Dsicrimination

Overview
Discrimination is the situation where people get
treated differently by the market because of the
colour of their skin, their gender, their religion,
sexual orientation or whatever even though
these characteristics are irrelevant for the
purpose being considered.
In labour market context normally interested in
discrimination in wages and employment.
a large number of theories of discrimination but I
will only describe 2 of the most prominent
Beckers theory of prejudice
Statistical discrimination
Beckers Theory of Prejudice
based on the prejudice of agents in the
labour market, employers, workers and
customers.
sometimes called a tastes theory.
idea is that some people are prejudiced so
will be prepared to pay a price to avoid
certain groups
this then affects the demand for labour of
those groups.
A simple example
Employer Discrimination
Suppose some employers are prejudiced
against black people so that, if black and
white wages were the same, they would
always prefer to employ white workers.
But they do care about profits so that, if
the black wage is sufficiently below the
white, the extra money they can save by
employing black workers is sufficient to
overcome their prejudice.
More formally
wage for white workers is W
w
wage for black workers is W
b
Firm f will choose to employ black workers
if:

where d
f
is the firms discrimination
coefficient.

/ 1
w b f
W W d > +
The discrimination coefficient
If d
f
=0 the employer is not prejudiced and
employs whichever group of workers is
cheapest
a larger value of d
f
implies the employer is
more prejudiced.

The Market as a Whole
The market will have a white wage and a
black wage
For given wages all firms with d
f
below d
f
*
will employ only black workers, those with
d
f
above d
f
* will employ only white workers
Where:
*
/ 1
w b f
W W d = +
Overall demand for black workers is:

Overall demand for white workers is:

Market wages will equate supply to
demand
What will equilibrium look like?

( )
( )
*
1
1
F
d d
B f f B
f
N n d W
=
= +

( )
* 1
F
d d
W f w
f f
N n W
= +
=

Equilibrium with No Prejudice

Relative Supply
Relative
Demand
White wage
/Black wage
White employment
/Black
employment
1

Equilibrium with prejudice


Relative Supply
Relative Demand
White wage
/Black wage
White employment
/Black
employment
1
Consequences
Wages and employment lower for black
workers
But also profits are lower for prejudiced
employers as they only hire expensive
white workers
Becker argued that competitive markets
would drive out employer discrimination
Though not customer discrimination
Is this true?
Statistical Discrimination
in a world of imperfect information,
employers will base decisions on
observable characteristics (like race and
gender) that do not directly affect
productivity because they are correlated
with unobserved characteristics that do
affect productivity
Many variants of this theory I will give
one
A Simple Model
Suppose true productivity of a worker is p
assume this is not observed by
employers
Employers do observe an imperfect signal
of productivity (e.g. education), s,
they are assumed to know the distribution
of p in the population as a whole.
Expected productivity of someone with signal s
can be shown to be (dont worry about the
details):

is mean productivity in population as a whole
is a measure of how informative the signal is
In a competitive labour market workers will
receive a wage equal to their expected
productivity
( ) ( )
1 E p s u u = +
theory starts by assuming that is lower
for whites than blacks.
The reasons why this should be the case
are not entirely clear but lets not get into
that.
Wages of whites and blacks will now be:
( ) ( )
1
w w w w
W s s u u = +
( ) ( )
1
b b b b
W s s u u = +
black and white workers with the same
level of education will now get different
wages so there is some discrimination
But average level of wages across will
simply reflect the average level of
productivity so there can only be
discrimination overall if
If not true then educated black workers will
get less than their white counterparts but
uneducated black workers will get more
with the average across all groups being
zero.
w b
=
This may not seem very interesting but
there are reasons why average
productivity may end up different
Consider choice of education
Suppose s is chosen to maximise:

This leads to first-order condition:
( ) ( ) ( ) ( ) ( )
1 U s W s C s s C s u u = = +
( )
' C s u =
Implication
Education increasing in
If is lower for blacks then they will acquire less
education and average productivity will be lower
In equilibrium blacks get paid less than whites
because they have lower productivity but this is
the outcome of a rational decision-making
process in which they have lower returns to skills
because employers find it harder to evaluate
their skills.
key point in models of statistical
discrimination
your fate is determined not just by what
you do but by what people like you do.
This can lead to self-fulfilling expectations
that are discriminatory in nature.

Empirical Evidence on
Discrimination
Much empirical evidence on discrimination puts
a dummy variable for gender or race in an
earnings function, controls for lots of other things
and pronounces that the coefficient on the race
variable is a measure of discrimination.
this is not very credible evidence one can
always argue that important variables have been
omitted or that some variables that are included
should themselves be part of measured
discrimination (e.g. occupation).
Audit Studies
These are experimental studies
These have a long history in academic
research, even TV documentaries.
basic idea is to get two people to apply for
jobs with identical (fake) CVs but who
differ in race/gender.
One then observes what happens to them.
Problems with audit studies
Most studies of this type have very small
samples because it is expensive,
there are concerns that the participants
may be knowingly participating in the
experiments producing the desired results.
Bertrand-Mullainathan found a clever way
around this
Bertrand-Mullanaithan
Instead of sending out people they sent out cvs.
this enabled them to:
more tightly control the information available to
employers
to dramatically increase the sample size they have
about 5000 job applications.
Use black-sounding names to pick up
discrimination
Treatment is correlated with being black but not
perfectly so
Results
Conclusions
But they also measure outcomes conditional on various
other covariates
location, Boston, Chicago
Gender
occupation and industry
quality of cv
address of applicant
Their main conclusions are that:
those with black names have lower call-back rates
than those with white names
this disadvantage is larger for those with better
observable skills
there is little other systematic variation across other
characteristics of the worker or job
it is hard for the theories described above to explain all
of these findings.
Interpretation of the Estimates
two issues I want to single out for
discussion
can one equate the effect of having a black
name to the effect of being black?
Is this really a randomised experiment?
What do we measure
denote by X the binary variable of having a
black name and B that of being black.
Suppose we can write the outcome equation as:

Here
1
is effect of being black,
2
the additional
effect of being black and having a black name
and
3
the effect of having a black name if white
(the omitted category is white with a white
name).
0 1 2 3
(1 ) y B XB X B | | | | c = + + + +

Bertrand-Mullanaithan estimate the
difference in outcomes for those with a
black name and those without i.e. they
estimate:

( ) ( )
1 0 E y X E y X = =
This is given by

( ) ( ) ( ) ( )
0 1 2 3 3
1 1 1 E y X E B X E B X | | | | | = = + = + = +
( ) ( )
0 1
0 0 E y X E B X | | = = + =
( ) ( )
( ) ( ) ( ) ( )
1 2 3 3
1 0
1 0 1
E y X E y X
E B X E B X E B X | | | |
= = =
(
= = + = +

This is not directly interpretable
If it is only race that matters and name matters
only because it is an indicator of race then we
would have the restrictions
2
=
3
=0
Then we have:

i.e. an under-estimate of the true effect of being
black unless being black and having a black
name are perfectly correlated.
( ) ( ) ( ) ( )
1
1 0 1 0 E y X E y X E B X E B X |
(
= = = = =

Is it a true random experiment?
the assignment to the cvs of the names is
random so random from the perspective of the
researchers.
But this does not mean the name will necessarily
be regarded as random by the employers.
In fact the researchers dont want it to be
regarded as randomly assigned as they want the
employers to infer something about the race of
the applicant.
But perhaps the employer infers all sorts of other
things from the name.
Fryer and Levitt
show that blacks with distinctively black
names come from lower socio-economic
backgrounds, poorer neighbourhoods etc.
So, employers might be inferring a lot
more than just race from these names.
If this is right then there will be an omitted
variables bias.
Omitted Variables Bias
suppose that the outcome variable is related to
two factors, W
1
that is observable and W
2
that is
not according to:

One can assume that the name is independent
of the observable characteristics but not
necessarily the unobservable.
In this case Bertrand-Mullanaithan will estimate:
0 1 1 2 2
y W W | | | c = + + +
( ) ( ) ( ) ( )
2 2 2
1 0 1 0 E y X E y X E W X E W X |
(
= = = = =

Implication
Only if the only omitted variable believed to be
correlated with having a black name is being
black will this be what we want to estimate.
Bertrand-Mullanaithan are aware of this problem
and investigate the correlation between callback
rates and the average mothers education for the
particular name not finding a significant effect.
But Fryer and Levitt, which is a non-
experimental study find that controlling for
factors observable at birth, having a black
name has little impact on a range of outcomes
(albeit not all those one would like) in later life.
Fryer and Levitt results
Other studies
Bertrand-Mullainathan study now been
repeated in many countries

Always seem to find the name matters

Perhaps suggests discrimination in
general not inferring economic
disadvantage as that varies country to
coountry
Britain
DWP Research Report No.607
Summary of Findings
Conclusion
Bertrand and Mullainathan results
provocative
However we interpret the results, we
would hope that name would be irrelevant
They show it is not