Chapter Study Outline

11.1 Discrimination: An Overview

  • Discrimination is still rampant in the U.S. economy
    • Minority: the group that is subject to discrimination
    • Majority: the group that discriminates
  • Economists define labor-market discrimination as a situation in which equally materially productive persons are treated unequally on the basis of an observable characteristic.
    • Equally materially productive: capable of producing the same number and quality of output using the same inputs; distinct from equal dollar productivity
    • Treated unequally: arriving at a systematically different outcome as a result of the actions of external agents
  • The evidence shows that there are large differences in the labor market outcomes of men, women, Whites, Blacks, and Hispanics in the United States.
    • These differences concern workforce participation, employment, wage, education, and occupation.
  • While there is broad agreement on the size of these observed differences, there are at least two polar hypotheses on their proximate causes.
    • [H0] Inherent group differences: There is no discrimination, and the observed variation in economic outcomes across alternative worker groups reflects differences in their inherent material productivities.
      • This hypothesis also attributes differences in outcomes to voluntary choices and preferences. Even if is implausible, it is an important starting point for an analysis of discrimination, since not every single group difference results from discrimination.
    • [H1] Discrimination: The differences in economic outcomes observed across different worker groups result from discrimination.
      • Intergroup differences result in whole or in part from actions taken by consumers, employers, coworkers, and the government.
  • Different types of discrimination are possible at several points over the course of a worker’s lifetime.
    • Premarket discrimination, Tp: discrimination before the worker enters the labor force
      • Premarket discrimination can affect a worker via low parent health and education, impoverished neighborhoods, and unequal schooling systems.
    • Market discrimination, Tm: discrimination after the worker enters the labor force
      • Market discrimination may function through prejudice, imperfect information, imperfect competition, and legislation, which may result in two major types of discrimination.
        • Earnings discrimination: The earnings of equally materially productive workers depend on their group affiliations.
        • Occupational discrimination: Impediments hinder certain groups of equally materially productive workers from entering particular occupations.
      • The effects of premarket and market discrimination are intertwined, especially since the anticipation of future discrimination affects current actions.
  • Becker (1957) was the first to show that prejudice can be interpreted as a distaste and modeled with microeconomic theory. The rest of this chapter will use his model.
    • Becker suggested that discrimination could adversely affect minority workers through prejudice by employers, coworkers, and consumers.
    • Assumption 11.1: Homogeneous Workers: All workers are homogeneous and hence equally materially productive.
      • This assumption makes it easier to detect the effects of prejudice through the channels Becker described.

11.2 Employer Discrimination

  • In maximizing their utility, the owners of firms may elect to sacrifice profits in order to take specific actions, such as discrimination.
  • In the Becker model, assume that the firm’s owners are also the managers.
    • The firm’s profits are π = py - wN - wbNb
    • The typical owner’s utility is given by U =U(π, wb Nb)
      • π = the firm’s profits
      • U = the owner’s utility
      • wb = the wages of Black workers
      • w = the wages of White workers
      • Nb = the employment level of Black workers
      • N = the employment level of White workers
      • p = product price
      • y= quantity of output
        • The owner’s utility depends positively upon profits, π, and negatively—as a result of its discriminatory preferences—on the total payments made the Black workers (wb Nb).
    • Assumption 11.2: Employer Utility: Employer utility is given by U = U(π, wb Nb)=π -δe∙ (wb Nb)
      • δe= the coefficient of employer discrimination. This translates the employer’s taste for discrimination into monetary terms. If δe=0, the employer is not prejudiced because it cares only about its profits.
      • w = (w = wb)/wb = the coefficient of market discrimination, or the proportionate gap between the wages of White and Black workers that prevails in the marketplace.
  • Model 11.1: Becker’s Model of Employer Discrimination
    • (a) The product and labor markets are perfectly competitive.
    • (b) The working population, N,) supplies its labor inelastically.
    • (c) Each firm produces output, y, according to y = MPL ∙ (N + Nb).
      • For simplicity, MPL is the constant marginal product of labor, not the usual diminishing marginal return.
      • The MPL is the same for both Black and White workers.
    • (d) In the short run, the capital stock is fixed, and each firm has a given number of jobs slots.
      • The total number of job openings is V, where V > N.
    • (e) There are no legal restrictions limiting discrimination in the workplace.
    • In the absence of discrimination, employers seek only to maximize their profits. Model 11.1 predicts that Black and White workers earn the same equilibrium wage, w* = wb* = pMPL, and in this example, w* = $150.
      • The demand for labor is represented by a horizontal line because the MPL is assumed to be constant.
      • The supply of minority and majority labor are represented by vertical lines because they are assumed to supply their labor inelastically.
    • If discrimination coefficient δe ≠ w, then employment is completely segregated. The firm exclusively employs Black workers if w >δe and White workers if w <δe. If w =δe, then the firm is indifferent.
  • Assumption 11.3: The Nature of Employer Prejudice
    • (a) Given any δ0, the cumulative number of job slots offered by employers prejudiced with δe δ is denoted by V(δ).
    • (b) The number of jobs offered by unprejudiced employers equals V(0) = V0 ≥ 0.
      • Assume that V0 < N0b and define a critical level of employer prejudice δ* by V(δ*) = N0b =w*.
    • For any value of the wage gap, w, each employer whose prejudice satisfies δe w demands only Black labor, and by definition, V(w) equals the total number of job slots these firms are seeking to fill. For each given level of w, the value of V(w) equals the demand for Black labor.
      • The demand curve for Black labor is flat when there is no discrimination. It is negatively sloped in the presence of discrimination, since as wb/w* falls, w rises, and an increasing number of employers overlook their prejudice and hire Black workers.
      • If wb/w* < 1 there is discrimination, since wb* < w.
      • Because firms are price takers, even unprejudiced firms will pay the same low wage wb < w*.
      • Since all workers are equally productive, this wage differential implies that firms that hire Black workers are more profitable than firms that hire only White workers.
    • The equality w* =δ* states that the market acts to attenuate the severity of wage discrimination by sorting Black workers into the jobs offered by the least prejudiced employers.
      • The severity of equilibrium wage discrimination, w*, is determined by the prejudice of the marginal employer, δ*, and not the average employer, defined by the median, δm.
    • A ceteris paribus increase in the number of unprejudiced firms or decrease in the supply of Black labor can completely eliminate wage discrimination, even if most employers are highly prejudiced.
      • This model predicts that in the long run competitive market forces will eliminate discrimination.
      • As unprejudiced firms prosper and acquire new capital, they should be able to increase their job openings until the Black wage and the White wage are equalized.
      • The persistence of discrimination today seems to debunk this model, yet it is possible for employers to discriminate in nonwage dimensions.

11.3 Coworker Discrimination

  • Majority coworkers may refuse to cooperate with or take orders from minority workers; the majority workers may even sabotage minority workers.
    • Assumption 11.4: The Coefficient of Employee Discrimination, δL: Each $1 of wage income provides a prejudiced White worker with utility $(1 - δLI).
      • I = 0 indicates that he works exclusively with other White workers; I = 1 indicates that he does not.
      • δL is his coefficient of employee discrimination. If δL = 0, he is unprejudiced.
        • A prejudiced White worker incurs a utility loss from working with Black workers.
    • If Model 11.1 holds and employers are not prejudiced, and if all White workers are prejudiced (δL > 0), then:
      • (a) Employers are racially segregated.
      • (b) There is no wage discrimination: w* = (w* - wb*)/wb* = 0.
        • In this situation discrimination fails to emerge even in the short run, even though every majority worker may be vehemently prejudiced.
        • Competition among colorblind but segregated employers ensures that w* = wb.
        • Segregation arises because it is never profitable for employers to hire a mixed labor force.
      • However, technological restrictions, hiring frictions, and population ratios may prevent this situation.
    • Each majority worker who is employed by an integrated firm will receive a compensating wage differential.

11.4 Consumer Discrimination

  • Assumption 11.5: The Coefficient of Consumer Discrimination, δc: Majority customers are willing to pay $p (1 – I δc) for a good or service.
    • I = 1 indicates that the good is produced or served using minority labor and I = 0 indicates that it is not.
      • White customers experience a utility loss equal to δc when they acquire products from Black workers.
    • Using Model 11.1 and assuming that the good that the good is sold only to majority consumers who all have an equal coefficient of consumer discrimination, δc > 0, then
      • (a) The equilibrium wages of White and Black workers are w* = pMPL > wb* = p ∙ (1 - δc)MPL, respectively.
      • (b) Black and White workers are employed in segregated firms.
        • This represents wage discrimination, since Black workers earn less for equal productivity.
        • Yet the firm with Black labor can only sell its products for $(1 - δc)p, giving it a lower marginal revenue product of labor and therefore a low wage in perfect competition.
        • No employer will find it profitable to hire a mixed workforce.
    • Consumers perceive White and Black workers as producing different products, and different products can command different prices in perpetuity.
      • Consumer prejudice can persist in the long run.
      • Indeed, due to the changing landscape of job opportunities and the increasing size of the service industry, consumer prejudice may worsen in the future.

11.5 The Modern Theory of Discrimination

  • The modern theory suggests that prejudice is not an inherent genetic phenomenon but an explicable social one.
    • The recent literature has stressed that discrimination can arise from imperfect information or imperfect competition. The former is discussed here.
  • Statistical discrimination: a situation in which decision makers make inferences about a worker’s group affiliation to obtain useful information about the worker
    • Imperfect information: employers cannot be certain of each job applicant’s true ability, since neither the screening nor the signaling process is perfect.
      • Given the high cost of hiring mistakes and competitive pressures, firms must use information as effectively as possible.
      • The firm may compare the characteristics of the current applicant pool to the characteristics and performance of the workers in its personnel records.
        • Signal: an observable attribute that an individual can vary
        • Trait: an observable attribute that is predetermined for a given individual but which varies across individuals
    • Assumption 11.6: Employers’ Beliefs: Competitive pressures force employers to use the information at their disposal efficiently. In the long run, firms learn from their mistakes and form correct expectations.
      • This implies that inaccurate stereotyping will be short-lived.
      • Statistical discrimination is based on the principle that employers base their decisions on an individual’s gender, ethnicity, and race to infer something about his ability.
  • Model 11.2: Statistical Discrimination
      • (a) The average ability of White workers is ā.
      • (b) During the interview process, the firm tests each job applicant. At the end of the process, each applicant is awarded a test score, denoted as x.
      • (c) In light of the test score, x, an individual’s expected ability is a(x).
      • (d) Firms are competitive and their wage offers are w(x) = pa(x), where p is the product price and the wage is the marginal revenue product of labor.
    • Assumption 11.7: Expected Ability: In light of the test score (x), a White worker’s expected ability is a(x) = ā +α ∙ (x = ā), 0 ≤ α ≤ 1.
      • The candidate’s expected ability is the group average plus an adjustment for her performance relative to the group.
      • If α = 0, the test is irrelevant. If α = 1, the test is completely informative.
    • An individual’s predicted wage is, then, w(x) = pā + pα(x - ā).
      • The wage is based on the group average, pā, plus an adjustment for the worker’s performance relative to the group, pα(x - ā).
    • The predicted wage of a Black worker who scores x on the test is w(x)b = pāb + pα(x - āb).
      • The wages of White and Black workers hinge on the average productivities of the two groups, ā and āb, and the informativeness of the test, α and αb.
      • Premarket discrimination in education could lead to a difference in average material productivity such that ā > āb.
  • Cultural bias could result in test scores that convey more information about White workers than Black workers such that α > αb.
    • Assumption 11.8: Abilities and the Informativeness of the Test
      • (a) Equal average material productivities: ā = āb
      • (b) The test is relatively more informative about the abilities of White workers: α>αb.
        • Thus the wage schedule for test scores is steeper for Whites than it is for Blacks. Whites are rewarded more for better test scores and punished more for worse test scores. This does not constitute prejudicial discrimination.
        • This basic framework fails to explain prejudicial discrimination. Nonetheless, it is a tool to explain observed differences and it is consistent with persistent wage differentials.
  • The job search approach predicts that the wage will be high if it is relatively easy for workers to find jobs and low if it is difficult for them to do so.
    • In the absence of employer prejudice, Black and White workers should have the same outcomes.
    • The presence of prejudiced firms and a lack of information about their identity will lower the wages of Black workers.
      • Black workers will waste time applying to prejudiced firms, and if all firms know this they will lower their wage offer for Black workers because they know that Blacks they will have a worse chance of finding a job since their options are limited to unprejudiced firms.
      • Unlike Becker’s framework, the extent of discrimination depends on the prejudice of the average—rather than the marginal—employer.
  • Peer effects may influence the underachievement of Black students as a result of the “Acting White” phenomenon.
    • Assumption 11.9: Acting White
      • (a) Black students differ in their abilities and in the values they place on their attachments to the community.
      • (b) The community desires only those members who have strong attachments to it.
      • (c) Schooling raises productivity and is relatively easier for higher-ability students.
      • (d) Although students know their own abilities and values, all that employers and the community know is each student’s educational attainment level.
        • High educational attainment signals high ability to employers and low attachment to the community.
        • Low educational attainment may be rational for students who wish to signal high attachment to the community.
  • Stereotypes of minority groups may be self-fulfilling, according to the model proposed by Coate and Loury (1993):
    • Employers hold negative stereotypes about the productivity of minority workers.
      • These employer stereotypes diminish the incentives for Black workers to accumulate costly skills.
      • Lower educational attainment makes Black workers less productive.
      • The outcome confirms the stereotype.
  • Mailath, Samuelson, and Shaked (2000) proposed a model in which search efforts create a vicious self-fulfilling cycle:
    • Employer expectations are self-reinforcing since minority workers anticipate their inferior job opportunities.
    • As a result, minority workers do not acquire greater skills; they expect they will not be able to obtain a high-skill job because of discrimination.
    • Employers do not search for workers in minority labor markets as a result of lower minority investment in skills.