Discrimination and Inequality
Few terms are as emotional as discrimination. Discrimination may happen in many contexts: the market for loans or housing or schooling or in the labor market. To a labor economist discrimination in the labor market happens when two otherwise equal workers (or groups of workers) are treated differently based on prejudice regarding immutable factors such as race, religion, gender and so on.
It is crucial to emphasize that many comparisons one sees in the press do not hold all dimensions otherwise equal . Thus, if we observe that a group of women are more likely to be absent from work due to family responsibilities and that absence is expensive to employers, we should not anticipate that the labor market would treat the men and women equally (same pay for example) even in the absence of prejudice. This is not a claim that women should have greater family responsibilities. Indeed, it might well be unfair that women do have greater responsibilities but it is not labor market discrimination that results in the earnings differences. It may well be socialization (even unfair socialization) that happens long before workers enter the labor market but the labor market is simply reflecting the productivity of the two groups of workers in this example.
Let me be clear that I am not suggesting that all earnings differences can be easily explained in the fashion done in the previous paragraph, rather that the careful observer needs to distinguish discriminatory treatment in the labor market from other sources of pre-market differences that generate productivity differences in the labor market that are then translated into earnings differences. Those pre-market difference may themselves reflect discrimination in education, access to health or many other things but do not reflect discrimination by or in the labor market.
With this as introduction, lets talk about broad patterns in earnings in the recent US economy. Female earnings as a share of male earnings were approximately 64 percent in 1973 but that share increased steadily over the late seventies to early nineties. In 2000 the share was approximately 78 percent and the latest estimates are at 81 percent. Over these same decades, black earnings as a share of white earnings has been virtually constant at about 80 percent. Compare the charts below. As the text makes clear the gender gap among blacks is virtually non-existent. That is, black men and black women earn essentially the same. Thus, even the basic patterns (women earn less than men) are not simple ones that hold in all circumstances.
Let’s compare these earning differences to differences in unemployment rates. Over the last three decades the rough rule of thumb is that the black unemployment rate is about two times as large as the white rate. Interesting, the female unemployment rate has historically been essentially the same as the male rate and shows a similar racial difference as that for men. The great recession revealed a change in this historical pattern with male unemployment rates substantially larger than the female rate: 10.1 vs. 7.7 percent seven years ago. One consequence of the recovery has been that this difference has been shrinking and is almost gone today — check out the latest in Table 1 at the end of this link and see how similar the unemployment rates by gender have been — http://www.bls.gov/news.release/empsit.nr0.htm
The differences in earnings and unemployment do not capture differences in the actual work that different groups do in the labor market. Thus, for some occupations a particular gender or race comes to mind (men are engineers and women are librarians perhaps). Examine, for instance, the occupational statistics given below. They range from crane operators that are 1 percent female to typists that are 99 percent female. Across occupations an index of segregation can be computed.
The extent of occupation segregation by race has fallen from 38 percent to about 26 percent but that for black women has fallen faster than that for black males.
Again, the earlier chart for this week presents the share of women and black workers in a variety of occupations. For example, in 2000 28 percent of physicians were women. Yet this hides a trend that more women are entering this and other professions. Thus, recent numbers shows dramatic changes in women’s entry into a variety of professions such that women are now nearly half of all new lawyers, 42 percent of new doctors, more than 2/3rds of all new pharmacists and nearly all of the new veterinarians. Such trends will change the shares of these occupations that are female. The figure below shows the overall index of gender occupational segregation (as above but across many, many occupations) and shows a very substantial decline. The share of occupations in which blacks are growing shows a far less dramatic change.
Despite these gains, we began by showing substantial gender differences in earnings. Where do these come from?
Factors not associated with discrimination in the labor market:
Rational choice: The view is that in attempting to make traditional household responsibilities more compatible with labor market work, women make decision concerning human capital investments, hours of work and job location that result in incomes lower than those of men who make other choices. There is surprisingly strong evidence of a large negative relationship between housework and wages for married women. (See me for references) Note that a decision to specialize relatively more at home or at work may make sense from a joint family perspective (without suggesting which spouse should specialize in which activity).
Participation and Human Capital Decisions: If women are responsible for a disproportionate share of childbearing and rearing their participation will be discontinuous and perhaps truncated and they may have lower labor force attachment. If they do work fewer lifetime hours, their return on human capital investments would be lower and they might rationally invest in less education or training. This may be especially true of specific training which they would lose if they leave a current employer. Moreover, a period out of the labor market may result in a period of depreciation of human capital that men do not have.
Heterogeneous tastes or preferences: Women may avoid jobs with difficult locations, hours, lots of risk of death or accident. These each genearate compensating differentials (higher wages) that we discussed earlier in the class.
Discrimination in the labor market:
The prejudice against women (and against racial minorities) may arise from three major groups of actors. First, the employer may have a prejudice. Second, the source of the prejudice may be fellow workers and finally, the source of predudice may be customers.
The employer may decide to hire fewer women and more men than is optimal. According to the major theory of employer discrimination (Nobel prize winner Gary Becker) this will result in a profit loss for the firm as it purchases lots of overpriced men when lower priced women could do the job as well. In this view lost profits represent a cost that the employer is willing to pay to indulge their prejudice.
If coworkers do not like a particular type of worker (who is otherwise equal) they will only work with such workers if other aspects of the employment bargain are adjusted — for instance if their pay is higher. To avoid paying these implicit costs of an integrated workforce, the rational employer will segregate its workforce.
Similarly, if customers have a strong preference to receive a service from a particular type of workers (say someone of the same sex or race), the skills of those types of workers will be more valuable and hiring or pay differences will emerge. It doesn’t have to be the same sex — My mother knew she was in a fancy restaurant when she had a male waiter.
Actual earnings differentials are the result of a complex intermingling of factors. The best evidence suggests that 2/3rds of the average gender difference in earnings can be attributed to observed differences such as amount and quality of education, years of experience, the industry, the occupation and union status. The single most important factor is years of experience. Similarly, 89 percent of the pay differential between black and white men can be explained by the same factors. One influential study found that more than 2/3rds of the racial difference could be explained by differences in cognitive achievement as measured by the armed services qualifying test. This study found that black men had lower scores due to lower-quality schooling and other environmental factors. These differences may be unfair (and should, indeed, be remedied) but they have developed pre-market. One would need to equalize educational quality, improve child environments and so on.
A critical point is that these studies that explain large portions of an earnings gap also routinely still leave a unexplained gap in earnings that maybe, in part or in total, the result of discrimination in the labor market.
Equal Employment Opportunity
A series of federal efforts attempt to combat discrimination in the labor market. They represent one of the three major exceptions to the “at will” doctrine. That doctrine, based on common law, implies that either side of the employment relationship can terminate the relationship at will. Thus, a worker can be fired for “a good reason, a bad reason or no reason.” These might include things such a boss not liking one’s hair color or attitude or really anything. The three major exceptions are the anti-discrimination laws, explicit collective bargaining contracts negotiated by trade unions and the growing interpretation of implicit contracts and the requirements for just cause. This latter exception is largely state specific rather than based on federal laws. You can find a discussion of this third exception in this article on-line . We will save collective bargaining until later in the class but now we will briefly discuss the major federal anti-discrimination statutes.
The Civil Rights Act of 1964: Title VII
It is illegal to hire, fire, pay, assign jobs or conditions, to segregate or limit opportunities on the basis of race, color, religion, sex or national origin.
The basic notion of the act was that women and minorities could not longer be discriminated against but should be judged by objective criteria. The Equal Employment Opportunity Commission (EEOC) was established to resolve complaints and has the power to bring suits.
This enforcement of Title VII has progressed along two broad lines as interpreted by the courts.
Disparate Treatment: This is deliberate discrimination based on race or gender. It usually involves two or more actual individuals treated differently because of race or gender. An example might be a policy that refused to hire women with small children while ignoring the small children of men. A more complex example is employer provided pensions. Under a defined benefit program a women with the same earnings profile and years of service as a man is likely to collect greater benefits as her life expectancy is longer. Yet, a firm that reduces the benefits of women in response has discriminated by not treating all employees as individuals but rather as part of groups. There are exceptions to this view provided by bona fide occupational qualification (the hiring of a minister may be limited to applicants of the relevant religion).
Disparate Impact: Job requirements that impact protected groups differently than others may be illegal if the requirement is not proved relevant to job performance. Thus in the famous Duke Power case of the 1970s, the company had requirements that applicants must have a high school degree and a minimum score on aptitude tests. The high school graduation rate for whites in N. Carolina was more than twice that of blacks at the time and 58 percent of whites could pass the aptitude test but only 6 percent of blacks in N. Carolina. Thus, the effect of the requirement was to greatly limit the number of successful black applicants. Given this different (disparate) impact, the law changes the burden of proof requiring that the company prove that these job requirements were closely related to job performance which the employer could not do. So one can anticipate that height, weight and strength requirements will have disparate impact by gender and so the employer faces the burden of proof to show the importance of these as critical to job performance. This is not always easy. As an illustration, strong male firefighters may be more successful in pulling an adult down from a second story in a fire but small female firefighters may be more successful in rescuing a child through a small basement window.
Sexual harassment is seen by the courts as a type of disparate treatment. Such harassment can be either quid pro quo harassment (do this or else) or it can be “hostile environment” harassment (verbal teasing of a sexual nature, improper touching and so on). Obviously, a difficulty in the latter case is that one person’s innocent playing may be another person’s sexual harassment. While the general standard has been that of a reasonable person, at times the court has applied a “reasonable women” standard. The victim can be awarded compensation from an employer for emotion pain and mental anguish if the employer knew, or should have known, about the situation.
The Equal Pay Act of 1963
For jobs that are substantially similar, men and women must be paid the same. This falls short of equal pay for comparable work and is sometimes described as equal pay for equal work. The difference is important if there is substantial gender segregation by job. If the jobs are different, men and women may have very different earnings. Some have argued that that the laws be strengthened to require equal pay for comparable worth. Critics worry about the functioning of the market. Who determines if the worrk of librarians and engineers is equal or not?
Age Discrimination
Age Discrimination in Employment Act was first passed in 1967 and applies to all workers 40 or older. Under most circumstances it is illegal to refuse to hire, promote or train a worker because they are “too old.” Mandatory retirement was ruled illegal under this law. Older workers cannot be paid less than younger workers doing the same job. Statistical analysis can be used to show that job performance deteriorates with age (airline pilots). If so, restricts may be imposed. A major number of suits are filed by older workers who feel “passed over for promotion.” Indeed, suits brought under age discrimination constitute the largest number of discrimination suits filed. Early retirement incentive plans can be legal if they are available for only a short period of time, are offered to all workers above a certain age and there is no treat of retaliation against those who do not accept.
Discrimination against the Disabled
The Americans with Disabilities Act of 1990 makes it illegal to use a handicap as a reason not to consider someone for a job. Five to ten percent of work age people may have such handicaps (handicaps that might otherwise influence their employment possibilities). The law requires that employers make a reasonable accommodation to a worker’s disability. A disability is defined as a physical or mental impairment that substantially limits one or more of an individual’s life activities. Such a worker is nonetheless to be considered “qualified” if they can perform the essential functions of the job, after reasonable accommodation if necessary. The standard of whether or not an accomodation is reasonable is one of undue hardship. Specifically, reasonable is judged by how large are the costs (all direct and indirect) sustained by the employer. Providing a new chair is reasonable but redesigning a building is likely not reasonable.
Affirmative Action
This remains an area of much controversy, in part, because legislation has not addressed the issue. Instead, policy has largely been created by executive order (the power of the President). The basic notion differs from that of Title VII. The presumption is that if women and minorities are underrepresented in a particular type or level of job, the employer should do something about it. Thus, a first step would require determination of whether there exist jobs in which protected classes are underrepresented. This may not be easy as it demands determining who is presently qualified for the job, how easy is it to train those not qualified and over how large an area should these questions be answered. (What is the geographic size of the relevant labor market?) If following this, the employer determines certain race or gender categories are “under utilized,” the first step is identification of policies or practices that may have resulted in that under utilization. Next an affirmative action play is detailed to remedy the problem. Failure to develop such a plan can result in loss of government contracts.
This is administered by the Office of Federal Contact Compliance Programs (OFCCP). This is often a process of meeting goals and timetables. This program has been a lightening rod seen as reverse discrimination by some. The extent to which applicants’ race and gender can be considered continues to be an on-going issue. The actual scope of affirmative action is modest and its effects are modest as well. At issue remains whether it is an appropriate way to redress past harms?
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