Question

Under employer discrimination, employers subjectively discount workers’ marginal revenue products. Set up a graphical analysis to show the case where discriminating employers hire fewer workers of the less preferred group than non-discriminating employers in perfectly competitive markets. Do these firms differ in terms of the wages they pay? Explain.

Answer 1

Employer Discrimination

• In maximizing their utility, the owners of firms may elect to sacrifice profits in order to take specific actions, such as discrimination.
• In the Becker model, assume that the firm’s owners are also the managers.
  • The firm’s profits are π = p ∙ y - w ∙ N - w_b ∙ N_b
  • The typical owner’s utility is given by U =U(π, w_b N_b)
    • π = the firm’s profits
    • U = the owner’s utility
    • w_b = the wages of Black workers
    • w = the wages of White workers
    • N_b = the employment level of Black workers
    • N = the employment level of White workers
    • p = product price
    • y= quantity of output
      • The owner’s utility depends positively upon profits, π, and negatively—as a result of its discriminatory preferences—on the total payments made the Black workers (w_b N_b).
  • Assumption: Employer Utility: Employer utility is given by U = U(π, w_b N_b)=π -δ_e∙ (w_b N_b)
    • δ_e= the coefficient of employer discrimination. This translates the employer’s taste for discrimination into monetary terms. If δ_e=0, the employer is not prejudiced because it cares only about its profits.
    • w = (w = w_b)/w_b = the coefficient of market discrimination, or the proportionate gap between the wages of White and Black workers that prevails in the marketplace.
    • Becker’s Model of Employer Discrimination
    • (a) The product and labor markets are perfectly competitive.
    • (b) The working population, N,) supplies its labor inelastically.
    • (c) Each firm produces output, y, according to y = MP_L ∙ (N + N_b).
      • For simplicity, MP_L is the constant marginal product of labor, not the usual diminishing marginal return.
      • The MP_L is the same for both Black and White workers.
    • (d) In the short run, the capital stock is fixed, and each firm has a given number of jobs slots.
      • The total number of job openings is V, where V > N.
    • (e) There are no legal restrictions limiting discrimination in the workplace.
    • In the absence of discrimination, employers seek only to maximize their profits. It predicts that Black and White workers earn the same equilibrium wage, w* = w_b* = p ∙ MP_L, and in this example, w* = $150.
      • The demand for labor is represented by a horizontal line because the MP_L is assumed to be constant.
      • The supply of minority and majority labor are represented by vertical lines because they are assumed to supply their labor inelastically.
    • If discrimination coefficient δ_e ≠ w, then employment is completely segregated. The firm exclusively employs Black workers if w >δ_e and White workers if w <δ_e. If w =δ_e, then the firm is indifferent.