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ECON 139 SP 15 Antonovics 9 5 26 15 1 May 26 2015 Theories of Labor Market Discrimination Differences between groups in labor market outcomes do not necessarily imply discrimination There are two main theories of labor market discrimination Preference based discrimination Statistical discrimination Preference Based Discrimination Employer Discrimination Start from the supposition that men and women are equally productive Labor is the only factor of production However employers do not like hiring women and act as if there is an extra cost to hiring women VMPE WF 1 d Where d is the discrimination coefficient d may vary across firms Page 1 of 12 Firms that Do Not Discriminate d 0 Suppose WM WF A firm that does not discriminate will hire only women since they are cheaper The firm will hire women up to the point where the value of the marginal product of labor equals the wage VMPE WF Firms that Discriminate d 0 Psychological non mandatory cost associated with hiring women WF 1 d Hire only men if WF 1 d WM Hire only women if WF 1 d WM As d increases firms switched from hiring women only to men only Discrimination Lowers Profits On the previous slide note that discrimination lowers firms profits for two distinct reasons 1 Employers who hire women are hiring the wrong number of women if d 0 E0 and E1 2 Employers who hire men are paying higher wages Page 2 of 12 dc solves WF 1 dc WM Discrimination should not survive if markets are competitive Pi max means the highest possible profit Labor Market Equilibrium Nd 0 means number of woman that can be hired by non discriminating firm Page 3 of 12 Predictions 1 The wage differential between men and women depends on the number of women in the labor force 2 The wage differential between men and women depends on the number of firms that discriminate Preference Based Discrimination Employee Discrimination Whites do not like working with blacks and blacks are indifferent between working with whites and members of other racial groups