Regulated Industries and Measures of Earnings Discrimination

Abstract

Discrimination in the labor market can fairly be listed among the handful of issues commanding the greatest policy and research attention. The contributions of economists in this extensive scrutiny have been myriad but the most common theoretical framework builds on the nearly forty year old insights of Gary Becker (1957). Becker contends that the source of discrimination is personal prejudice. This prejudice might be held by the customer (Borjas and Bronars, 1989), or by the coworker (Buffum and Whaples 1995), or by the employer. While each of these three possibilities may result in equally productive workers receiving different labor market treatment because of their demographic group, it is prejudice by the employer that has received the greatest attention and which is mostly clearly seen as generating earnings differences between employees. The substance of this chapter begins with a description of how employer prejudice is presumed to generate discriminatory earnings differences. The model presented emphasizes the crucial role played by the absence of competitive product markets. That role follows from Becker’s view that discrimination is costly to employers. There exists, in his view, a trade-off between satisfying prejudices and earning profits. Thus, this popular model of discrimination differs from the two other broad models proposed by economists: first, that discrimination is an information problem, statistical discrimination, and second, that discrimination is a profitable tool in which firms engage as a matter of explicit strategy as suggested by some renderings of the dual labor market hypothesis.

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James Peoples deserves heartfelt thanks for routinely fine suggestions and the strongest of moral support. William Shepherd also should be thanked. It was he who first interested me in this subject when serving as my outside examiner at Swarthmore College in 1979.