Chapter 10: Discrimination Theory

What are the three types of workplace discrimination

- Employer (causes segregation but not wage disc) - Employee (causes seg. but not wage disc.) - Customer (can cause discrimination)

What occurs in employer discrimination?

- Employers dislike hiring blacks, even though B & W are just as productive - Employers will only hire blacks if they achieve some fixed profit/worker/hour (like $1/hour) - Since they could just hire white workers, the only way to hire black workers is if they earn a dollar less per hour than white workers If the differential is less than $1, won't hire any black workers. If the differential is more than $1 per hour, they will hire black workers so they will pay less The solution: have wages between blacks and whites differ exactly by the amount firms require to hire blacks BUT it is unlikely that all firms will be prejudiced In the short run, it causes non-discriminating firms to hire more black workers at a lower rate, which makes them more money because black and white workers are equally profitable. They will drive white firms out of business. Demand for black workers will rise, and wages will eventually adjust until they are equal. Since wages are equal, firms can segregate if they want based on preference, but pay will be exactly the same so there will be no discrimination.

How do we combat the self-confirming expectations theory?

- Subsidize training - Act if they had the same beliefs about both groups by using affirmative action (bad bc makes black workers less productive bc given skilled job anyways and has no incentive to get training)

How do we add complexity to the statistical discrimination model?

1. Assume different worker types for both, a high skill and a low skill A SJ + SW = 10 A USJ + SW = 7 A SJ + USW = 4 USJ + USW = 0 - They can successfully assign white workers to their skill levels, so they'll make an average of 7 (10 + 4)/2 - Can't successfully assign black workers, so they dump them all into one category and pay them the skilled average wage This means that white workers make more (discrimination) and there is a different distribution when there should be the same distribution of wages

What is statistical discrimination?

1. Assumes firms are profit maximizing 2. employers/ees are NOT prejudiced 3. when faced with uncertainty, they make decisions based on statistic inferences

What are the assumptions we make regarding the basic models of discrimination?

1. Equal productivity among both groups 2. Labor Market is perfect

What do transaction cost models state?

1. Relies that social distance makes it hard for people of different backgrounds to interact - but groups must be able to communicate on some basis in order to trade

What does the transaction cost model result in at equilibrium?

1. Segregation across firms, but also possible discrimination since blacks must share the cost of the premium paid to workers who can code switch and communicate with both groups

What is the significance of the "perfect" labor market assumptions in the models? What imperfections are relevant and what are the consequence?

1. The assumption of perfect markets is critical in establishing the conclusions of all three models. (Firms can find each other, are good at matching and judging a worker's value, and workers can bid wages up since lots of firms are competing) Important imperfections in the market include: 1. Hiring delays (Getting hired and finding jobs takes time) 2. Matching challenges (Workers are unaware of which jobs have vacancies, jobs don't know who is looking) 3. Job search strategies to minimize opportunity costs (Workers want to apply to high paying jobs with few applicants, jobs want lots of candidates and must choose who to interview and forego others. Applicants must choose and forego certain applications because they take time. Consequences: 1. Blacks will avoid "white attractive jobs" 2. Blacks will experience more unemployment when applying at the same jobs as whites 3. Blacks will accept lower wages because they will receive lower wages 4. More likely to have poor matching outcomes, making employers less likely to hire blacks

Why do we worry about theories of discrimination?

1. To help us interpret data on discrimination 2. To help us address discrimination

How do we set the statistical discrimination model up?

Assumes that there are high productive and low productive groups of blacks and whites in the same amount. Employers can assess whether whites are high or low, but will treat all blacks as average (all get paid the same as the average worker) So the average is the same. Half of whites earn 10 and half earn four, so the average is 7. All blacks get paid average, so 7. But the distribution is different amongst blacks and whites

What is the model behind the self-confirming expectations model?

Assumptions: Firms max profits, are not prejudiced, have skilled and unskilled workers, but struggle to tell them apart. However, they expect that blacks invest less in themselves than whites do, so blacks must send a stronger signal of investment to show that they are legitimacy Since they have to give off harder signals, blacks get defeated and invest in themselves less, confirming the expectations Left up to employer's preconceived notions: If they believe whites get trained, then whites will get trained and it'll be worthwhile, while it won't be for blacks because they believe the opposites Blacks will not see training as worth it because of how the employer views blacks, and will take the lesser job

What does adding a dominant language to firms do? Why does this support affirmative action?

Causes a disadvantage - people who can speak the language will have ongoing advantage of those who do not Affirmative action: Supports affirmative action because adding female/black ppl to leadership will allow them to change the dominant language of business and succeed

What is social distance?

Differences in expression, communication, and nonverbal cues

How is discrimination defined with respect to outcomes?

Discrimination is present when blacks and whites with identical characteristics have systematically different outcomes

What does the basic statistical discrimination model state?

Employer have a harder time observing productivity of blacks than whites

What are the three signals that workers can give off? What does self-confirming expectation cause?

High - only skilled workers Low - only unskilled workers Medium - both kinds of workers, so how the employer views the worker will impact outcome Cause: Workers with the same ability earn different wages, blacks invest in themselves less in the long run

What can statistical discrimination cause?

Negatively affect unobserved investment - black people will not invest in things that may help their careers. If black students go to schools where no connections exist, they won't get much benefit for trying harder in school, so they may put in less effort

How is prejudice different from discrimination

Prejudice = dislike, distaste, or misperception based on innate characteristics Discrimination = action = treating someone differently

What does the taxi example from the book show us?

The taxi driver discriminated by picking up the little old lady, but the race profiling aligned with statistics.

What happens if customers are prejudiced?

There should be two possible outcomes: - Segregation across all job types - Wage gap in visible jobs where people have to interact with customers (sports - white players earn more and draw bigger crowds) If customer discrimination is important, we should see blacks working in less visible jobs.

What is discrimination and what does it usually arise from?

Treating people differently based on their affiliation with a group. Often arises from rational responses to imperfect information. When MORE powerful group treats less powerfully poorly and has an IMPACT on the individual. Keeps them from getting taxi, wage, etc.

How does employee prejudice work?

Workers prefer to work with their own race. Unless the wage for an integrated firm is higher enough than a segregated firm, white workers won't go there. The firm has to pay white workers more to get them to stick around. The firm will not hire black workers unless it can pay them less; the firm can pay white workers more to get them to stick around Since black workers now earn less, profitable firms will hire more black workers. To make up the profit difference, firms will up the wage of black workers and white wages will fall until there is no difference. At equilibrium, there will be some segregation but not wage discrimination