Chapter 9 – Labor Market Discrimination
Review Questions: 1, 2, 3, 4, 5, 6, 7, 8 and 9 on page 411
Discrimination Coefficient
1 – What is the discrimination coefficient?
Employer Discrimination
2 – Discuss the implications of employer discrimination for the employment
decisions of the firm, for the profitability of the firm, and for the black-white wgae
ratio in the labor market.
3 – Can employer discrimination against blacks lead to a situation where the
equilibrium black wage exceeds the equilibrium white wage?
Employee Discrimination
4 – Derive the implications of employee discrimination for the employment
decisions of firms and for the black –white wage differential.
Customer Discrimination
5 – Discuss the implications of customer discrimination for the employment
decisions of firms and for the black –white wage differential.
Statistical Discrimination
6 – What is statistical discrimination? Why do employers use group membership as
an indicator of a worker’s productivity? What is the impact of a statistical
discrimination on the wage of the affected workers? Must statistical discrimination
reduce the average wage of blacks or women?
Measurement of Discrimination
7 – Derive the Oaxaca measure of discrimination. Does this statistic truly measure
the impact of discrimination on the relative wage of the affected groups?
Black-White & Female-Male Wage Differentials
8 – Discuss the factors that might explain why the black-white wage ratio rose
significantly in the past few decades.
9 – Discuss why a sizable part of the female-male wage differential might be
attributable to supply-side factors, such as a woman’s decision to work and acquire
human capital.
Problems: 1, 3, 5, 6, 7, 9, 10, 11 and 14 on pages 411-415
Types of discrimination
9-1. Feeling that local firms follow discriminatory hiring practices, a non-profit firm
conducts the following experiment. It has 200 white individuals and 200 black
individuals, all of whom are similar in age, experience, and education, apply for local
retail jobs. Each individual applies to two jobs, one in a predominantly black part of
town and one in a predominantly white part of town. Of the white applicants, 120
are offered jobs in the white part of town while only 80 are offered jobs in the black
part of town. Meanwhile, 90 of the black applicants are offered jobs in the black
part of town while only 50 are offered jobs in the white part of town. Using a
difference-in-differences estimator, do you find evidence of discriminatory hiring
practices? If there is discrimination, is it most likely employer-based, employeebased, customer-based, or statistical?
9-3
(a) Suppose a restaurant hires only women to wait on tables, and only men to cook
the food and clean the dishes. Is this most likely to be indicative of employer,
employee, consumer, or statistical discrimination?
(b) The dropout rate of minority and international students at U.S. colleges and
universities is higher than it is for white American students. Is this pattern most
likely indicative of employer (college administrations), employee (college faculty
and staff), consumer (students), or statistical discrimination?
Measurement of discrimination
9-5. Suppose years of schooling, s, is the only variable that affects earnings. The
equations for the weekly salaries of male and female workers are given by:
wm = 500 + 100s
and
wf = 300 + 75s.
On average, men have 14 years of schooling and women have 12 years of schooling.
(a) What is the male-female wage differential in the labor market?
(b) Using the Oaxaca decomposition, calculate how much of this wage differential is
due to discrimination?
(c) Can you think of an alternative Oaxaca decomposition that would lead to a
different measure of discrimination? Which measure is better?
9-6. Suppose the firm’s production function is given by
,
where Ew and Eb are the number of whites and blacks employed by the firm
respectively. It can be shown that the marginal product of labor is then
.
Suppose the market wage for black workers is $10, the market wage for whites is
$20, and the price of each unit of output is $100.
(a) How many workers would a firm hire if it does not discriminate? How much
profit does this non-discriminatory firm earn if there are no other costs?
(b) Consider a firm that discriminates against blacks with a discrimination
coefficient of .25. How many workers does this firm hire? How much profit does it
earn?
(c) Finally, consider a firm that has a discrimination coefficient equal to 1.25. How
many workers does this firm hire? How much profit does it earn?
9-7. Suppose that an additional year of schooling raised wages by 7 percent in 1970,
regardless of the worker’s race or ethnicity. Suppose also that the wage differential
between the average white and the average Hispanic was 36 percent. Finally,
assume education is the only factor that affects productivity, and the average white
worker had 12 years of schooling in 1970, while the average Hispanic worker had 9
years. By 1980, the average white worker had 13 years of education, while the
average Hispanic had 11 years. A year of schooling still increased earnings by 7
percent, regardless of the worker’s ethnic background, and the wage differential
between the average white worker and the average Hispanic fell to 24 percent. Was
there a decrease in wage discrimination during the decade? Was there a decrease in
the share of the wage differential between whites and Hispanics that can be
attributed to discrimination?
9-9. Each employer faces competitive weekly wages of $2,000 for whites and $1,400
for blacks. Suppose employers under-value the efforts/skills of blacks in the
production process. In particular, every firm is associated with a discrimination
coefficient, d where 0 ≤ d ≤ 1. In particular, although a firm’s actual production
function is Q = 10(EW + EB), the firm manager acts as if its production function is Q =
10EW + 10(1 – d)EB. Every firm sells its output at a constant price of $240 per unit
up to a weekly total of 150 units of output. No firm can sell more than 150 units of
output without reducing its price to $0.
(a) What is the value of the marginal product of each white worker?
(b) What is the value of the marginal product of each black worker?
(c) Describe the employment decision made by firms for which d = 0.2 and d = 0.8
respectively.
(d) For what value(s) of d is a firm willing to hire blacks and whites?
Occupational Crowding
9-10. After controlling for age and education, it is found that the average woman
earns $0.80 for every $1.00 earned by the average man. After controlling for
occupation to control for compensating differentials (i.e., maybe men accept riskier
or more stressful jobs than women, and therefore are paid more), the average
woman earns $0.92 for every $1.00 earned by the average man. The conclusion is
made that occupational choice reduces the wage gap 12 cents and discrimination is
left to explain the remaining 8 cents.
(a) Explain why discrimination may explain more than 8 cents of the 20 cent
differential (and occupational choice may explain less than 12 cents of the
differential).
(b) Explain why discrimination may explain less than 8 cents of the 20 cent
differential.
Statistical Discrimination
9-11. Consider a town with 10 percent blacks (and the remainder is white). Because
blacks are more likely to work the night shifts, 20 percent of all cars driven at night
are driven by blacks. One out of every twenty people driving at night is drunk,
regardless of race. Persons who are not drunk never swerve their cars, but 10
percent of all drunk drivers, regardless of race, swerve their cars. On a typical night,
5,000 cars are observed by the police force.
(a) What percent of blacks driving at night are driving drunk? What percent of
whites driving at night are driving drunk?
(b) Of the 5,000 cars observed, how many are driven by blacks? How many of these
cars are driven by a drunk? Of the 5,000 cars observed at night, how many are
driven by whites? How many of these cars are driven by a drunk? What percent of
nighttime drunk drivers are black?
(c) The police chief believes the drunk-driving problem is mainly due to black drunk
drivers. He orders his policemen to pull over all swerving cars and one in every two
non-swerving cars that is driven by a black person. The driver of a non-swerving car
is then given a breathalyzer test that is 100 percent accurate in diagnosing drunk
driving. Under this enforcement scheme, what percent of people arrested for drunk
driving will be black?
Oaxaca Decomposition
9-14. Consider a data set with the following descriptive statistics.
Table 1. Descriptive Statistics.
Ln(wages)
Black
Age
Work experience
Schooling
% female occupation
Mean
3.562
0.231
42.2
18.1
13.9
0.182
Men
Min
1.389
0
19
0
9
0.023
Max
5.013
1
68
42
21
.954
Mean
3.198
0.191
39.2
16.1
14.1
0.623
Women
Min
1.213
0
19
0
9
0.067
Max
4.875
1
63
35
21
.985
Wage is the worker’s hourly wage; Black takes on a value of 1 if the worker is Black
and a value of 0 otherwise; work experience is actual years of work experience,
schooling is measured in years; and % female occupation is the percent of all
employees in the worker’s occupation who are female. The following table reports
the regression results from a log-wage regression.
Table 2. Regression Results.
Men
Constant
2.314
Black
-0.198
Age
0.054
Years of work experience
0.042
Years of schooling
0.085
Percent female in occupation
-0.121
Number of Observations
R-squared
442
0.231
Women
2.556
-0.154
0.037
0.059
0.083
0.002
278
0.254
Decompose the raw difference in average wages using the Oaxaca decomposition.
Specifically, decompose the raw difference into the portion due to differences in
personal characteristics (schooling, race, age, and experience), the portion due to
occupation, and the portion left unexplained possibly due to gender discrimination.