When you think of job discrimination, your first image might be a manager who refuses to hire members of some group, such as African-Americans or women, because of pure prejudice. As a result, the victims of prejudice, prevented from working at high-paying jobs, must accept lower wages elsewhere. No doubt, many employers hire according to their personal prejudices. But it may surprise you to learn that economists generally consider employer prejudice one of the least important sources of labor market discrimination.
To see why, look at Figure 4, which shows the labor market divided into two broad sectors, A and B. To keep things simple, we'll assume that all workers have
EMPLOYER DISCRIMINATION AND WAGE RATES
Sector A (Discriminating)
Sector B (Nondiscriminating)
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Number of Workers
In the absence of discrimination, the wage rate would be W, in both Sector A and Sector B. If firms in Sector A discriminate against some group—such as women—the group would seek work in nondiscriminating Sector B. The increased labor supply in Sector B causes the wage there to fall to W2, while the decreased supply in Sector A causes the wage there to rise to W3. But only temporarily. As men migrate from Sector B to the now-higher wage Sector A, the labor supply changes in both sectors are reversed. The wage returns to W, in both sectors.
the same qualifications and that they find jobs in either sector equally attractive. Under these conditions, if there were no discrimination, both sectors would pay the same wage, W1. (Can you explain why?)
Now suppose the firms in sector A decide they no longer wish to employ members of some group—say, women. What would happen? Women would begin looking for jobs in the nondiscriminating sector B, and the labor supply curve there would shift rightward, decreasing the wage to W2. At the same time, with women no longer welcome in sector A, the labor supply curve there would shift leftward, driving the wage up to W3. It appears that employer discrimination would create a gender wage differential equal to W3 — W2.
But the differential would be only temporary. Why? With the wage rate in sector B now lower, men would exit that market and seek jobs in the higher-paying sector A. These movements would reverse the changes in labor supply, and, in the end, both sectors would pay the same wage again. Employer prejudice against women might lead to a permanent change in the composition of labor in each sec-tor—with only men working in sector A and both sexes working in sector B—but no change in wage rates.
But employer prejudice might not even change the composition of labor in either sector, because there is another force working to eliminate this form of discrimination altogether: the output market. Since biased employers must pay higher wages to employ men, they will have higher average costs than unbiased employers. If biased firms sell their output in a competitive market, they will suffer losses and ultimately be forced to exit their industries. Over the long run, prejudiced employers should be replaced with unprejudiced ones. If the output market is imperfectly competitive, the firm will still have its stockholders or owners to contend with. Unless their prejudice is so strong that they are willing to forego profit, management will be under pressure to hire qualified women at a lower wage. In either case,
When prejudice originates with employers, market forces work to discourage discrimination and reduce or eliminate any wage gap between the favored and the unfavored group.
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