Study Notes: Discrimination in the Labour Market (9640 Economics)
Hello future Economist! This chapter dives into a crucial real-world issue: Discrimination in the Labour Market. Understanding this topic isn't just about passing your exam; it helps you analyze why wage differences exist even between equally productive workers. It highlights how market failures (like discrimination) reduce economic efficiency and increase inequality. Let's get started!
1. Defining Labour Market Discrimination
Labour market discrimination occurs when individuals with the same abilities, experience, and productivity are treated differently solely based on non-economic characteristics, such as gender, ethnicity, age, or religion.
Key Forms of Discrimination
- Wage Discrimination: This happens when workers in the same job, with the same marginal revenue product (MRP), are paid different wages.
Example: A woman and a man doing the exact same management job, but the woman is paid 10% less. - Employment (or Occupational) Discrimination: This occurs when certain groups are restricted in terms of the jobs they can get, the training they receive, or the promotions they are offered.
Example: A specific ethnic group is disproportionately denied interviews for high-paying corporate roles.
Did you know? Discrimination can be subtle (tacit) or very obvious (overt). It often persists because of historical biases, imperfect information, or employer prejudice.
2. Impact of Discrimination on Wages, Levels, and Types of Employment
The syllabus explicitly asks you to understand how factors like gender and ethnicity impact the outcomes for workers.
Impact on Discriminated Groups (e.g., Women, Minority Ethnic Groups)
- Lower Wages: The most direct and visible effect. Discriminatory employers effectively face a lower labour supply curve for the discriminated group, allowing them to pay a lower wage (\(W_D\)) compared to the non-discriminated wage (\(W_{ND}\)) for the same job.
- Restricted Employment Levels: By hiring fewer workers from the discriminated group, employment levels (\(L_D\)) fall below the efficient level (\(L_{E}\)). This can lead to higher rates of unemployment or underemployment for these groups.
- Concentration in Certain Types of Employment: Discriminated groups are often crowded into lower-status, lower-paid occupations, sometimes referred to as the secondary labour market. This is known as Occupational Segregation.
Example: Historically, women were limited primarily to teaching, nursing, or secretarial roles, even if qualified for higher-level positions. - Reduced Human Capital Investment: If a person expects to face discrimination and receive a lower return on their education/training, they have less incentive to invest in human capital. This creates a long-term drag on their potential earnings and the economy's potential output.
Quick Review Box: The Vicious Cycle
Prejudice leads to Occupational Segregation, which means the supply of labour for the discriminated group in high-wage jobs is restricted. This lack of access justifies lower returns on Human Capital, reinforcing the inequality.
3. Conditions Necessary for Wage Discrimination (The Employer's Perspective)
For an employer to successfully implement wage discrimination, three primary conditions must be met. These conditions are similar to those required for price discrimination in product markets (Section 3.3.3.6).
Condition 1: Identify and Separate Groups
The employer must be able to clearly distinguish between the group they wish to pay less (the discriminated group) and the group they pay more (the non-discriminated group).
Example: Using demographic data (gender, ethnicity) on job applications.
Condition 2: Imperfect Competition/Market Power
In a perfectly competitive labour market, employers are wage takers—they must pay the market wage, determined by supply and demand. If they try to pay one group less, that group will immediately move to a competing firm.
Therefore, for wage discrimination to occur, the employer must have some degree of Monopsony Power (Section 3.3.4.4) or the market must be imperfectly competitive. This allows the firm to act as a wage maker.
Condition 3: Differences in Elasticity of Labour Supply
The employer must face different wage elasticities of supply (WES) for the different groups.
- Discriminated Group: Must have a more inelastic labour supply (i.e., less responsive to wage changes). This means they are less likely or able to leave the job if wages fall slightly. This often happens if the group faces higher geographical or occupational immobility, or financial pressures.
- Non-Discriminated Group: Must have a more elastic labour supply.
Analogy: Imagine a small town where a large factory is the only employer (monopsonist). If local women (inelastic supply due to immobility) are willing to accept \(£8\) per hour, but men from out of town (elastic supply) demand \(£10\) per hour, the factory can successfully practice wage discrimination.
4. Assessing the Economic Impact: Advantages and Disadvantages
When evaluating discrimination, we must consider the perspective of all economic agents: workers, employers, and the economy as a whole.
A. Impact on Workers (Disadvantages Heavily Outweigh Advantages)
- Disadvantage: Lower economic welfare due to reduced income and purchasing power, resulting in lower living standards (Section 3.3.5.6).
- Disadvantage: Psychological stress, lower morale, and resentment, which can also impact their productivity (paradoxically making the discrimination self-fulfilling).
- Disadvantage: Reduced incentive to acquire skills if returns are expected to be lower.
B. Impact on Employers
- Short-Term Advantage: Lower wage costs for the discriminated group, leading to higher short-run profits.
- Long-Term Disadvantage: Discrimination limits the talent pool available to the firm. By overlooking qualified candidates from a discriminated group, the firm may hire less productive workers from the non-discriminated group, reducing productive efficiency.
- Long-Term Disadvantage: Higher staff turnover and lower worker morale, which can increase long-run costs (training, recruitment) and reduce productivity.
- Risk of Legal Action: Modern economies have anti-discrimination laws, creating a legal risk for firms that practice wage discrimination.
C. Impact on the Economy as a Whole
Discrimination is overwhelmingly detrimental to the economy, leading to significant market failure and reducing overall economic welfare.
- Misallocation of Resources (Market Failure): Discrimination prevents the most productive workers from being matched with the highest-valued jobs. This leads to allocative inefficiency—society's resources (labour) are not being used where they yield the maximum benefit.
- Lower Potential Output: If highly skilled workers are trapped in low-productivity jobs (occupational segregation), the economy is producing inside its Production Possibility Frontier (PPF). This reduces the economy's productive capacity and future economic growth.
- Increased Inequality: Discrimination exacerbates income and wealth inequality (Section 3.3.5.1), which can lead to social tensions and economic instability.
- Reduced Aggregate Demand (AD): Lower wages for a significant portion of the workforce can reduce overall consumption, potentially shifting the AD curve to the left (Section 3.2.2.3).
Key Takeaway for Evaluation: While employers might gain small short-term profit benefits by paying lower wages, this gain is offset by long-term losses in efficiency, productivity, and morale. From the perspective of overall economic welfare, discrimination causes a massive loss (a form of deadweight loss) due to resource misallocation.
Don't worry if assessing the efficiency loss seems tricky! Just remember the analogy: if you're selecting the best team for a high-performance job, ignoring 50% of the population means you're almost certainly missing out on the best talent, making your team (and the economy) less efficient.
STUDY CHECK: Can you identify the three conditions necessary for wage discrimination?
(Answer: Identify Groups, Monopsony Power, Different WES)