Wage Discrimination
What is Wage Discrimination?
Wage discrimination is paying equally productive workers different wages because of a personal characteristic such as race or sex rather than their output.
Economists define wage discrimination narrowly: two workers with the same marginal revenue product are paid differently because of who they are. Taste based discrimination is prejudice, held by an employer, co-workers or customers, that acts like an extra cost of employing the disfavored group. Statistical discrimination involves no prejudice at all, because an employer who cannot observe an individual's productivity cheaply falls back on group averages, so the individual is judged by the group. Competition pushes against the taste based kind, since a rival who hires underpaid workers gets the same output for less, while monopsony power, entry barriers and search frictions blunt that pressure. A raw pay gap between two groups is not the same thing, because it also reflects differences in hours, experience, occupation and job risk.
Wage Discrimination: a worked example
Two workers each produce output worth $30 an hour, but a discriminating employer pays the favored one $30 and the other $24, a markdown of $6 an hour. A rival with no such preference can hire the underpaid worker at $26, more than she was earning, and still keep $4 an hour, the $30 of output minus the $26 wage. Across 50 such workers putting in 2,000 hours a year, that is 50 × 2,000 × $4, or $400,000 a year of cost advantage. Competition therefore taxes taste based discrimination, which is why it survives best where competition is weak and workers cannot easily move.
The mistake students make with wage discrimination
Students apply the term to any pay gap between two groups. In economics it requires equal productivity and unequal pay, so a gap driven by different occupations, hours or experience is a different phenomenon needing a different explanation. The opposite error is assuming competition makes discrimination impossible. Statistical discrimination can survive in a competitive market with no prejudice at all, because using group averages is cheap when individual productivity is hard to observe.
Wage Discrimination questions
What is the difference between taste based and statistical discrimination?
Taste based discrimination comes from prejudice, while statistical discrimination comes from imperfect information about individual productivity. A prejudiced employer acts as if hiring the disfavored group carried an extra cost; a statistically discriminating employer has no prejudice but judges individuals by their group's average. Both produce unequal pay for equally productive workers, and only the first is directly punished by competition.
Why does competition reduce wage discrimination?
Competition reduces taste based discrimination because underpaying productive workers leaves profit on the table for rivals. A firm indifferent to race or sex can hire those workers slightly above their depressed wage and still gain, which bids the wage back up toward marginal revenue product. The pressure weakens when employers have monopsony power or when workers cannot easily move between jobs.
Is every pay gap evidence of wage discrimination?
No, a raw pay gap is not by itself evidence of wage discrimination. Measured gaps mix together differences in hours, occupation, industry, education and years of experience, and controlling for those usually shrinks the gap a great deal. What remains after controls is consistent with discrimination but also with factors nobody measured.
Related terms
Common comparisons
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