BEE2045 - 2025 - Lecture 3 - Discrimination - Part 1

Two main classes: Competitive Models and Collective Models.
- Competitive Models: Focus on individual maximizing behavior, which may involve discrimination.
- Collective Models: Examine how groups act against one another.
Predominant focus of economic analysis has been competitive models.
Competitive models further divided into:
- Taste-Based Models: Discrimination based on preferences.
- Statistical Models: Discrimination based on statistical characteristics.

Definition: Discrimination occurs if minority group members are treated differently compared to majority group members with the same productivity characteristics.
Wage equation for individual i:
- 𝑌𝑖 = 𝑋𝑖𝛽 + 𝛼𝑍𝑖 + 𝑒𝑖
- Where:
  - (𝑋𝑖): Vector of observable productivity characteristics
  - (𝑍𝑖): Indicator for minority group status

Suppose (𝑋𝑖) captures the productive characteristics perfectly, and if (𝑍𝑖) is uncorrelated with the error term (𝑒𝑖):
- Discrimination indicated by negative ( 𝛼 < 0 ).

The impact of ( Zi) on productivity must be considered.
Example: In sectors like entertainment, customers may prefer certain racial or gender traits of employees.

Question whether production technology (𝛽) is truly exogenous.
Historical example: Strength requirements in firefighting limiting women's entry, indicating engineering of physical requirements.

Pre-market discrimination or anticipated discrimination may reduce ( Xi ) for minority groups.
- Consequences: Poor education systems or rational beliefs about labor market biases.

Definition by Becker (1957): Discrimination occurs when individuals incur a cost to minimize interaction with specific groups.
Employers may refuse to hire workers from undesirable groups, even if they are qualified.

Firm optimization leads to discrimination when ><
- ( d > 0 ): Indicates prejudice by the employer.
- Conditions for hiring: Employers will hire B group members only if the wage differential compensates for the taste parameter ( d ).

Optimal hiring approach determined by:
- First Order Conditions from utility maximization.

Cumulative density function ( G(d) ) helps to analyze prejudice in the employer population.
Factors governing wage determination based on worker types.

Conditional on the fraction of discriminating employers, wage differential ( w_b - w_a < 0 ) will arise.
Importance of non-discriminating employers in providing equitable wage solutions.

Free entry leads to non-discriminating firms expanding into profitable zones vacated by discriminatory firms.
Long-term effects: Proper elasticity within the market can eliminate discrimination.

Discriminating tastes promote occupational segregation into 'tolerant' jobs.
Evidence: LGBTQ+ workers favor tolerant occupations, indicating a pattern of self-segregation in professional environments.

Frictions introduced in job search can help sustain discrimination in equilibrium.
Profit-making nepotism leads to unique conditions preventing the exit of discriminatory employers from the market.

Upcoming topics include Statistical Discrimination and Extensions.
Insight from culture: "Shrek the Musical" points towards discussions on institutional discrimination.