Learning Objectives

• Analyze earnings gaps based on race and gender
• Explain the impact of discrimination in a competitive market
• Identify U.S. public policies designed to reduce discrimination

Earnings Gaps by Race and Gender

A possible signal of labor market discrimination is when one group is paid less than another. Figure 15.5 shows the average wage of black workers as a ratio of the average wage of white workers, and the average wage of female workers as a ratio of the average wage of male workers. According to research done by the Pew Research Center, released in 2016, the wage gap between white men and black and Hispanic men has not narrowed since 1980. In 1980 that gap was 73% for black men and 71% for Hispanic men. In 2015, the gap for black men was still 73% and the gap for Hispanic men grew slightly to 69%.

Figure 15.5 Wage Ratios by Sex and Race The ratio of wages for black workers to white workers rose substantially in the late 1960s and through the 1970s, but has not changed much since then. The ratio of wages for female to male workers changed little through the 1970s, but has risen substantially since the 1980s. In both cases, a gap remains between the average wages of black and white workers and between the average wages of female and male workers. (Source: Bureau of Labor Statistics, 2014)

An earnings gap between average wages, in and of itself, does not prove that discrimination is occurring in the labor market. We need to apply the same productivity characteristics to all parties (employees) involved. Gender discrimination in the labor market occurs when women are paid less than men despite having comparable levels of education, experience, and expertise. Read the Clear It Up feature about the sex-discrimination suit brought against Wal-Mart. Similarly, racial discrimination in the labor market exists when racially diverse employees are paid less than their coworkers of the majority race despite having comparable levels of education, experience, and expertise. To bring a successful gender discrimination lawsuit, a female employee must prove that she is paid less than a male employee who holds a similar job, with similar educational attainment, and with similar expertise. Likewise, someone who wants to sue on the grounds of racial discrimination must prove that he or she is paid less than an employee of another race who holds a similar job, with similar educational attainment, and with similar expertise.

Investigating the Female/Male Earnings Gap

As a result of changes in law and culture, women began to enter the paid workforce in substantial numbers in the mid- to late 20th century. By 2014, 58.1 percent of adult women held jobs, while 72.0 percent of adult men did. Moreover, along with entering the workforce, women began to increase their education levels. In 1971, 44 percent of undergraduate college degrees went to women; by 2014, women received 56 percent of bachelor’s degrees. In 1970, women received 5.4 percent of the degrees from law schools and 8.4 percent of the degrees from medical schools. By 2014, women were receiving 47 percent of the law degrees and 48.0 percent of the medical degrees. These gains in education and experience have reduced the female/male wage gap over time. However, concerns remain about the extent to which women have not yet assumed a substantial share of the positions at the top of the largest companies or in the U.S. Congress.

There are factors that can lower women’s average wages. Women are likely to bear a disproportionately large share of household responsibilities. A mother of young children is more likely to drop out of the labor force for several years or work on a reduced schedule than the father. As a result, women in their 30s and 40s are likely, on average, to have less job experience than men. In the United States, childless women with the same education and experience levels as men are typically paid comparably. However, women with families and children are typically paid about 7 percent to 14 percent less than other women of similar education and work experience. Meanwhile, married men earn about 10 percent to 15 percent more than single men with comparable education and work experience.

The different patterns of family responsibilities could possibly be called discrimination, but it is primarily rooted in America’s social patterns of discrimination, which involve the roles that fathers and mothers play in child-rearing, rather than discrimination by employers in hiring and salary decisions.

Link It Up

Visit this website to read more about the persistently low numbers of women in executive roles in businesses.

Investigating the Black/White Earnings Gap

Blacks experienced blatant labor market discrimination during much of the 20th century. Until the passage of the Civil Rights Act of 1964, it was legal in many states to refuse to hire a black worker, regardless of the credentials or experience of that worker. Moreover, blacks were often denied access to educational opportunities, which, in turn, meant that they had lower levels of qualifications for many jobs. At least one economic study has shown that the 1964 law is partially responsible for the narrowing of the black/white earnings gap in the late 1960s and into the 1970s; for example, the ratio of total earnings of black male workers to white male workers rose from 62 percent in 1964 to 75.3 percent in 2013, according to the Bureau of Labor Statistics.

However, the earnings gap between black and white workers has not changed as much as the earnings gap between men and women has in the last half century. The remaining racial gap seems related both to continuing differences in education levels and to the presence of discrimination. Table 15.5 shows that the percentage of blacks who complete a four-year college degree remains substantially lower than the percentage of whites who complete college. According to the U.S. Census, both whites and blacks have higher levels of educational attainment than Hispanics and lower levels than Asians. There are many factors that could explain an earning gap. This makes the determination of an exact cause extremely difficult. These same factors are likely to have different impacts based on which gap is being studied. However, there is some evidence that suggests educational differences play a part in the black/white earnings gap. In fact, black women who have the same levels of education and experience as white women receive, on average, about the same level of pay. One study shows that white and black college graduates have identical salaries immediately after college; however, the racial wage gap widens over time, an outcome that suggests the possibility of continuing discrimination. Another study conducted a field experiment by responding to job advertisements with fictitious resumes with either very African American–sounding names or very white-sounding names and found that white names received 50 percent more callbacks for interviews. This is suggestive of discrimination in job opportunities. Further, as the following Clear It Up feature explains, there is evidence to support that discrimination in the housing market is connected to employment discrimination.

Competitive Markets and Discrimination

Gary Becker (b. 1930), who won the Nobel Prize in economics in 1992, was one of the first to analyze discrimination in economic terms. Becker pointed out that while competitive markets can allow some employers to practice discrimination, it can also provide profit-seeking firms with incentives not to discriminate. Given these incentives, Becker explored the question of why discrimination persists.

If a business is located in an area with a large minority population and refuses to sell to minorities, it will cut into its own profits. If some businesses run by bigoted employers refuse to pay women and/or minorities a wage based on their productivity, then other profit-seeking employers can hire these workers. In a competitive market, if the owners of a business care more about the color of money than about the color of skin, they will have an incentive to make buying, selling, hiring, and promotion decisions strictly based on economic factors.

The power of markets to offer at least a degree of freedom to oppressed groups should not be underestimated. In many countries, cohesive minority groups such as Jews and emigrant Chinese have managed to carve out a space for themselves through their economic activities, despite legal and social discrimination against them. Many immigrants, including those who come to the United States, have taken advantage of economic freedom to make new lives for themselves. However, history teaches that market forces alone are unlikely to eliminate discrimination. After all, discrimination against black Americans persisted in the market-oriented U.S. economy during the century between President Abraham Lincoln’s Emancipation Proclamation, which freed the slaves in 1863, and the passage of the Civil Rights Act of 1964—and has continued since then, as well.

So, why does discrimination persist in competitive markets? Gary Becker sought to explain this persistence. Discriminatory impulses can emerge at a number of levels: among managers, among workers, and among customers. Consider the situation of a manager who is not personally prejudiced, but who has many workers or customers who are prejudiced. If that manager treats minority groups or women fairly, the manager may find it hurts the morale of prejudiced coworkers or drives away prejudiced customers. In such a situation, a policy of nondiscrimination could reduce the firm’s profits. After all, a business firm is part of society, and a firm that does not follow the societal norms is likely to suffer. Market forces alone are unlikely to overwhelm strong social attitudes about discrimination.

Link It Up

Visit this website to read more about wage discrimination.

Public Policies to Reduce Discrimination

A first public policy step against discrimination in the labor market is to make discrimination illegal. For example, the Equal Pay Act of 1963 said that men and women who do equal work at a company must be paid the same. The Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex, or national origin. The Age Discrimination in Employment Act of 1967 prohibited discrimination on the basis of age against individuals who are 40 years of age or older. The Civil Rights Act of 1991 provides monetary damages in cases of intentional employment discrimination. These are examples of the many laws that have been passed in efforts to reduce (and even eliminate) discrimination. Passing a law, however, is only part of the answer, because discrimination by prejudiced employers may be less important than broader social patterns.

These laws against discrimination have reduced the gender wage gap. A study by the Department of Labor in 2007 compared salaries of men and women who have similar educational achievement, work experience, and occupation and found that the gender wage gap is only 5 percent.

In the case of the earnings gap between blacks and whites, and also between Hispanics and whites, probably the single largest step that could be taken at this point in U.S. history to close the earnings gap would be to reduce the gap in educational achievement. Part of the answer to this issue involves finding ways to improve the performance of schools, which is a highly controversial topic in itself. In addition, the education gap is unlikely to close unless black and Hispanic families and peer groups strengthen their culture of support for educational achievement.

Affirmative action is the name given to active efforts by government or businesses that give special rights to minorities in hiring and promotion to make up for past discrimination. Affirmative action, in its limited and not especially controversial form, means making an effort to reach out to a broader range of minority candidates for jobs. In its more aggressive and controversial form, affirmative action required government and companies to hire a specific number or percentage of minority employees. However, the U.S. Supreme Court has ruled against state affirmative action laws. Today, affirmative action policies are applied only to federal contractors who have lost a discrimination lawsuit. This type of redress is enforced by the federal Equal Employment Opportunity Commission (EEOC).

An Increasingly Diverse Workforce

Racial and ethnic diversity is on the rise in the U.S. population and workforce. As Figure 15.6 shows, while white Americans comprised 78 percent of the population in 2012, the U.S. Bureau of the Census projects that whites will be 69 percent of the U.S. population by 2060. The proportion of U.S. citizens who are of Hispanic background is predicted to rise substantially. Moreover, in addition to expected changes in the population, diversity is being increased in the workforce as the women who entered the workforce in the 1970s and 1980s are now moving up the promotion ladders within their organizations.

Figure 15.6 Projected Changes in America’s Racial and Ethnic Diversity This graph shows projected changes in the ethnic makeup of the U.S. population by 2060. Note that NHPI stands for Native Hawaiian and Other Pacific Islander. AIAN stands for American Indian and Alaska Native. (Source: U.S. Department of Commerce and U.S. Census Bureau)

Fortune-telling is not economics, but it still can be clarifying to speculate about the future. Optimists argue that the growing proportions of minority workers will knock over remaining discriminatory barriers. The economy will benefit as an increasing proportion of workers from traditionally disadvantaged groups have a greater opportunity to fulfill their potential. Pessimists worry that the social tensions between men and women and between ethnic groups will rise and that workers will be less productive as a result. Antidiscrimination policy, at its best, seeks to help society move toward the more optimistic outcome.