Week7 - Discrimination

• what does racial prejudice cause regarding employer and their perceived costs


  it causes employers to blindly perceive the costs of hiring non-whites as being higher than the true costs
• what is the actual and prejudiced wage for non-whites


  actual wage: Wnw

  
  

  prejudice wage: Wow(1+d)
• what is d


  discrimination coefficient
• what is the wage of a non-white worker under nepotism and what does this behaviour mean


  Wnw(1-n)

  
  

  where an employer prefers to hire non-whites
• what is the firm output function


  q = f(Ew + Enw)

  
  

  depends on total number of workers regardless of their race
• what is the employment decision for a firm that does not discriminate

  i. the cheapest group of workers is hired i.e. if that group is non-whites then they are hired up to the point where Wnw = WMPe
• what is the employment decision of a discriminatory firm


  hires only non-whites if Wnw(1+d) < Ww

  
  

  hires only whites if Wnw(1+d) > Ww

  
  

  if non-white and white are perfect substitutes then we have a segregated workforce

  
  

  the race of a firms workforce depends on the magnitude of the discrimination coefficient

  
  

  assuming whites have a higher wage, firms with high d hire only a few whites as its expensive
• what does discrimination cause


  a Lower level of employment
• what level of profit do non-discriminatory firms earn

  the max level of profit
• what is the relationship between a discriminatory firm and competitiveness of a market


  the more competitive the product market is the less chance a discriminatory firm can survive
• explain the equilibrium wage differences


  i. assume initially all firms discriminate (d>0) so at equal wages, when the non-white to white wage ratio is 1, or when Wnw>Ww, no non-white worker will be hired

  
  

  ii. are the ratio falls, then increasingly prejudices firms are willing to hire non-whites

  
  

  iii. so employer discrimination generates a wage gap between equally skills workers

  
  

  iv. if the firm is nepotistic, their demand curve shifts upwards, so non-white employment remains the same due to an inelastic supply, but their wage increases
• explain employee discrimination


  i. white workers dislike working alongside non-whites so they demand a compensating wage differential

  
  

  ii. they act a their wage is Ww(1-d)

  
  

  iii. colour-blind firms would need to pay more to attract whites, and they will hire only the cheaper group creating a segregated workforce

  
  

  iv. there is no wage differential due to competition for the cheapest workers so there ardent any effects on profits
• explain customer discrimination


  i. customers act as if the price of a product sold by a different race is utility adjusted : p(1+d)

  
  

  ii. firms facing customer discrimination with a mixed workforce may strategically place their non-white workers in the production department

  
  

  iii. if firms are looking to fill production positions, equally skilled whites and non-whites will earn the same wage

  
  

  iv. if non-whites cannot be hidden, firms have to lower p to compensate the white buyer for their disutility so wages fall to compensate a loss in profits
• what is statistical discrimination


  shows how racial and gender differentials can occur in the absence of overt prejudice, but where membership of a particular group is perceived as carrying information about skills or productivity i.e. males are more likely to be hired due to females being more likely to quit/go on maternity leave due to pregnancy
• give and explain the model for statistical discrimination


  i. if score T is a perfect predictor then wages would index it perfectly

  
  

  ii. in reality, it is not a perfect predictor so the employer uses group averages, Tbar, as additional information

  
  

  iii. w = alphaT + (1 - alpha) Tbar

  
  

  alpha = 1 : perfect predictor of productivity = no statistical discrimination

  
  

  alpha = 0 : wage is set completely by Tbar

  
  

  iv. so wage depends partly on their own T and on Tbar
• explain statistical discrimination when whites have a higher average score


  i. two parallel upward sloping curves depicting the relationship between wages and test scores

  
  

  ii. if non-white workers on average score lower than white workers, a white worker who scored T* earns more than a non-white worker with the same score
• explain statistical discrimination when the test is a better predictor for white workers


  i. white curve is steeper with the non-white curve intercepting it, depicting the relationship between wages and test scores

  
  

  ii. if the test is a better predictor of productivity for white workers, high scoring whites earn more than high scoring non-whites and low scoring whites earn less than low scoring non-whites
• when may statistical discrimination improve labour market efficiency


  when the test scores for productivity are a better predictor for non-whites
• why may removing discriminatory information on cv's not fix the problem


  information can be used as proxy - i.e. someones name and whether it sounds foreign
• explain the Blinder-Oaxaca decomposition

  Wm = alpham + ßmSm

  Wf = alphaf + ßfSf

  
  

  ß: wage returns to schooling. if employers value both schooling equally then the betas would be equal

  
  

  alpha : would be equal if employers value the skills of males and females without any schooling equally

  
  

  raw mean difference: split into difference due to discrimination, reflecting differences in prices which can arise if the employer values male schooling more (betas) or if they pay males more for any level of schooling (alphas)

  
  

  the second component is the difference due to characteristics, i.e. schooling. if male and female schooling was identical then it would tend to 0
• describe the wage decomposition graph and its characteristics

  i. pounds on vertical

  ii. schooling on horizontal

  iii. mens earning function has a higher intercept and slope of female earnings function

  iv. functions are upward sloping

  v. wbarm-wf : average wage difference

  vi. wbarm - w*f : difference due to skill differentials

  vii. w*f-wbarf : measure of discrimination
• what is the issue with the Oaxaca decomposition


  in practice, S is replaced by a some vector, which tries to capture all observable differences in skill etc that might influenced productivity

  
  

  any important factor missing from this vector goes to the discrimination coefficient

  
  

  so if one group has poorer skills and this is observed by the employer, it will be characterised as discrimination in a regression when in fact it is not.

  
  

  pre-market factors, such as poorer access to schooling may be important as they lead to wage differentials which will not be picked up by this approach as discrimination.
• explain discontinuity hypothesis


  this is a determinant of the gender wage gap

  
  

  Oaxaca decomposition ignores that similarly aged men and women have different labour market histories - discontinuity in women's LM participation may explain the gap

  
  

  human capital will deteriorate for women while they are on leave, so they are better off entering occupations in which their skills do not deteriorate
• explain occupation crowding hypothesis


  this is a potential determinant of the gender wage gap

  
  

  women are intentionally segregated into particular occupations where the return to education is lower i.e. female jobs such as teachers, child care

  
  

  but this has been found true regardless of the gender of the worker