BEE2045 - 2025 - Lecture 3 - Discrimination - Part 1

Theories of Discrimination: Overview

Lecture Introduction

• Course: BEE2045 Economics of Diversity and Inclusion

• Institution: University of Exeter, Business School

• Focus: Theories of discrimination (Part 1)

Economic Models of Discrimination

Classification of Models

• 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.

Measuring Discrimination in Labor Market

Discrimination and Wage Differentials

• 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

Examination of Discrimination Components

• Suppose (𝑋𝑖) captures the productive characteristics perfectly, and if (𝑍𝑖) is uncorrelated with the error term (𝑒𝑖):

  • Discrimination indicated by negative ( 𝛼 < 0 ).

Challenges in Theoretical Frameworks

Issue 1: Productivity Dependency on Z

• The impact of ( Zi) on productivity must be considered.

• Example: In sectors like entertainment, customers may prefer certain racial or gender traits of employees.

Issue 2: Endogenous ( 𝛽)

• Question whether production technology (𝛽) is truly exogenous.

• Historical example: Strength requirements in firefighting limiting women's entry, indicating engineering of physical requirements.

Issue 3: Endogenous ( X )

• Pre-market discrimination or anticipated discrimination may reduce ( Xi ) for minority groups.

  • Consequences: Poor education systems or rational beliefs about labor market biases.

Taste-Based Discrimination Model

Key Points

• 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.

Model Set-Up

• Majority group = A, Minority group = B.

• Utility function to maximize:

  • 𝑈 = 𝑝𝐹 𝑁𝑎 + 𝑁𝑏 − 𝑤𝑎𝑁𝑎 − 𝑤𝑏𝑁𝑏 − 𝒅𝑵𝒃

• ( d ): Taste parameter reflecting the firm’s level of discrimination.

Firm Objectives and Prejudiced Employers

• 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 ).

Advanced Firm Optimization

Determination of Worker Hiring

• Optimal hiring approach determined by:

  • First Order Conditions from utility maximization.

General Equilibrium Considerations

Prejudiced Employers and Market Demand

• Cumulative density function ( G(d) ) helps to analyze prejudice in the employer population.

• Factors governing wage determination based on worker types.

Implications of Discrimination

Wage Differential Conditions

• 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.

Competition's Role in Discrimination

Effect on Discriminating Employers

• 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.

Segregation and Evidence

Market Segregation

• Discriminating tastes promote occupational segregation into 'tolerant' jobs.

• Evidence: LGBTQ+ workers favor tolerant occupations, indicating a pattern of self-segregation in professional environments.

Additions to Theories of Discrimination

Frictions and Nepotism

• 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.

Next Lectures

• Upcoming topics include Statistical Discrimination and Extensions.

• Insight from culture: "Shrek the Musical" points towards discussions on institutional discrimination.

Acknowledgments

• Slides adapted from notes by David and Heidi Williams.