ECON 139 set 9

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ECON 139 set 9

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Lecture Note
University of California, San Diego
Econ 139 - Labor Economics

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Page 1 of 12 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 ECON 139 SP ‘15 Antonovics 9 5-26-15 1 Page 2 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 3 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 4 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.

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