Chapter 1

Labor Market Discrimination

1.1 Definition of Labor Market Discrimina-

tion
Economic discrimination exists when female or minority workers – who have
the same ability, education, training, experience as white male workers –
are accorded inferior treatment with respect to hiring, occupational access,
promotion, wage rate, or working conditions. Note that discrimination also
take the form of unequal access to formal education, apprenticeship, or on-
the-job training programs, each of which enhances one’s stock of human
capital.

1.2 Types of Discrimination

This definition is sufficiently important to merit elaboration. Implicit in our
definition, labor market discrimination can be classified into four general
types1

1. Wage Discrimination means that female (black) workers are paid

less than male (white) workers for doing the same work. More tech-
nically, wage discrimination exist when wage differentials are based on
considerations other than productivity differentials.

2. Employment Discrimination occurs when, other things being equal,

blacks and women bear a disproportionate share of the burden of un-
1
We are concerned here only with those kinds of discrimination that are relevant to the
labor market.

1
 employment. Blacks in particular have long faced the problem of being
the last hired and the first fired.

3. Occupational or Job Discrimination means that females (blacks)

have been arbitrarily restricted or prohibited from entering certain oc-
cupations, even though they are as capable as male (white) workers of
performing those jobs, and are conversely “crowded” into other occu-
pations for which they are frequently overqualified.

4. Human Capital Discrimination is in evidence when females (blacks)

have less access to productivity-increasing opportunities such as formal
schooling or on-the-job training. Blacks in particular often obtain less
education and education of inferior quality compared to whites.
The first three categories of discrimination are frequently designated as
postmarket (also “current” or “direct”) discrimination because they are en-
countered after the individual has entered the labor market. Similarly, the
fourth category is called premarket (also “past” or ’indirect”) discrimination
because it occurs before the individual seeks employment.

1.3 Theories of Labor Market Discrimination

There us no generally accepted economic theory of discrimination. There are
undoubtly a variety of reasons for this. First, the interest of economists in
explaining the phenomenon of discrimination is relatively recent. The pio-
neering book in the field, Gary Becker’s The Economics of Discrimination 2,
was published in 1957. Second, discrimination may assume a variety of guises
and take different forms for different groups. For example, blacks tradition-
ally have been at a substantial disadvantage in obtaining employment, while
women have had access to jobs but only in a restricted number of occupa-
tions. Finally, the roots of discrimination are diverse and complex, ranging
beyond the boundaries of economics. A discipline such as economics, which
predicates its analysis on rational behavior, may be at a severe disadvantage
in explaining a phenomenon that many regard as irrational. Nevertheless
economists have contributed important analytical and empirical work on the
problem of discrimination, and our immediate goal is to summarize several
of the more prominent theories: (1) the taste-for-discrimination model, (2)
statistical discrimination, (3) the crowding model. You should be aware that,
for most part, the models to be discussed apply to all types of discrimination.
For example, although we will present the taste-for-discrimination model in
2
Chicago: University of Chicago Press, 1957.

2
terms of racial discrimination, the model is also useful in explaining discrim-
ination by gender, ethnicity, age and sexual orientation.

1.3.1 Taste-For-Discrimination Model

Becker’s taste-for-discrimination model envisions discrimination as a
preference or “taste” for which the discriminator is willing to pay. Becker
uses an analogy based on the theory of international trade. It is well known
that a nation can maximize its total output by engaging in free trade based
on principle of comparative advantage. But in fact nations obstruct trade
through the use of tariffs, quotas, and variety of other techniques. Nations
are apparently willing to sacrifice economic efficiency to have certain goods
produced domestically rather than imported. Society seems to have a prefer-
ence or taste for domestically produced goods, even though it must pay the
“price” of a diminished national income in exercising that taste. Similarly,
Becker argues that, unfortunately society also has a taste for discrimina-
tion and is willing to forgo productive efficiency – and, therefore, maximum
output and profits – to exercise its prejudices.
Becker’s theory is general since it can be applied to, say, white (male)
workers who discriminate against black (female) workers or white consumers
who discriminates against firms that employ black workers or salespersons, or
white employer who discriminates against black workers. The latter aspect
of this theory – white employers who exercise their taste for discrimination
against black workers – is the most relevant to our discussion, and therefore,
we will concentrate on it. Why do employers discriminate? Employers’ tastes
for discrimination are based on the idea that they and their employees want
to maintain a physical or “social” distance from certain groups; for example,
that white employers and their workers do not want to associate with black
workers. These employers may then choose not to hire black workers because
they and their employees do not want to work alongside them.

The Discrimination Coefficient

Assuming that black and white (male and female) workers are equally pro-
ductive, a non discriminating employer will regard them as perfect substitute
and will hire them at random if their wages are the same. But is a white em-
ployer is prejudiced against blacks, then the situation is significantly altered.
According to Becekr, prejudiced white employers have “tastes for discrim-
ination” and behave as if employing black workers imposed subjective or
psychic cost on the employer. The strength of this psychic cost is reflected
in a discrimination coefficient d, which can be measured in monetary

3
terms. Given that the employer is not prejudiced against other whites the
cost of employing a white worker is simply the wage rate Ww . However the
cost of employing a black worker to a prejudiced employer will be regarded
as the black worker’s wage Wb plus the monetary value of the discrimination
coefficient – in other words, Wb + d. The prejudiced white employer will
be indifferent as to hiring black and white workers when the total cost per
worker is the same, that is, when Ww = Wb +d. It follows that our prejudiced
white employer will hire blacks only if their wage rate is below that of white
workers. More precisely for the prejudiced employer to employ blacks, their
wage must be less than the wages of whites bu the amount of the discrimina-
tion coefficient – in other words, Wb = Ww − d. For example, if we suppose
that he going wage rate for whites is $10 and that the monetary value of the
psychic cost the employer attaches to hiring of blacks is $2 (that is, d = $2),
then that employer will be indifferent to hiring blacks or whites only when
the black wage is $8 (Wb = Ww − d or $8 = $10 - $2).
It is apparent that the larger the white employer’s taste for discrimination
as reflected in the value of d, the larger the disparity between white wages
and the wages at which blacks will be hired. As noted earlier. for a non
discriminating or “color blind” employer (d = 0), equally productive blacks
and whites will be hired randomly if their wage rates are the same. at the
other extreme, the white employer whose d was infinity would refuse to hire
blacks at any wages. But note carefully that we are not saying prejudiced
employer will refuse to hire blacks all conditions. Thus, in our initial example
where the monetary value of d was $2, the white employer would prefer to
hire blacks if the actual white-black wage gap exceeds $2. For example, if in
fact whites could be hired at $10 and equally productive blacks at only $7.50
per hour, the employer would choose to hire blacks. The prejudiced employer
would be willing to pay a wage premium of up to $2 per hour for whites in
order to satisfy his or her taste for discrimination, but no more than that. At
the $2.50 differential, the employer would choose to hire blacks. Conversely,
if whites could be hired at $10 ad blacks at $8.50, whites would be hired.
The employer would be willing to pay a wage premium of up to $2 for whites;
having to pay only a $1.50 premium means that hiring whites is a “bargain”.

Demand and Supply Interpretation

Modified demand and supply analysis is useful in deepening our understand-
ing of Becker’s model and, more specifically, in explaining the prevailing
wage differential between black and white workers. In [?, fig] we assume a
competitive labor market for some particular occupation. The vertical axis
differs from the usual labor market representation in that it measures the

4
Black-white wage ratio. Wb/Ww

Sb

A B
1.00

.8 C

Db

Quantity of Black Workers

Figure 1.1: Wage Discrimination in the Labor Market

ratio of black to white wages Wb /Ww , and the horizontal axis shows the
quantity of black workers. The quantity of white workers and their wage
rate are assumed to be given. The kinked demand curve for black workers
Db is constructed by arraying white employers left to right from lowest to
highest discrimination coefficient. Thus, we find that the horizontal portion
(ab) of the demand curve where Wb /Ww equals 1.00 reflects non discrimi-
nating white employers–those whose d0 s are zero. These employers do not
discriminate between equally productive black and white workers so long as
the wage rates of the two groups are equal. The downward-sloping portion of
the demand curve (bDb ) reflects discriminating employers, whose d’s increase
as we move down that segment. On this segment of the curve, Wb /Ww is less
than 1.00 and diminishes as we move to the southeast.
To this demand curve we now add the supply of black labor. Not sur-
prisingly, this curve is upward-sloping; the quantity of black labor supplied
increases as Wb /Ww increases. The intersection of the two curves establish
the actual Wb /Ww ratio–that is, the extent of wage discrimination–and the

5
number of black workers who will be employed in this occupation. Using
the numbers from our initial illustration, let’s assume that the actual wage
rates being paid to blacks and whites are $8 and $10, respectively, so that
Wb /Ww is 8/10 or .8. This model suggests that non discriminating white
employers (segment ab of the demand curve) and those whose d’s are less
than $2 (segment bc) will hire black workers in this occupation; those shown
by the cDb range of the demand curve have d’s greater than $2 and will hire
only whites.

Two Generalization
Two generalization concerning the size of the black-white wage differential
emerge from the taste-for-discrimination model.

1. A change in the shape or location of the demand curve will alter the
Wb /Ww ratio. For example, suppose that a change in societal attitudes
or anti discrimination legislation has the effect of reducing the discrim-
ination coefficient of employers. This will extend the horizontal portion
of the demand curve further to the right and reduce the slope of the
remaining downward-sloping segment. Given the suppl of black labor,
the effect will be to raise the equilibrium Wb /Ww ration, that is, to re-
duce the discriminatory wage differential and increase the employment
of black workers. For example, the equilibrium Wb /Ww ratio in Figure
1.1 may rise from .8 to, say, .85.

2. The size of the discriminatory wage differential varies directly with

the supply of minority (black) workers. If the supply of black labor
in Figure 1.1 were so small as to intersect the horizontal segment of
the demand curve, there would be no discriminatory wage differential.
If the supply of black labor increased to the position shown on the
diagram, the differential would be .8 or 8/10. A further increase in
supply will lower the Wb /Ww ratio, indicating a widening of the wage
differential.

These two generalizations raise an interesting question: Is the greater

observed wage differential between black and white workers in the south as
compared to the north the consequences of a stronger taste for discrimination
in the south, that is, a further leftward demand curve? Or, alternatively, is
it the result of a greater relative supply of black workers in the south? In
either case, of course, the source of the discrimination is white prejudice, not
the size of the black labor force.

6
Gainers, Losers, and the Persistence of Discrimination
Becker’s taste for discrimination model indicates that white workers will gain
from discrimination because their wage rates will be higher than otherwise.
The reason for this is that just as import restrictions reduce foreign com-
petition to the benefits of domestic producers, discrimination by employers
protects white workers from the competition of black workers. Blacks, of
course, are losers in that they receive lower wages because of discrimination.
Finally, employers who discriminate may injure themselves since they will
experience higher costs than necessary. let’s explain why this is so.
Returning to Figure 1.1 once again, let’s further assume that all of the
employers arrayed on the demand curve are producing the same product.
All of the non-or less-discriminating employers on the demand curve to the
left of the intersection point will find themselves with a competitive cost
advantage relative to the more-discriminating employers on the segment of
the demand curve to the right of the intersection. To illustrate: In equi-
librium, the Wb /Ww ration .8, that is, whites are paid $10 and blacks are
only $8. Remembering the assumption that blacks and whites are equally
productive workers, a non discriminating employer on the horizontal seg-
ment would hire black labor force at $8 per hour, while a discriminator far
down the demand curve would hire all white workers at $10 per hour. The
discriminating employer will incur higher costs than the non discriminating
employer. Therefore, non discriminating firms will have lower average costs
and product prices than discriminating producers.
One of the important implication of the Becker’s model is that the com-
petitive market forces will cause discrimination to diminish and disappear
over time because the lower cost non discriminating firms can gain a larger
share of the market at the expense of less-efficient discriminating firms. In
fact, in a highly competitive product market, only non discriminating (least-
cost producers) will survive; discriminators will have average total costs that
will exceed product price. Thus, Becker’s theory is consistent with a “con-
servative” or laissez-fa ire position toward discrimination; that is, in the
long run, the operation of the competitive market will resolve the problem
of discrimination, and therefore, the only governmental action requires is
that which promotes free occupational choice. Discriminating employers will
either have to become non discriminators or be driven out of business.
A fundamental criticism of this perspective is that, in fact, progress in
eliminating discrimination has been modest. The functioning of the market
has not eliminated employer’s prejudiced. Discrimination based on both race
and gender has persisted decade after decade. Thus, alternative models have
been proposed to explain why discrimination has continued.

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1.3.2 Theory of Statistical Discrimination
Still another theory centers on the concept of statistical discrimination 3
By way of definition, we can say that statistical discrimination
occurs whenever an individual is judged on the basis of the aver-
age characteristics of the group, or groups, to which he or she belongs
rather than upon his or her own personal characteristics. The judg-
ments are correct, factual and objective in the sense that the group
actually has thee characteristics that are ascribed to it, but the judg-
ments are incorrect wit respect to many individuals within the group.

A commonplace non-labor market example of statistical discrimination

involves automobile insurance. Insurance rats for teenage males are higher
than those for teenage females. This rate differential is based on accumulated
factual evidence indicating that, on the average, young males are more likely
than females to be involved in accidents. However, many young male drivers
are equally or less accident prone than the average of young females, and these
males are discriminated against by having to pay higher insurance rates.
It is easy to understand how statistical discrimination would function in
labor markets, Employers with job vacancies want to hire the most productive
workers available to fill open positions. Thus, their personnel departments
collect a variety of information concerning each job applicants: for exam-
ple, an individual’s age, education, and prior work experience. Employers
supplement this information with scores on preemployment tests that they
feel are helpful indicators of potential job performance. But two interrelated
considerations pertain to this employee screening process. First, because it
is very expensive to collect detailed information about each job applicants,
only limited data are collected. Second, the limited information available to
the employer from job application forms and test scores will not permit the
employer to predict perfectly which of the job applicants will prove to be the
most productive employees. As a consequence of these two considerations, it
is common for employers to use “subjective” considerations such as race or
gender or age in determining who is hired. In practicing statistical discrim-
ination, the employer s not satisfying a taste for discrimination, but rather
is using gender or race or age as a proxy for production-related attributes of
workers that are not easily discernible. Gender, for example, may be used as
a proxy for physical strength or job commitment.
3
See Edmund S. Phelps, “The Statistical Theory of Racism and Sexism”, American
Economic Review, September 1972, pp. 659-661; and Dennis J. Aigner and Glen G. Cain,
“Statistical Theories of Discrimination in Labor Markets”, Industrial and Labor Relations
Review, January 1977, pp. 175-187.

8
 To illustrate: An employer may assume that on the average, young mar-
ried women are more likely to quit jobs within, say, 2 years after hire than
males because they may become pregnant or their husband may take a job
in a different locality. All other things being equal, when confronted with a
married female and a male job applicant, the employer may hire the male.
Similarly, when considering whether to employ a black or a white high school
graduate whose age, work experience, and test scores are identical, the em-
ployer may hire the white youth because the employer knows that on the av-
erage blacks receive schooling that is qualitatively inferior to that obtained
by whites. Note that what is happening here: Characteristics that apply
to the group are being applied to individuals. Each married women is as-
sumed to behave with respect to employment tenure as the “average”married
women. Similarly, every black youth is assumed to have the same quality of
education as the “average” black youth. It is assumed that group or average
differences apply in each individual case. As a result, married women who
do not plan to have children (or do not plan to quit work if they do) and
black youths who receive a quality education will be discriminated against.
Three further aspect of statistical discrimination merit comment. In the
first place, unlike in the taste for discrimination model, the employer is not
harmed by practicing discrimination. On the contrary, the employer is a
beneficiary. An employer will enhance profits by minimizing hiring costs.
Given that the gathering of detailed information on each job applicant is
costly, the application of perceived group’s characteristics to job seekers is
an inexpensive means of screening employees. Some economists feel that the
statistical discrimination theory, which envisions employers as “gainers” is
more plausible than the taste-for-discrimination model, which conceives of
them as “losers”.
Second, as suggested earlier, the statistical discrimination model does not
necessarily indicate that an employer is being malicious in his or her hiring
behavior. The decisions made may well be correct, rational, and, as noted,
profitable on the average. The only problem is that many workers who differ
from the group average will be discriminated against.
Finally, as noted at the outset, there is no compelling reason statisti-
cal discrimination need diminish over time. In contrast to the taste-for-
discrimination model, statistical discrimination may persist because those
who practice are beneficiaries.
Our first and third points merit qualification in one important sense. If
the average characteristics of any two groups converge over time–perhaps
because a decline in other aspects of discrimination–the application of sta-
tistical discrimination may become increasingly costly to employers. For
example, suppose human capital discrimination diminishes and black youths

9
now obtain high school education equal in quality to those acquired by white
youths. By applying statistical discrimination to employ only whites, the
employer will now be making more hiring mistakes. These mistakes will be
of two types: hiring more whites who are not qualified and failing to hire
black who are qualified.
Similarly, the increasing availability of child care facilities, higher female
pay, and changing female preferences have meant that having children no
longer seriously interrupts the work careers of many women. Also, studies
reveal that the differences in turnover rates of men and women in similar
jobs with similar advancement opportunities is small.4 Thus, employers who
base their hiring decisions on the average turnover rates of females may make
costly hiring mistakes. The cost to the employer of such mistakes is that the
most productive workers available are not being selected. Employers who
make fewer mistakes will have lower production costs and will increase their
market share at the expense of rivals.

1.3.3 The Crowding Model: Occupational Segregation

Data reveals that the occupational distribution of whites and blacksand male
and female is substantially different. Data also suggest that wages also differ
substantially by occupation, and so the occupational structure is an impor-
tant factor in explaining wages differences across workers. Thus, it is no
surprise to find that an entire theory of discrimination has been based on
the concept of occupational segregation. This crowding model uses sim-
ply supply and demand concepts to explore the consequences of confining
women and blacks to a limited number of occupations.5
Why does crowding occur? Why do employers practice job segregation
based on gender or race? One important reason is that worker productivity
is the result of a group or “team” effort. If social interaction on the job are
unfavorable, productivity will suffer. Some male (white) workers may become
disgruntled when obligated to work along with or to take orders from women
(blacks). Thus, in the interest of productivity and profits, employers decide
to segregate men and women (blacks and whites) on the job. Furthermore,
4
Francis D. Blau and Lawrence M. Klein, “Race and Sex differences in Quits by Young
Workers”, Industrial and Labor Relations Review, October 1981, pp. 563-577.
5
For a detailed discussion of the “crowding hypothesis” by one of its leading exponents,
see Barbara Bergmann, The Economic Emergence of Women (New York: Basic Books,
Inc., 1986), chaps 4-6 and more specifically, pp. 128-132 and appendix B. Bergmann’s book
contains a number of case studies of occupational crowding. Also see her, “Does the Market
for Women’s Labor Need Fixing?” Journal of Economic Perspectives, Winter 1989, pp.
43-60; and Elaine Sorensen, “The Crowding Hypothesis and Comparable Worth”, Journal
of Human Resources, Winter 1990, pp. 55-89.

10
many employers have preconceived notions of concerning the job capabilities
of women and minorities. As a result, very few women, for example, have
jobs driving trucks or selling electronics equipments or automobiles.

Assumptions and Predictions

The following simplifying assumptions will facilitate our discussion of the
crowding model.

1. The labor force is equally divided between male and female (or whites
and blacks) workers. Let’s say there are 6 million male and 6 million
female workers.

2. The total labor market is composed of three occupations–X, Y, and

Z–each having identical labor demand curves as shown in Figure 1.2.

3. Men and women have homogeneous labor force characteristics; males

and females are equally productive in each of the three occupations.

4. Product markets are competitive so that the demand curves reflect

not only marginal revenue product (MRP) but also value of marginal
product (VMP).

5. We assume that as a result of occupational segregation, occupations X

and Y are “men’s jobs” and occupation Z is a “women’s job”. Women
are confined to occupation Z and systematically excluded from occu-
pations X and Y.

Assuming no barriers to mobility, any initially different distribution of

males between X and Y would result in a wage differential that would prompt
labor shifts from low to high-wage occupations until wage equality was re-
alized. Note that all 6 million women, on the other hand, are crowded into
occupation Z and, as a consequence of this occupational segregation, receive
a much lower wage rate Wf . Given the reality of discrimination, this is an
“equilibrium” situation. Women cannot, because of discrimination, reallo-
cate themselves to occupations X and Y in the pursuit of higher wage rates.
Although men could presumably enter occupation Z if they so chose, they
would not want to do so in the face of Z’s lower wage rates.
The net result of occupational segregation is obvious: Men realize higher
wage rates and incomes at the expense of women. Note, however, that women
are not being disadvantaged as the result of exploitation; they are not being
paid a wage rate less than their marginal revenue product. In occupation Z

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Wage Rate Wage Rate Wage Rate

Wm Wm
We We We
Wf
Dx Dy Dz

0 3 4 0 3 4 0 3 4
Quantity of Labor Quantity of Labor Quantity of Labor
(millions) (millions) (millions)

Occupation X Occupation Y Occupation Z

Figure 1.2: Occupational Segregation: The Crowding Model

women are being paid a wage rate equal to their MRP and to their contribu-
tion to society’s output (VMP). Their problem is that by being restricted to
only occupation Z, their supply is great relative to demand and their wage
rate is therefore low compared to that of males.

Ending Discrimination
Suppose that through legislation or sweeping changes in social attitudes, dis-
crimination disappears. What are the results? Women, attracted by higher
wage rates, will shift from Z to X and Y. Specifically, if we assume occu-
pational shifts are costless, 1 million women will shift into X and another 1
million into Y, leaving 4 million workers in Z. At this point, 4 million workers
will be in each occupation and wage rates will be equal to We in all three
occupation. This new, nondiscriminatory equilibrium is to the advantage of
women, who now receive higher wages, and to the disadvantage of men, who
now receive lower wages.

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