Labor Economics

Labor Market Discrimination – Part One:  “Measurement and Definitions”

(sources:  Sowell, Williams, Walker, Becker, Roback, Reich, common knowledge)

Discrimination is Everywhere:  First and foremost - we have already been talking about labor market discrimination – all employers, as well as everyone else – discriminate everyday whenever we make a decision.

We will focus, however, on gender (or sex), race, national origin, sexual orientation, handicapped, age, etc., because the usual idea is that these characteristics should be “irrelevant” to the hiring decision.

However – we can’t lump these all together because this may not be true – there are certainly differences between men and women that do not exist between races, for example.

How is Discrimination Typically Measured by Economists?

Let’s start, however, with how discrimination (particularly racial and sex) have been “measured” by economists.

We will look at some stats – the difference in earnings is always what is focused on – http://www.pay-equity.org/info-time.html

http://www.infoplease.com/ipa/A0882775.html

One of the most famous articles in economics (and seen as the beginning of the literature on this topic) is by Gary Becker – his doctoral dissertation The Economics of Discrimination which became a book (1957) (1971) … this guided the literature.

Becker’s theory is based on the concept of taste discrimination.

Basically tries to measure discrimination by putting it all in monetary terms.

White workers                       Ww      =          wage

Black workers                        Wb      =          wage

If employer is prejudiced against black workers, gets disutility from hiring a black worker – the employer acts as if the “monetary cost” of hiring is higher by adding the “discrimination coefficient”-

Wb (1 + d) dollars where d is a positive number.

If          d = .5, and the Wb    =          $10,    the employer will perceive Wb         = $15 per hour.

If the employer prefers to hire blacks, gets utility from hiring black workers – Wb (1 - n) (called nepotism)

If          n = .5, and the Wb = $10, the employer will perceive Wb = $5 per hour.

Can also apply this to employee discrimination and customer discrimination.

If an employee’s wage equals Wb and does not want to work with whites, but does, Wb (1 - d) will be perceived as his wage.

Or if you are buying something from a store and are serviced by someone who causes you disutility – then you can add to the cost of your good (1 + d).

So this is the idea of trying to “measure” the discrimination (the disutility one gets from hiring or working with or being serviced by a race or sex or etc. that a person prefers not to work with, etc.). began –

Studies then took on the job of figuring out that coefficient (how much to add on or subtract).

A popular way is to regress the differences (pay gap) and see which variables explain it and anything not explained by the equation (the error term) is considered discrimination.

For example:

Wm – wage of males

Ww – wage of females

Wm – Ww = F (skill differences, education differences, turnover rates, geographical, etc.)

See how strong the relationships are – for example say skill differences account for 50% of the difference (statistic) – and so on…

The trouble with all of this is that much of what should be in that equation is NOT measurable and the measurements can be quantitative, but not qualitative.

Jennifer Roback-

Bottom Line:  Can’t prove or disprove discrimination with statistics.

So how much discrimination exists?

Perfect markets theory - where the economic man only cared about monetary profits - discrimination would only be from employees and customers – not employers.

(And really employees and customers are questionable too - if $ are all that matters).

Why?

So do markets decrease discrimination?   We will return to this later as well.

 Basic Argument:

“The Economics of Racism”                        by Michael Reich

(A Marxist/Institutionalist view)

“Contrasts the conventional approach of neoclassical economic analysis -- … with a radical approach ….

Argues that racism is deeply rooted in the current economic institutions of America, and is likely to survive as long as they do.”

Pervasiveness of Racism

Gives the same criticism Sowell does – says neoclassical economists try to separate,

“pure wage discrimination” as the “racial differences in wages paid to equivalent workers” through regression analysis.

Can’t analyze the extent of wage discrimination without simultaneously analyzing the extent to which discrimination also affects the factors they hold constant. 

For example – there are differences in skill levels between two workers – the skill level difference can partly account for wage differences – but the skill level differences could also be a result of discrimination (worker A does not have the same opportunities to obtain the skill level as does worker B).

“Since all aspects of racism interact, an analysis of racism should incorporate all of its aspects in a unified manner.”

Reich criticizes:

Gary Becker – The Economics of Discrimination

Remember the model:  Whites have a “taste” for discrimination if they are willing to forfeit income in order to be associated with other whites instead of blacks.

Require a monetary compensation for the psychic cost of association with blacks.

Model – whites pay for discrimination - hire fewer blacks than is efficient so white employers lose (in money terms) while white workers gain (since they are hired over more efficient blacks).

Reich says, for Becker:

The source of the discrimination is determined outside of the economic system.

So – white employers would find ending discrimination in their interest, but white workers would not.

Market forces will lead to the end of discrimination because of lower costs to employers who don’t discriminate will run others out of business.

Reich argues:

Racism is rooted in the economic system and not in “exogenously determined” attitudes.

That is – racism is economical.

Examples he uses – what he calls the “American empire” came about by:

-the extermination of American Indians.

-and was financed by profits from slavery.

Therefore:  “Racism serves the needs of the capitalist system.”

In other words - It is not true that the capitalist class as a whole would profit if racism were eliminated and labor were efficiently allocated without regard to skin color.

So:  The market decreases discrimination to Becker/Sowell.

The market increases discrimination to Reich.

Reich continues - Even if racism was not originated by capitalism, it

“breeds an individualistic and competitive ethos” . . .  so there is a “need for visible scapegoats on which to blame the alienating quality of life in America.”

A change in institutions is necessary. (Not simply a change in morality.)

Marxist paradigm – racial attitudes and institutions are seen as parts of a larger social system – emphasis on conflict between classes and the use of power to determine the outcome of such conflicts.

Persistence of racism lend support to the radical approach … says Reich.

Concludes:

“In extra-economic ways, racism helps to legitimize inequality, alienation and powerlessness – legitimization which is necessary for the stability of the capitalist system as a whole.”

“In general, blacks as a group provide a convenient and visible scapegoat for problems that actually derive from the institutions of capitalism.”

So which view is correct?  If the institutions changed – such that there were no longer private property rights in the means of production –

Is there less discrimination in “communist” countries, or socialist countries?  Would there be no race or sex discrimination if all incomes had to be equalized?          

Bottom Line:  Reich wants to use the ratio of median black to median white incomes – as a “rough, but useful, quantitative index of the economic consequences of racism for blacks.”

So – the median difference, without trying to determine other factors that might affect wages – is the “measure” of discrimination.

But Sowell disagrees here:  There are a lot of reasons for income differentials!  Sowell would call this the “results oriented” approach to discrimination.  Sowell says this approach is based on some important assumptions regarding discrimination (often stated as facts instead of as assumptions):

The assumptions and Sowell's responses:

1. discrimination leads to adverse effects:

2. statistical differences signal, imply and/or measure discrimination:

3. large statistical differences between groups do not usually arise and persist without discrimination:

So – let’s at least analyze discrimination per se – and then go from there.

Discrimination in Labor Markets (Definitions):

Remember: employers discriminate in every hiring decision.  Most (but not all) would agree that to discriminate with respect to differences in productivity is not a “bad” thing.

The Marxists/Institutionalists would disagree - why?

When it comes to discriminating on the basis of sex (or gender), disagreement abounds.  This is true among men and women on the street, as well as among economists. 

Definitions:  These are loosely based upon definitions by Thomas Sowell in Markets and Minorities (he applies them to race – I am broadening them to include sex).

1. Pure Discrimination:  the offering of different contract terms (including none at all) to a person based solely on group membership, not based on any other criteria usually used otherwise (such as prior experience, education, etc.).  In other words pure discrimination exists whenever there is no economic (i.e. productivity) justification for offering different contract terms to one person over another.  In this case, for example – an employer may perceive a female applicant to be more qualified for a job than a male applicant but still refuse to give her the job (this is your basic sexist or bigot).

2. Institutional Discrimination:  the offering of different contract terms (including none at all) to an individual subjectively perceived as being less qualified than someone else solely because of group membership.  The perception is not based on objective facts, but is based on presumptions about behavior.  The presumptions generally have no basis in reality today but persist because of past behavior and/or cultural norms (women for example), laws, and other institutions.

3. Statistical Discrimination:  the offering of different contract terms (including none at all) to someone based on statistical averages of the relevant criteria for a job (for example:  years of experience, skills, education, etc.).  The statistical averages arise because of actual or objective differences between actions of people who are categorized into different groups.  Under this kind of discrimination, people are not judged as individuals – but are seen as “the average” member of a group.  Any given individual within the group may not behave as the “average” member does but will be judged as the average.  Those individuals below the average may actually benefit from this type of discrimination, while those above the average will bear a cost.

4. Economic Discrimination:  the offering of different contract terms (including none at all) to a person, judged as an individual, because the person does not meet the relevant criteria for the job AND the reasons for this lack of qualifications are related to the fact that he or she is a member of a group.  For example – there may be no females qualified to be a linebacker in the NFL.  As differences among groups decrease – economic discrimination will decrease.

Does economic discrimination apply to race?  Age?  Sexual orientation?  Religion?