Discrimination in the Labor Market

Today’s ReadingsSchiller Ch. 11-Discrimination in the Labor MarketDeparle, Ch.13: W-2 Buys the Crack: Milwaukee, 1998

Today’s Topics

• How is labor market discrimination related to poverty?

• What are earnings?• What is labor market discrimination?• How large are the black/white,

female/male wage gaps?• How do we explain the wage gaps

theoretically?

Today’s Topics, cont.

• How do we measure discrimination in the labor market?

• How much of the wage gaps are explained by labor market discrimination?

• Are there limitations of the decomposition method?

• How do nonmarket discrimination and preferences figure in?

Today’s Topics, cont.

• Why would the labor market preferences of men and women differ?

• How does recognizing these limitations affect our estimates of discrimination?

• How is discrimination related to earnings/income inequality?

• Are the wage gaps narrowing, growing, or staying the same?

How is labor market discrimination related to poverty?

• Labor market discrimination depresses the earnings of minorities and women.

• Consequently, minorities and women are overrepresented among the poor.

• Labor market discrimination affects how many will be poor (depressed earnings) and who will be poor (members of minority groups).

What is discrimination?

• Consider the case of a taxi driver who is driving down a one-way street at night in a dangerous part of town and is hailed simultaneously by people on each side of the street. It is equally easy for her to pick up either customer. On the left side of the street is a little old lady. On the right side is a tall African-American teenage boy wearing a hood. The taxi driver unhesitatingly chooses the little old lady over the teenager. Did she discriminate? Is she a racist?

What is discrimination?, cont.

• Discrimination: Treating people differently on the basis of their membership in a class– Discrimination need not imply racism, sexism, or

prejudice.

• Prejudice: dislike, distaste, or misperception based on innate characteristics such as race or sex– Prejudice can but need not generate

discrimination.

What is labor market discrimination?

• Employment (hiring and hours worked), wage, and promotion practices that result in workers who are equal with respect to their productivity being treated differently because of their race, gender, age, ethnic group, or other characteristics unrelated to their job performance.– Discrimination: any situation in which individuals

with identical observed characteristics have systematically different outcomes.

What is labor market discrimination?

• These practices lead to lower earnings by affecting hours and/or wage rates:

Earnings = hours x wage rate

How large is the black/white wage gap?

• The mean earnings of full-time black workers 25 years and older were 32 percent less than comparable whites in 2004. – The Black/White ratio is 0.68; – Asian/white ratio is 1.03; – Hispanic/White (not Hispanic) is 0.66

Source: U.S. Census Bureau, http://pubdb3.census.gov/macro/032005/perinc/new03_000.htm

How large are the female/male wage gap?

• The median earnings of full-time, year-round female workers 15 years and over were 27 percent less than males in 2004.– The female/male ratio was 0.77.

Source: U.S. Census Bureau, http://pubdb3.census.gov/macro/032005/perinc/new03_000.htm

How do we explain the wage gaps theoretically?

• Discrimination is usually thought of as market discrimination—that is the current practices of employers.

• Assumptions– Labor markets work smoothly, unless otherwise

stated– All workers are equally productive innately– Firms are profit maximizers, unless otherwise

stated

Models of Discrimination, cont.

• Becker’s theory personal prejudice or tastes for discrimination: – by employers who care about the characteristics of

their employees as well as profits! leads to segregated but equally paid workforces

– by co-workers (including unions) leads to segregated but equally paid workforces

– by customers leads to segregation on basis of the visibility of job, and

equal pay may lead to discrimination (unequal pay) if job requires

visibility– Example: professional sports

Models of Discrimination, cont.

• Imperfect MarketsDiscrimination– Firms do not fill vacancies instantly and

workers need time to find jobs– Firms do not adjust wages instantly in

response to the number of applications they receive.

Results of Imperfect Markets

• Knowing they are at a competitive disadvantage, the persons subject to prejudice will – avoid applying for jobs (high-wage) that attract

other workers.– Experience more unemployment if they do apply– May be willing to accept lower wages– Accept jobs that are poor matches for their skills

unwittingly reinforcing discrimination.

Models of Discrimination, cont.Statistical Discrimination

• Assumptions about Firms:– Seek to maximize profits– Are not prejudiced– Use characteristics (race, gender) to draw inferences

about workers that are correct, on average.– Identify two types of workers, good and bad, who are

present in equal numbers in all groups– Can observe the productivity of individuals in only

one group (whites for example), and treats all members of other groups according to the groups average.

Models of DiscriminationStatistical Discrimination, cont.

• In this model, discrimination results (workers of equal productivity earn different amounts) when the lack of information about individuals ends up reducing their productivity

• One way productivity is reduced is when a lack of information interferes with the appropriate matching of workers to jobs.

(For more information, see Kevin Lang, Poverty and Discrimination, Princeton University Press, 2007)

How do we measure discrimination in the labor market?

• Decomposition of wage differentials– What portion of the wage gap is due to human

capital factors? – Another way to state this is to ask what portion of

the wage gap is due to differences in productivity?• Look for differences in education, training, and experience.

– The portion of the wage gap not explained by these differences is attributed to discrimination.

Source for Slides 10-26: Also see Table 13.4, from Thomas Hyclak, Geraint Johnes, and Robert Thornton, “Chapter 13:Gender and Racial Differences in Labor Markets,” Fundamentals of Labor Economics. Boston: Houghton Mifflin Company, 2003: p.373.

Measuring Discrimination: Regression Analysis

1. Estimate male and female earnings equations

2. Estimate the average log earnings (ln wm) for males with the average levels of human capital and other variables (Xm) and likewise estimate the average log earnings (ln wf) for males with the average levels of human capital and other variables (X f)

l n wm

= β0 m

+ βm

Xm

∑

l n wf

= β0 f

+ βf

Xf

∑

l n wm

= β0 m

+ βm

Xm

∑

l n wf

= β0 f

+ βf

Xf

∑

Measuring Discrimination: Regression Analysis, cont.

1. Find the diff erence between average male and average female earnings:

2. Add the following term to t he right hand side of the equation:

l n wm

− l n wf

= β0 m

− β0 f( )

+ βm

Xm

∑ − βf

Xf

∑( )

− βm

X f + X f βm

= 0∑∑

Measuring Discrimination: Regression Analysis, cont.

Rearranging terms, we get

Where

The latter is often referred to as unjustified discriminat ion.

l n wm

− l n wf

= β0 m

− β0 f( )

+ βm

X m − X f( )∑ + X f βm

− βf( )∑

X m − X f( )

= t h e d i f f e r e n c e i n t h e a v e r a g e l e v e l s o f h u m a n c a p i t a l .

βm

− βf( )

= t h e d i f f e r e n c e s i n w h i c h t h e a v e r a g e l e v e l s o f h u m a n c a p i t a l

a r e e v a l u a t e d ( r e w a r d e d ) i n t h e m a l e a n d f e m a l e e a r n i n g s f u n c t i o n s .

Measuring Discrimination: Regression Analysis, cont.

Xf Xm

C

B

Awm

wf

wfbm

Human Capital Levels

Female earnings function

Male earnings function

Wage

Interpretation of the Graph

• Male earnings function is steeper and thus shows a greater payoff for additional investments in human capital.

• Xf and Xm represent average levels of human capital for females and males respectively

• wf is the average wage earned by a female with average female human capital

• wm is the average wage earned by a male with average male human capital

Interpretation of the Graph

• wm - wf is the female/male wage gap

• wfbm is the wage women would earn if they received the same reward for additional investments in human capital as men.

• AB or wm - wfbm is the portion of the wage gap due to differences in human capital

• BC or wfbm-wf is the portion of the wage gap due to discrimination

How much of the wage gaps are explained by labor market

discrimination?

• White-Black Wage Gap– Hyclak et al. assert that none of the wage gap

between white and minority workers is due to discrimination! Schiller reports that one-fourth of the wage gap is due to discriminatory labor practices (p. 194).

– This implies that human capital differences explain ¾ to all of the Black/White wage gap.

How much of the wage gaps are explained by labor market

discrimination?, cont.

• Male-Female Wage Gap– Human capital: Education and experience

explain only 6 percent. Controlling for measures of education and experience reduce the gap from 29 percent to 27 percent

– Almost the entire gap is attributed to discrimination!

Are there limitations of the decomposition method?

• The decomposition method assumes– The differences in the observed amounts of

human capital (the Xs) are not affected by discrimination.

– The Xs represent all the relevant variables having nothing to do with discrimination. Might we have overlooked some?

– Minority groups do not prefer work in jobs that are poorly paid.

How does nonmarket discrimination figure into this model of discrimination?

• Nonmarket discrimination influences the amount of human capital investment, and hence the values of the Xs in the decomposition model – Black workers are much more likely than

white workers, on average, to come from families with lower incomes, to live in poor neighborhoods, and to attend inferior schools.

How preferences figure into this model of discrimination?

• Preferences may lead minority members to opt for lower paying jobs.

• Preferences are most often called into service when we think of the wage gap between men and women, but could also apply to wage differences between wages or ethnic groups.

Why would the labor market preferences of men and women differ?

• Tastes for parenting• Physical attributes• Societal and parental expectations—

How are these formed?– Past discrimination – Anticipated discrimination (Statistical

discrimination becomes a self-fulfilling prophecy.)

How does recognizing these limitations affect our estimates of

discrimination?

• The portion of the wage gaps attributed to differences in human capital may be overstated and the portion attributed to discrimination may be understated.

How is discrimination related to earnings/income inequality?

• Work by Juhn and others has shown that the wage differential between majority and minority workers, between men and women is connected to inequality (the overall dispersion) in the distribution of earnings. – An increase in inequality can result in an

increase in the wage gaps.

Are the wage gaps narrowing, growing, or staying the same?

• The black/white differential has stagnated since the 1970s.

– Blacks are over represented in lower part of the wage distribution.

– Returns to schooling increased. Gains in more schooling among blacks offset by increased rates of return to high levels more likely to be achieved by whites.

– Relocation of jobs to suburbs hurt blacks more than whites.

Are the wage gaps narrowing, growing, or staying the same?

• Between 1960 and 1980, women earned 60 percent of what men earned

• Since 1980, there has been a steady and rapid rise in the relative earnings of women.

• In 2005, women earned 77 percent of what men earned on average.– Five percentage points or 1/3 of the change is due to

increased schooling among women.

– Decline in unionization and shift in jobs from manufacturing to service industries lowered male wages.

Women’s earnings as a percentage of men’s earnings, 1960 to 2005

Full-time, Year-round Workers

0

20

40

60

80

100

1960 1970 1980 1990 2000

Year

Ratio of Median

Earnings

women/men

Factors narrowing the female/male wage gap

• Increased experience– New workers represent a small share of all female

workers; hence their lower earnings do not pull down the median as it did before 1980.

• Decline in unionization (men’s wages fell)• Shift of women into higher paying

occupations• Increased relative education of women.• Reduced discrimination in the market?