1 Theories of Discrimination. 2 What do we generally mean by “discrimination”?

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Theories of Discrimination

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What do we generally mean by “discrimination”?

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Difficulties in defining discrimination. What is Lang’s illustrative example with respect to

cosmetic sales?

Firm A:

Firm B:

Firm C:

Firm D:

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Preference /Prejudiced Based Discrimination What is basic argument?

Why might employer based preference discrimination have trouble persisting in a competitive economy?

Should we always assume economies are competitive?

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Preference or Prejudiced Based Discrimination (cont.) Customer Based Discrimination

What if it isn’t customer animus against other race employees, but incorrect beliefs (e.g., white salesmen know what they are talking about more than black salesmen even if this isn’t true).

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Other Types of Discrimination Often in discussions of discrimination and racism people will bring

up the thought exercise of how you would react to seeing different people when you are walking down the street by yourself late at night.

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Statistical Discrimination Race may be correlated with a different trait that is not directly

observable, and therefore people use race a signal of that trait.

We do this all the time in a variety of contexts. If I observe an individual with long hair, what do I infer about his

political leanings?

What do you infer about people’s career goals when you learn which of the 5 C’s they attend?

Suppose you had two job applicants, both graduating from CMC. One was named Jin Woo Kim they other named Henry Kim, would you make any assumptions about their English skills?

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Statistical Discrimination In Labor Market Some aspect of workers’ skills are unobservable by employers.

Workers of different races (genders, nationalities, etc.) differ on average on some dimension of this unobservable skill.

Even if an employer is not “racist” (in a preference sense), the employer may find it optimal to use race as a signal regarding some aspect of unobservable skill, which results in discrimination.

Competitive pressures actually lead to such discrimination, rather than work against it. Therefore, such discrimination may be able to persist in a competitive economy because it is profit maximizing given imperfect information.

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Theories of DiscriminationStatistical Discrimination (cont.)Example 1 (Difference in skill distributions between races)

Suppose there are two skill types of workers: H-types and L-types, and there are two kinds of jobs: Skilled jobs and Unskilled jobs. Value of output produced:

Unskilled job is $8K for all types. Skilled job is $20K for H-types, but $0 for L-types.

Worker type and output is unobservable to employers. However, employers know: Whites: 50% are H-types, 50% are L-types. Blacks: 25% are H-types, 75% are L-types.

If labor market is competitive, how would employers assign workers? What will black workers be paid in equilibrium? How about white workers?

So what is racial wage gap? What if we condition on their skill type?

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Theories of DiscriminationStatistical Discrimination (cont.)Example 2 (Difference in ability to signal skills between races)

Again suppose there are two skill types of workers: H-types and L-types, and there are two kinds of jobs: Skilled jobs and Unskilled jobs.

Value of output produced: Unskilled job is $8K for all types. Skilled job is $20K for H-types, but $0 for L-types.

Now suppose 50% of each race are H-types (i.e., now groups have identical skill distributions).

But, also assume employers cannot observe worker type, but observe a “signal” of type (G, B). Whites:

H-types emit a G (good) signal w/ prob 1, bad signal w/ prob. 0. L-types emit a G (good) signal w/ prob 0, bad signal w/ prob. 1.

Blacks: H-types emit a G (good) signal w/ prob 0.75, bad signal w/ prob. 0.25. L-types emit a G (good) signal w/ prob 0.25, bad signal w/ prob. 0.75.

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Statistical Discrimination (cont.)Example 2 (Difference in ability to signal skills between races, cont.)

Employers must decide which job to assign each worker to and how much to pay him based on race and signal. What will equilibrium look like if labor market is competitive?

What is the expected output of white emitting B signal if assigned to Unskilled job? Expected output of white emitting G signal if assigned to Unskilled job? Black workers?

What is the expected output of those emitting G signal if assigned to Skilled job? White? Black?

What is the expected output of those emitting B signal if assigned to Skilled job? White? Black?

Who gets “promoted” to skilled job from each race? What will each racial group get paid at each job? What will be average pay for each race? Is this

discriminatory?

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Statistical Discrimination (cont.)Example 3 (Self-Confirming Expectations)

Again suppose there are two skill types of workers: H-types and L-types, and there are two kinds of jobs: Skilled jobs and Unskilled jobs.

Value of output produced: Unskilled job is $8K for all types. Skilled job is $20K for H-types, but $0 for L-types.

However, suppose type is not exogenous. All workers start out at L-types, but can invest in training to become an H-type at a utility cost equivalent to $5K.

Again, employers cannot observe worker type, but a “signal” of type (G, M, B).

H-types emit signal: G w/ prob 0.25, M w/ prob. 0.75, B w/ prob. 0. L-types emit signal: G w/ prob 0, M w/ prob. 0.25, B w/ prob. 0.75.

What will be equilibrium behavior of workers and firms if labor market is competitive?

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Statistical Discrimination (cont.)Example 3 (Self-Confirming Expectations)

Suppose a firm observes a G signal, what does it imply about the worker? What about a B signal? What about an M signal?

Suppose firms believes everyone is H-type, how will they assign workers based on signals?

Given this behavior, what will workers do?

Can such beliefs and behavior then be maintained in equilibrium?

Is this only equilibrium? Suppose firms all believe everyone is L-type, how will they assign workers based on signals?

Given this behavior, what will workers do?

Can such beliefs and behavior then be maintained in equilibrium?

How does all this relate to discrimination?

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Summary: Employer Preference Based Discrimination

What must be true for this type of discrimination to persist?

Customer Preference Based Discrimination What must be true for this type of discrimination to persist?

Statistical Based Discrimination What must be true for this type of discrimination to persist?

How realistic are key assumptions? Where might they hold? Where/When might they not?

Is one type of discrimination “worse” than others?

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Summary: Solutions?

1 Theories of Discrimination. 2 What do we generally mean by “discrimination”?

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