Discrimination Employer Discrimination Employee Discrimination Customer Discrimination Monopsonistic Discrimination

Employer Discrimination Employer behaves as if minority worker’s true MRP is MRP-d where d is measure of employer prejudice against minority. Firm pays for discrimination in the form of lower profits (CBGE).

Employer Discrimination  Non-discriminating employers generate horizontal portion of demand curve.  Discriminating employers generate downward sloping portion of demand curve.  Over time, non- discriminating employers should drive discriminating employers out of business.

Employer Discrimination Statistical discrimination. Each worker’s productivity is measured with some error: true productivity = measured productivity + error If expected value of error depends on demographic group, can use group status to improve estimate of productivity. As variance of error within a group rises, the value of discriminating on basis of group status is reduced. Profitable to firm and may persist.

Employer Discrimination Monopsonistic discrimination. If search costs create upward-sloping labor supply curves to individual employers, and if discrimination raises the search costs of certain groups of workers, monopsonistic behavior creates wage differentials among otherwise identical workers. (Similar to argument developed in chapter 10.) Profitable for firm & may persist.

Employee Discrimination Employees from majority work dislike working with the minority group. Employee discrimination generates supply-related behavior that might cause employers to segregate their plants by race or sex if possible. If not, wage differentials arise as a result of the need of employers to retain workers in the majority group. Could be profitable for firm and may persist.

Customer Discrimination MRP for minority group is reduced because customer is willing to pay higher price for product when provided by majority group. Customers pay for prejudice in form of higher prices. Profitable for firm and may persist.

Measuring Discrimination The Blinder-Oaxaca Decomposition Y1=a1 + b1*x1 Y2=a2 + b2*x2 Y1-Y2 = EXP + UNEXP where EXP = (x1-x2)*b1 UNEXP = (a1-a2) + (b1-b2)*x1