The Gender Gap in Earnings - Explanations II

Transcription

1 The Gender Gap in Earnings - Explanations II Labor Market Discrimination Labor Market Discrimination - Employment, wage and promotion practives that result in workers who are equal with respect to productivity being treated differently because of race, gender, age ethnic group or other characteristics unrelated to job performance. Means of Discrimination Employers prefer to hire a particular group. (Other groups need more qualifications to get hired.) Restrict promotions (Glass ceilings) Pay lower wages Consumer discrimination (Buy American) Workers unwilling to work with certain groups. Theories of Labor Market Discrimination (Gary Becker s) Personal Prejudice Theory Certain firms were assumed to have a Taste for discrimination, d. The discriminator acts as if the price of the product or wage of the worker is higher by the proportion d. Discriminators are not profit maximizers and are willing to sacrifice profits for the ability to discriminate. In a perfectly competitive market firms that discriminate will be driven from the marketplace. Discrimination in a Perfectly Competitive Industry Recall, that in a perfectly competitive output market the firm has no control over the price; it must charge the market price. Any firm that choses to discriminate must pay a higher 1

2 wage to the preferred group. This will result in a higher marginal cost curve, average variable cost curve and average total cost curve for the discriminating firm. Whereas the non-discriminating firm will be able to take advantage of the situation and pay a lower wage to the discriminated group. Likewise, this will result in a lower marginal cost, average variable cost and average total cost for non-discriminating firms. The difference in cost curves has significant impacts for each perfectly competitive firm since it must charge the industry price for its product. Given that consumers do not also discriminate against this same group and opt for the product with the lowest price, the discriminating firm will lose money while the non-discriminating firm will make an economic profit. Any entrepreneur considering starting up a firm will see this industry as one in which she may make a profit. This new firm entry will increase the losses of discriminating firms to the point where either their stockholders demand they not discriminate or leave the industry. Eventually, a perfectly competitive output market will be free of discriminating firms. 2

3 Wage Differentials Caused by Employer Prejudice If the relative wage ratio is equal to 1 then the wages are equal to one another and there is no evidence of discrimination. This is because there are so few of the discriminated group that they are all able to find employment with employers who do not discriminate. It is only when the proportion of discriminated workers to firms who do not discriminate is large enough that we will find evidence of wage or employment discrimination. In this case, discriminated workers are forced to find employment with firms who have a taste for discrimination. These firms will only hire the discriminated group if they are paid a low enough wage to over take the employer s taste for discrimination. Statistical Discrimination Result of imperfect information. Employer uses signals (grades, college choice, letters of recommendation, average characteristics of group applicant belongs etc.) to judge prospective employee s level of quality. Differences between groups need not be present for statistical discrimination to exist. It may exist due to differences in reliability of signals between groups. If employer perceptions on differences between groups are correct on average discriminators will not be driven out of market and may even be more profitable. 3

4 Differences in Average Productivity In the above graph, firms are correct in their assumption that women have lower productivity than men on average but the distribution of skill is the same for men as it is for women. Firms who use sex as signal of productivity will find that they will obtain a larger benefit from hiring men than women on average. Those men whose productivity is less than that of the average woman (those in shaded area a) will benefit from this discrimination. Those women whose productivity is more than that of the average man (those in shaded area b) will be hurt by statistical discrimination. Differences in Distributions If there is no difference in average productivity levels but instead the distribution of worker productivity levels is shorter in the center and fatter at the tails. Then on average the firm hiring a woman or man will find that the amount produced on average will be the same. However, there is a higher chance of hiring a female employee who is above average or below average. As a result, the risk preference and firm size will likely determine the firms willingness to hire women versus men. A firm who is risk averse, (because poor workers not only produce less but can pull can also make other workers less productive and exceptional workers may be only marginally more productive than the average worker) will hire workers from the group with the narrower distribution. 4

5 Differences in Signal Quality Suppose firms decide not to use sex as a signal but instead use another tool (like SAT scores) as a signal for productivity. If the quality of the signal tool is better at predicting productivity levels for men than it is for women then we have a similar situation to the Differences in Distributions case described above. The primary difference is that instead of using sex as a signal of quality to discriminate (which is illegal) they are using an objective (a standardized test) signal of future worker productivity. 5