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 This implies that employers must pay white workers a compensating wage differential to work with blacks Segregated Workforce Firms can avoid these higher labor costs by hiring either only blacks or only whites Page 4 of 12 No Wage Differential Employers will hire whichever group is the cheapest Thus competition will eliminate any racial wage differential Preference Based Discrimination Customer Discrimination Consumers don t like buying goods made or sold by blacks Purchasing decisions based on utility adjusted price p d Consumer discrimination reduces the demand for goods and services made and sold by minorities Segregated workforce Firms have an incentive to place minority workers in jobs with little customer contact No wage differential No wage differential between blacks and whites as long as firms can hide black workers Statistical Discrimination Basic Logic Two people identical resumes One of the applicants is a man and the other is a woman Statistical evidence indicates that women are more likely to quit their jobs than men Quits hurt employer because disrupt teamwork etc Thus the employer will hire the man Statistical discrimination arises because firms do not have complete information about worker productivity Same logic as racial profiling The Impact of Statistical Discrimination on Wages Employers observe T a noisy productivity measure Can be thought of as a test score Ta is the average productivity test score for group Wages based on what you observe about individual and what you know to be true about their group W pT 1 p Ta p measures the correlation between the test score and productivity Two Ways in Which Statistical Discrimination Leads to Wage Inequality CASE 1 The average productivity varies across groups but p is the same In this picture blacks are less productive than whites on average Tw Tb Even if blacks and whites have the same T blacks paid lower wages Page 5 of 12 CASE 2 The average test score is the same across groups but p differs In this picture firms have less accurate information about blacks than about whites pb pw High scoring blacks earn less than high score whites Low scoring blacks earn more than low scoring whites Page 6 of 12 Should Employers Use Group Averages From the standpoint of profit maximization yes From the standpoint of efficiency yes maybe From a moral legal standpoint no And the very process of using the group average to infer productivity can lead to self fulfilling prophecies Example women and the decision to leave the labor force to have children Measuring Discrimination How do you measure or quantify discrimination One possible definition of discrimination is to look at the difference in the mean wage between two groups say men and women This measure is unappealing because there are many reasons why men earn may more than women differences in education experience occupation A more appropriate measure would compare the wages of equally skilled workers Oaxaca Decomposition To simplify the exposition let s suppose that only one variable schooling affects earnings Male earnings function WM M MS Female earnings function WF F FS Can estimate these parameters by running a regression tells how much an individual s wage increases as the result of an additional year of schooling tells the level of the earnings profile for each group So that the difference in the average wage of men and women becomes Page 7 of 12 Diagram of the Oaxaca Decomposition Page 8 of 12 ECON 139 SP 15 Antonovics 9 5 28 15 9 May 28 2015 Critique of the Oaxaca Decomposition n The Oaxaca decomposition may overstate the extent of discrimination if We cannot control for all of the relevant observable differences between men and women In this case part of the wage difference between men and women is due to differences in skills that we cannot measure Omitted variable bias n The Oaxaca decomposition may understate the extent of discrimination If differences in observable characteristics are themselves be the result of discrimination In this case discrimination shows up as differences in skills the s s Endogeneity bias Many discrimination law suits in the U S court system use the Oaxaca decomposition explained unexplained Page 9 of 12 Summary Sources of Racial and Gender Wage Gaps A large part of the black white wage gap can be explained by differences in skills A large part of the female male wage gap can be explained by labor market experience Two explanations l Because female lack of experience they get lower