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Wage discrimination involves differential market wage payments for otherwise identical persons. Wage discrimination may occur because of prejudice (statistical discrimination), bigotry and nepotism (animus toward other-group persons and favoritism toward on-group persons), or because it enhances profitability (racism). An early work by Francis Y. Edgeworth in 1922 considered equal work for equal pay by sex, matching the marginal utility of the employer with the marginal disutility of the employee. This concept was accepted with some reservations and adjustments. Equal work means that the worker is indifferent between two tasks, and equal pay means that wage is equal to the marginal product of labor.
Gunnar Myrdal discussed animosity of whites against blacks in the United States from the point of view of the cumulative methodology where increased prejudices caused more discrimination and less employment, worsening both standards of living and health conditions for blacks. Discrimination causes a cumulative degradation of blacks’ standard of living, education, health, morals, and social conditions.
Gary Becker’s preference theory of discrimination advanced a coefficient of discrimination, di, measured under free competition. Assuming away differences in capital, the employer’s utility function depends on profits, and the types of workers—whites and blacks. If workers are equally productive, then discrimination enters through the tastes and preferences of the employer. An employer is willing to pay a higher wage, π(1 + di) to exclude someone from employment. An employee is willing to accept a lower wage, πj*(1 – dj), to avoid working near to someone. A consumer is willing to pay a higher price, p(1 + dk) not to be served by someone. The result is a kinked demand curve for labor if we plot the ratio of the wages of blacks to whites, women to men, young to old, or unskilled to skilled against the person discriminated against. When the ratio is unity, no discrimination happens, di = 0, and the demand curve is flat. The kink occurs where the wage ratio starts to fall from unity, indicating that the discrimination coefficient, di, is becoming larger. At equilibrium, the downward sloping part of the demand curve cuts a normal supply curve that measures more labor offered as the wage ratio increases. One implication of equilibrium is that since minority workers offer the same productivity at lower wages, a discriminating employer will have to pay higher wages to others.
Phelps advanced a statistical discrimination model to explain why, for instance, insurance companies price auto insurance higher for teenage males than females. Companies use the average behavior of the group and not individual characteristics in pricing their policies. Another popular model is Barbara Bergmann’s expansion and articulation of the crowding hypothesis. The productivity of minorities who are crowded into certain occupations may depend on group effort and having minorities in a group can be perceived as a hindrance to social interaction, lowering productivity and causing wages to fall. An index of occupational segregation showing by how much mobility between occupations is necessary to equalize wages has been declining over time. Other models consider different market structures.
William A. Darity Jr. and Rhonda Williams argue that governmental actions that allow free occupational choice is not sufficient to eliminate discrimination due to cultural barriers that create imperfect markets. Darity found that research studies on discrimination lack a unified methodology and that some studies that subscribe to the positive methodology find discrimination antithetical to perfect markets. However, Patrick L. Mason has presented a theoretical model and empirical analysis showing that racial wage and occupational discrimination may enhance the profitability of firms and protect dominant group workers from competition in the more desirable occupations. The theoretical analysis by Darity and Williams and Mason is constructed on the notion that racial discrimination is sustained by racism among employers and racial animus among workers. Moreover, in their discussion of the economics of identity, Darity, Mason, and Stewart show that the persistence of racial group identities, that is, the origins of the tastes for discrimination, may be found in the material incentives associated with inter-group antagonism and intra-group altruism.
Since the mid-1970s, government statistics for the United States have indicated that the wage ratio for blacks to whites has been stable indicating a large earning gap. The unemployment rate for blacks is about twice that of whites, but results are similar when comparing unemployment rates for white and black males against the rates for white and black women. For the same timeframe, the index of gender segregation (male vs. female) fell by approximately 16 percent from a high of approximately 68 percent in 1973, indicating that women have made considerable entry into professional occupations. The index for previous age discrimination confirming racial segregation (black vs. white) shows the same trend, falling from 37 to 24 percent for women and from 37 to 26 percent for men.
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