MSU Discrimination in the Labor Market Discussion

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Chapter 9
Labor Market Discrimination
“God, what gorgeous staff I have. I just can’t understand those
who have ugly people working for them. I really can’t. Just call me
a pathetic aesthetic”
-Jade Jagger
(Mick’s Daughter)
2
Introduction
Discrimination occurs when the marketplace takes into account
such factors as race and sex when making economic exchanges.
©McGraw-Hill Education
3
Race and Gender in the Labor Market
Men earn more than women, and whites usually earn more than
nonwhites.
Differences in educational attainment between whites and
nonwhites account for a portion of the wage differential.
©McGraw-Hill Education
4
The Discrimination Coefficient
Taste discrimination translates the notion of racial prejudice.
• Racial prejudice causes employers to blindly perceive the costs of
hiring blacks as being higher than the true cost.
• Even though it costs wb dollars to hire one
person-hour of black labor, the employer acts as
if it costs wb(1+d) dollars, where d, d>0, is the
discrimination coefficient.
©McGraw-Hill Education
5
Employer Discrimination
• Implication of the Becker model
If blacks and whites are perfect substitutes, employers
have a segregated work force.
• Even non-discriminating employers have a segregated
work force, as they employ all black workers
Discrimination does not pay.
• Employers hire the wrong type of worker and/or they hire
the wrong number of workers.
©McGraw-Hill Education
6
The Employment Decision for a Firm That Does Not
Discriminate
If the market-determined
black wage is less than the
white wage, a firm that
does not discriminate will
hire only blacks. It hires
black workers up to the
point where the black wage
equals the value of
marginal product of labor,
E*B.
©McGraw-Hill Education
7
The Employment Decision for a Prejudiced Firm
Firms that discriminate can be either white firms (if the discrimination coefficient is very high) or
black firms (if the discrimination coefficient is relatively low). A white firm hires white workers up
to the point where the white wage equals the value of marginal product. A black firm hires black
workers up to the point where the utility-adjusted black wage equals the value of marginal
product. Firms that discriminate hire fewer workers than firms that do not discriminate.
©McGraw-Hill Education
8
Profits and Discrimination
Discrimination reduces
profits in potentially two
ways. A discriminatory firm
that hires only white
workers will hire too few
workers at a very high
wage. Even a
discriminatory firm that
only hires black workers is
harmed by its actions as it
hires too few workers.
©McGraw-Hill Education
9
The Black-White Wage Ratio in the Labor Market
Employer discrimination generates a wage gap between equally
skilled black and white workers.
The quantity demanded for black labor increases as the blackwhile wage ratio falls.
©
2016 McGraw-Hill
©McGraw-Hill Education
10
Determination of Black/White Wage Ratio in the
Labor Market
If the black-white wage ratio is very
high, no firm in the labor market will
want to hire blacks. As the blackwhite wage ratio falls, more and more
firms are compensated for their
disutility and the demand for black
workers rises. The equilibrium blackwhite wage ratio is given by the
intersection of supply and demand,
and equals (wB/wW)*.
©McGraw-Hill Education
11
Determination of Black/White Wage Ratio in the
Labor Market
If some firms prefer to hire blacks,
they would be willing to hire blacks
even if the black-white wage ratio
exceeds 1. If the supply of blacks is
sufficiently small, it is then possible
for the black-white wage ratio to
exceed 1.
©McGraw-Hill Education
12
Employee Discrimination
Employee discrimination does not generate a wage differential
between equally skilled black and white workers.
Employee discrimination does not affect the profitability of
firms.
Work places will be segregated
©
2016 McGraw-Hill
©McGraw-Hill Education
13
Customer Discrimination
If customers discriminate, their perceived price of a good is
utility-adjusted with a discrimination coefficient.
When a firm cannot hide black workers, customer discrimination
can have an adverse effect on black wages.
©
2016 McGraw-Hill
©McGraw-Hill Education
14
Statistical Discrimination
Statistical discrimination is based on treating an individual on the
basis of membership in a group and knowledge of that group’s
history.
©
2016 McGraw-Hill
©McGraw-Hill Education
15
The Impact of Statistical Discrimination on Wages
The worker’s wage depends not only on his own test score, but also on the mean test score of
workers in his racial group. (a) If black workers, on average, score lower than white workers, a
white worker who gets a score of T* earns more than a black worker with the same score. (b) If
the test is a better predictor of productivity for white workers, high-scoring whites earn more
than high-scoring blacks, and low-scoring whites earn less than low-scoring blacks.
©McGraw-Hill Education
16
Measuring Discrimination
One possible measure of discrimination is the difference in mean
wages.
A better measure would compare the wages of equally skilled
workers.
Oaxaca decomposition: a technique that decomposes the raw
wage differential into a portion related to a difference in skills
and a portion attributable to labor market discrimination.
©
2016 McGraw-Hill
©McGraw-Hill Education
17
Measuring the Impact of Gender Discrimination on
the Wage
The average woman has sF years
of schooling and earns w–F. The
average man has sM years of
schooling and earns w–M. Part of
the wage differential arises
because men have more
schooling than women. If the
average woman was paid as if she
were a man, she would earn w*F.
A measure of discrimination is
then given by w*F–w–F.
©McGraw-Hill Education
18
Policy Application: Determinants of the White-Black
Wage Ratio
There has been an upward trend in the wages of blacks in recent
years.
This has been attributed to increases in the quality and quantity
of black schooling.
Government programs have positively affected black wages.
©McGraw-Hill Education
19
The Oaxaca Decomposition of the Black-White Wage
Differential, 1995
Controls for Differences in Controls for Differences in
Education, Age, Sex, and
Education, Age, Sex,
Region of Residence
Region, and Occupation
and Industry
Raw log wage differential
-0.211
-0.211
Due to differences in skills
-0.082
-0.144
Due to discrimination
-0.134
-0.098
Source: Joseph G. Altonji and Rebecca M. Blank, “Race and Gender in the Labor Market,” in Orley Ashenfelter
and David Card, editors, Handbook of Labor Economics, vol. 3C, Amsterdam: Elsevier, 1999, Table 5. The log
wage differential between any two groups can be interpreted as being approximately equal to the percentage
wage differential between the groups.
©McGraw-Hill Education
20
The Trend in the Black-White Earnings Ratio, 19672012
©McGraw-Hill Education
21
Male Labor Force Participation Rates, by Race, 19552010
©
2016 McGraw-Hill
©McGraw-Hill Education
22
The Decline in the Labor Force Participation of Blacks
and the Average Black Wage
©McGraw-Hill Education
23
Discrimination Against Other Groups
Differences in wages can be linked to varying educational
attainment.
Less skilled workers earn less, just as human capital theory
proposes.
Asians tend to earn more than white, mainly due to schooling.
©
2016 McGraw-Hill
©McGraw-Hill Education
24
The Trend in the Earnings Ratio of Hispanics and
Asians, 1974-2012
©McGraw-Hill Education
25
Policy Application: Determinants of the Male-Female
Wage Ratio
Occupational crowding has segregated women into particular
occupations where the return to education is lower.
Human capital is more profitable the longer the payoff period.
Women are better off if they enter occupations in which their
skills do not deteriorate during the years they spend in the
household sector.
©
2016 McGraw-Hill
©McGraw-Hill Education
26
Trend in the Female-Male
Earnings Ratio, 1960-2012
©McGraw-Hill Education
27
Discrimination was a big issue in the United States before the passage of the civil rights act in the
1960s. However, after the passage of the civil rights act and a few other national laws that made
discrimination illegal, it slowly began to fade away. In recent years there have been some big talks
about the gender pay gap, the gender pay gap is that women on average earn around 80 cents for every
dollar a man earns. But, in 1963 President Jon F Kennedy signed into law the equal pay act. This act
banned wage discrimination across sex. This means outside of exceptions you must pay men and
women the same wage for the same job. A couple of exceptions to this rule are generally applied to
those who have worked longer than newer employees and receive a higher wage. The argument made
nowadays is the average wage. This means all the wages averaged out across men and women. The
counter-argument to that is usually pointed out that men often have higher-paying positions than
women, such as CEOs or CFOs, it is also a fact that men also work longer hours as well. However, there
may yet be some discrimination in the economy, a possible example could be charging a teenager or an
older person more in car insurance. This is usually done because of the higher risk of accidents
associated with new drivers and older drivers, but the textbook pointed out that this could be possibly
customer discrimination. You are charging certain age groups higher than others, and that could
warrant an argument for discrimination.
Discrimination was a big issue in the United States before the passage of the civil rights act in the
1960s. However, after the passage of the civil rights act and a few other national laws that made
discrimination illegal, it slowly began to fade away. In recent years there have been some big talks
about the gender pay gap, the gender pay gap is that women on average earn around 80 cents for every
dollar a man earns. But, in 1963 President Jon F Kennedy signed into law the equal pay act. This act
banned wage discrimination across sex. This means outside of exceptions you must pay men and
women the same wage for the same job. A couple of exceptions to this rule are generally applied to
those who have worked longer than newer employees and receive a higher wage. The argument made
nowadays is the average wage. This means all the wages averaged out across men and women. The
counter-argument to that is usually pointed out that men often have higher-paying positions than
women, such as CEOs or CFOs, it is also a fact that men also work longer hours as well. However, there
may yet be some discrimination in the economy, a possible example could be charging a teenager or an
older person more in car insurance. This is usually done because of the higher risk of accidents
associated with new drivers and older drivers, but the textbook pointed out that this could be possibly
customer discrimination. You are charging certain age groups higher than others, and that could
warrant an argument for discrimination.

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