Episode #54  -  Economics Notes  -  "Discrimination":
Definitions From This Episode:
Price Discrimination:  Identical goods / services that are sold at different prices from the same provider.  In a theoretical market (perfect information, perfect substitutes, no transaction costs / prohibition etc) price discrimination can only be a feature of monopolistic / oligopolistic markets.

Discrimination:  Often referred to as "taste" or "racial" discrimination, occurs when the marketplace takes into account characteristics that don't effect productivity.  (IE:  Sex, Age, Race, Religion, etc.)

Statistical Discrimination:  The theory that a particular party in a transaction is discriminated against because one party in the market transaction is more culturally attuned to more familiar cultural groups.  These assumptions are not necessarily based on bigotry, but rather expected productivity etc. based on personal historical encounters with members of that particular group in an attempt to advert risk.

Discrimination Coefficient:  The compensation required to interact with members of an undesirable group.

VMP:  The value of marginal product is a measure of a firm's revenue contributed by the last unit of a productive factor employed (IE: Last employee hired).

Utility:  Ability of a good or service to satisfy one or more needs or wants of a consumer. Utility is an indefinable variable and can be hard to measure. However, it can be determined indirectly by using consumer behavior theories, which assume that consumers will strive to maximize their utility.

Incentive:  A reward for a specific behavior, designed to encourage that behavior.

* More economics definitions / info can be found here.

Math, Graphs and other boring stuff:  Rockers vs. Rappers (from show):
Employer Discrimination: 

  • Suppose that there are only two types of workers, Rockers and Rappers.  In the absence of discrimination, Wage(Rocker) = Wage(Rapper).  For this example, let's assume that the equilibrium wage is $10 per hour.  Now suppose that an employer dislikes Rappers.  This distaste for Rappers causes the employer to act as if hiring Rappers is more expensive than their true market wage rate.  (*See "discrimination coefficient" definition above).
  • Wage(Rapper) = (1 + d)  where "d" is the discrimination coefficient.  (d >= 0).
  • If the employer has a discrimination coefficient of 0.25, they feel as if they are paying the employee $12.50, which in their mind is more than the equilibrium wage of $10 per hour.
  • Since an employer will hire more employees until the Value of Marginal Product = Wage, that is the last employee hired produces exactly what he is paid, the firm that discriminates will hire fewer workers and be less productive than the firm that does not discriminate.  Employer discrimination is therefore less profitable in the free market.

Employee Discrimination: 

  • Ever have a job that paid more than your last job, but you would gladly make less to avoid working with your new co-workers?  Well, suppose that to employers Rockers and Rappers are equally productive, but Rockers don't like working with Rappers.
  • Wage(Rocker) = (1 - d)  where "d" is the discrimination coefficient, much like the above example.
  • If a Rocker has a discrimination coefficient of 0.5, he / she would see a job that pays $10 an hour working for other Rockers (10 - 0 = $10 per hour) to be more desirable than a job that pays $14 an hour working for Rappers (14 - 7 = $7 per hour).  Since employers will not pay above market wage for employees (in an unregulated market), Employee Discrimination is less profitable in the free market.

Consumer Discrimination: 

  • Suppose that customers don't like to interact with a firms Rapper employees and therefore perceive the price they pay as being higher.
  • Price of Good / Service = (1 + d) where "d" is the discrimination coefficient, much like the above examples.
  • If the firm can't hide their Rapper employees, they may experience less demand for their product / fewer profits in order to compensate their customers for their "distaste".
  • *** Consumer Discrimination is often mistaken as "Employer Discrimination" by outsiders.  (IE: Hooters employs 90lb chicks with "D Cups" for their wait staff, and hides 300lb "Fat Dudes" in the back to prepare the food, because that's what their customers want).
  • The premium that the consumer is willing to pay in order to avoid a particular group is not profitable for the consumer.  (IE:  Customers willing to pay more to shop at Whole Foods as opposed to WalMart because of the friendlier, more knowledgeable staff (or less idiotic customers :)).
  • Consumer Discrimination is based on societies tastes, which will naturally change over time.

Statistical Discrimination: 

  • Differentials in wage / price that arise between groups in the absence of prejudice.  The result of treating members of a group based on a knowledge of that group's history.
  • For instance, the show example of discriminating against Rapper customers (regardless of race, sex, religion etc.) because of negative historical encounters (IE: Customers stealing stuff, customers robbing you at gunpoint, customers being shot while robbing convenient stores etc.) in order to advert risk.

 

Additional Notes on Discrimination: 

  • Discrimination can be hard to measure.  For instance, there are many more factors that go into men and women's wages than simply race, education etc...  One must consider that women tend to generally work fewer hours and demand more benefits (maternity etc.) which may account for their generally lower wages.  Or, employees with similar education but less job experience, may produce different levels of production.
  • Regressional analysis would ideally be run on a data set of people that are identical in nearly every way (education, age, etc) except for the desired discrimination factor (race, sex, etc).
  • The above examples do not show the effects on labor supply and labor demand because it would make this text twice as long and twice as confusing.  But, If they did, it would further demonstrate that discrimination is not profitable, and that over time the "invisible hand" of the free market would bring market prices into equilibrium naturally.  I'm willing to explain this further.  Feel free to contact us.
  • It is important to note that government intervention has little to no effect on discrimination.  In theory, such intervention reduces overall utility in consumers, employers or employees.  Additionally, it's extremely costly as well, which raises the price of the effected market transactions.  Empirical evidence of this can be found in the paper below entitled "Are Emily and Greg More Employable than Lakisha and Jamal", in which Equal Opportunity / Government employers were found to be no more likely to higher minorities than their unregulated private sector counterparts.

 

Noteworthy Economics Papers on the topic of "Discrimination":
Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination
Author(s): Marianne Bertrand and Sendhil Mullainathan
Source: The American Economic Review, Vol. 94, No. 4 (Sep., 2004), pp. 991-1013
Published by: American Economic Association
Article (PDF)

Discrimination in the Lab: Does Information Trump Appearance?
Author(s): Marco Castillo & Ragan Petrie
Source: Georgia Institute of Technology / Georgia State University.
Published by: Dept. of Public Safety
Article (PDF)

The Nature and Extent of Discrimination in the Marketplace: Evidence from the Field
Author(s): John A. List
Source: The Quarterly Journal of Economics, Vol. 119, No. 1 (Feb., 2004), pp. 49-89
Article (PDF)

Why Beauty Matters
Author(s): Markus M. Mobius and Tanya S. Rosenblat
Source: The American Economic Review, Vol. 96, No. 1 (Mar., 2006), pp. 222-235
Published by: American Economic Association
 Article (PDF)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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