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CHAPTER 9. “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). Labor Market Discrimination.

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chapter 9

“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)

labor market discrimination
Labor Market Discrimination

Definition: differences in labor market outcomes that reflect immutable worker characteristics, such as race and sex, after accounting for all relevant differences in human capital.

Types of discrimination:


Employee (co-worker)



race and sex in the labor market
Race and Sexin the Labor Market

Men earn more than women, and whites earn more than both African-Americans and Hispanic-Americans.

Differences in human capital between men and women and among whites, blacks, and Hispanics account for some, but not all, of these wage differentials:


Labor-market experience

Job tenure

School quality and choice of major

the discrimination coefficient
The Discrimination Coefficient

Taste discrimination translates the notion of racial prejudice.

Racial prejudice causes employers to perceive the costs of hiring blacks as being higher than the true cost.

Even though it costs wb dollars to hire one unit of black labor, the employer acts as if it costs wb(1+d) dollars, where d, d>0, is the discrimination coefficient.

employer discrimination
Employer Discrimination

arises when a company discounts the true marginal revenue product of a worker from a disfavored group

if the supply of workers from the disfavored group is perfectly elastic to the company, then fewer workers from that group will be hired by the company

If the supply of workers from the disfavored group is perfectly inelastic to the company, then workers from that group hired by the company will receive a lower wage

reduces the profits of the discriminating firm

is inconsistent with long-run competitive equilibrium in the product market

the employment decision for a firm that does not discriminate
The Employment Decision for a Firm That Does Not Discriminate






If the market-determined black wage for blacks is less than the wage for whites, a firm that does not discriminate will hire only blacks. It hires black workers up to the point where the wage for blacks equals the value of marginal product of black labor, E*B.

the employment decision for a prejudiced firm
The Employment Decision for a Prejudiced Firm















(a) White Firm

(b) Black 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 wage for whites equals the value of their marginal product. A black firm hires black workers up to the point where the utility-adjusted wage for blacks equals the value of their marginal product. Firms that discriminate hire fewer workers than firms that do not discriminate.

profits and discrimination
Profits and Discrimination




Black Firms

White Firms



Discrimination Coefficient

Discrimination reduces profits in two ways. A discriminatory firm that hires only white workers will hire too few workers at too high a wage.A discriminatory firm that only hires black workers hires too few workers.

the black white wage ratio in the labor market
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 black-while wage ratio falls.

determination of black white wage ratio in the labor market
Determination of Black/White Wage Ratio in the Labor Market

Black-White Wage Ratio








Black Employment



If the black-white wage ratio is very high, no firm in the labor market will want to hire blacks. As the black-white wage ratio falls, more and more firms are compensated for the disutility and the demand for black workers rises. The equilibrium black-white wage ratio is given by the intersection of supply and demand, and equals (wB/wW)*. If some firms prefer to hire blacks, they would be willing to hire blacks even if the black-white wage ratio exceeds 1, shifting the demand curve up to D. If the supply of blacks is sufficiently small, it is then possible for the black-white wage ratio to exceed 1.

employee discrimination
Employee Discrimination

Employee or co-worker discrimination arises when one group of workers (e.g., whites or men) does not like to work with, or be supervised by, another group (e.g., blacks or women).

does not generate a wage differential between equally skilled workers.

does not affect the profitability of firms.

implies racially (or sex-) segregated workplaces.

customer discrimination
Customer Discrimination

Examples: hair salons/barber shops, funeral homes, physicians

arises when customers prefer to interact with employees from their own sex or race group

implies sex- or race-based occupational segregation within firms and sex- or race-based segregation across firms

implies lower wages for members of disfavored groups in firms where occupational segregation is not possible

is consistent with long-run competitive equilibrium in product markets

statistical discrimination
Statistical Discrimination

is commonplace in insurance and annuity markets: men pay more than women for life insurance, teenage boys pay higher premiums than teenage girls for auto insurance, women pay higher prices than men for a lifetime annuity.

in the labor market involves making hiring or compensation decisions about individuals based, in part, on the average expected productivity of members of their race or sex group, rather than solely on their individual merit.

w = G + (1 – )Ḡ

 = 1 ↔ individual merit  = 0 ↔ statistical discrimination

the impact of statistical discrimination on wages
The Impact of Statistical Discrimination on Wages







Test Score


Test Score


(a) Whites have higher average score

(b) Test is better predictor for white workers

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.

measuring discrimination
Measuring Discrimination

A crude measure of discrimination is the difference in mean wages across race and sex groups.

A better measure is the difference in mean wages of black and white (or male and female) workers with identical, observed human capital.

Oaxaca decomposition technique: separates the wage differential into a portion attributable to differences in human capital and a portion attributable to labor market discrimination.

measuring the impact of sex discrimination on male female wage differences
Measuring the Impact of Sex Discrimination on Male-Female Wage Differences


Men’s Earnings Function



Women’s Earnings Function







The average woman has sF years of schooling and earns wF. The average man has sM years of schooling and earns wm. 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*. A measure of sex discrimination is then given by w*– wF.

trends in racial earnings ratios for males and females
Trends in Racial Earnings Ratios for Males and Females

There has been an upward trend in the earnings ratio of blacks to whites and Asians to whites for both females and males.

This has been attributed to increases in the quality and quantity of schooling among blacks and Asians.

AA and EEO programs may have contributed to the rise in the black-white wage ratio.

There has been a downward trend in the earnings ratio of Hispanics to whites for both females and males.

the oaxaca decomposition of the black white wage differential 1995
The Oaxaca Decomposition of the Black-White Wage Differential, 1995

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.

the decline in the labor force participation of blacks and the average black wage
The Decline in the Labor Force Participation of Blacks and the Average Black Wage






Wage rate

discrimination against other groups
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 whites, mainly due to higher average schooling levels.

occupational choice and the male female wage ratio
Occupational Choice and the Male-Female Wage Ratio

Human capital investment is more profitable the longer is the expected payoff period.

Women who expect to have children are better off if they enter occupations in which their skills do not deteriorate during the years they spend out of the labor market.

Occupational choices have crowded women into occupations where the return to schooling is lower.

Within occupations, male-female wage ratios are typically close to 1.