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We have seen that all workers are paid the same wage in competitive labor markets. This is seen in real life in low-skilled industries (such as fast-food restaurants) in which workers earn close to the minimum wage, or even in some occupations that require high-skilled workers whose wages are determined by contract based on market conditions. For example, public elementary school teachers in a district might all earn a starting salary set by a county school board. However, in industries in which managers are given discretion to set the wages of their employees, different wages may be given to employees doing the same work. Although these wage differentials may be due to differences in training or work experience, some differentials may be due to economic discrimination.

Economic discrimination takes place whenever workers of equal ability and productivity are paid different wages or are otherwise discriminated against in the workplace because of their race, color, religion, gender, age, national origin, sexual orientation, or disability. This can mean that one group is paid lower wages than another for doing the same job, or that members of different groups are segregated into occupations that pay different wages.

The U.S. Bureau of Labor Statistics (BLS) measures wages for persons of various races and ethnicities as well as by gender in the labor force. Each year, it collects data on the gender wage gap, the salary that women make as a percentage of what men earn in the same occupation. The trend has represented a narrowing of the wage gap, indicating that gender discrimination has diminished over time. Less certain based on the data is whether discrimination based on race or ethnicity has seen similar improvements. Data from the BLS continue to show that African Americans and Latinos earn substantially less than Caucasians and Asians; however, these data are not separated by occupation. Thus, it is uncertain the extent to which these differences in earnings are due to discrimination as opposed to occupational choices.

Economic theories of discrimination generally take one of two approaches. The first, developed by Gary Becker, rests on the notion that bias is articulated in the discriminatory tastes of employers, workers, and consumers. The second approach, the segmented markets approach, maintains that labor markets are divided into segments based on race, gender, or some other category. This approach is often referred to as the job crowding hypothesis, or the dual labor market hypothesis.

Gary Becker’s main contribution to economics is that he vastly broadened the issues that economists study. This was no small feat. Before Becker’s influence, economists focused almost exclusively on the production and exchange of material goods and services. One early example shows the difficulties Becker faced in broadening this focus.

In 1955 Becker was asked to speak at Harvard about his dissertation on the economics of discrimination. Becker noted that his audience was perplexed. “They thought I would discuss price discrimination”—that is, the analysis of why businesses charge different prices for the same goods. “No one conceived that an economist would talk about race discrimination in those days.”2

2 Peter Passell, “New Nobel Laureate Takes Economics Far Afi eld,” The New York Times, October 14, 1992, p. D1.

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Published in 1957, The Economics of Discrimination was not warmly received by the profession. Not until the mid-1960s, when the civil rights movement gained momentum, did the book receive the recognition it deserved. Surprisingly enough, Becker challenged the conventional view that discrimination benefits the person who discriminates. Let’s see why he thought the conventional wisdom was wrong.

Becker argued that employers who discriminate against women will lose market share and profit opportunities, both because they do not always hire the best employees available, and because they must pay mostly high-wage male employees. Nondiscriminating firms, in contrast, will have lower labor costs, having more women earning lower wages on the payroll. Nondiscriminating firms will attract the most productive managers and employees, many of whom will be women. Profits for the nondiscriminating firm should therefore be higher. Becker concluded that the cost of wage differentials and the pressures of the marketplace should drive discrimination down to zero in the long run.

In practice, we know that wage discrimination still exists. According to the Bureau of Labor Statistics, women in 2015 earned 82.5% of what men earned in the same occupation. Why might competition fail to erase wage differentials? For one thing, the adjustment costs of firing unproductive workers, giving them severance pay, then recruiting and training new workers can be extremely high, especially considering the protections unions and the legal system offer workers. Second, women may be less mobile than men when it comes to work. They may be less willing to move to accommodate employer preferences, and thus be forced to accept lower-wage positions. Third, if women continue to choose occupations with more flexible career paths that do not heavily penalize extended absences from the labor market, wage differentials between men and women may always exist. Note, however, that such differentials could also be caused by discrimination that precedes labor market entry, as when social norms direct girls toward lower-wage occupations such as elementary education or social work.

Economists who advocate segmented labor market theories argue that discrimination does not arise due to a lack of competitive labor markets, but rather because these markets, although competitive, are segmented into a variety of constituent parts. And these different parts, while interacting, are noncompeting sectors. Segmented labor market theories have been developed along several different lines.

3 F. Y. Edgeworth, “Equal Pay to Men and Women for Equal Work” (1922), p. 439, cited in Stephen Smith, Labour Economics (New York: Routledge), 1994, p. 102.

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These hypotheses all predict that separate job markets will emerge for different groups. Figure 5 shows how segregated markets can lead to significant wage differentials, such as those we see for men and women.

In a world without discrimination, equilibrium wages for everyone would be W₀, with total employment at M₀ + F₀. If some form of discrimination in male-dominated jobs is present, labor supply to that segment will decline to S₁, wages will rise to W₁, and hiring will fall to M₁ (point a). Those women who are excluded from jobs in this sector will have to move to jobs available in the female-dominated sector, thus increasing the supply of labor there to S₂, reducing wages to W₂, and increasing employment to F₂ (point b). The result is a wage differential equal to W₁ − W₂.

Notice that once such a wage differential is established, the firms in competitive markets have no real incentive to eliminate the gap. Men and women are both being paid their marginal revenue products; therefore, no profits are gained by substituting workers.

Wage differentials can arise for a variety of reasons. Some people may simply prefer one occupation to another. If such preferences have their roots in specific social groups, group-wide wage differentials can be expected to arise. Wages will vary between occupations, moreover, because of differences in their attractiveness, difficulty, riskiness, social status, and the human capital investments required. Still, lingering wage differentials today may be the result of past discriminatory practices that barred women from entering some occupations or professional schools.

Do wage differentials necessarily mean that discrimination exists in the market? Job crowding and wage differentials could just reflect different levels of human capital investment or different professional choices. Many women, for instance, may truly prefer occupations that are complementary to parenting. Further, female labor force participation is often interrupted when women take a break from working to have children. Therefore, jobs such as nursing, teaching, and administrative work may look attractive as women can leave their jobs, later returning or finding a new employer, with little loss in salary or benefits.

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For the first half of the last century, the inequities associated with various forms of discrimination were mostly accepted as a part of life in the United States. Gradually, however, a groundswell developed to end racial segregation and other forms of discrimination, culminating in passage of the Civil Rights Act in 1964. In what follows, we briefly outline the major acts and public policies that have been implemented with the goal of ending discrimination. Because of these policies, discrimination, wage differentials, and segmented labor markets have declined markedly over the past five decades.

The Equal Pay Act of 1963 The Equal Pay Act of 1963 amended the Fair Labor Standards Act of 1938. It requires that men and women receive equal pay for equal work. Equal work is defined as work performed under similar circumstances requiring equal effort, skill, and responsibility. Some argue that the Equal Pay Act was a hollow victory because occupational segregation forced women into specific occupations, causing them to earn less than men for essentially comparable work. Further, the law provided a limited time during which a worker must file a case against an employer for wage discrimination. This prevented many women from filing cases out of fear that they would lose their jobs.

In 2009 the Lily Ledbetter Fair Pay Act was signed into law, providing employees more flexibility to file cases asserting that they have been discriminated against with respect to pay. Specifically, it allowed the 180-day statute of limitations for filing a case to be reset with each discriminating paycheck received. Thus, a worker could file a case long after the discriminatory action began, as long as the worker had worked at the company within the last 180 days.

Civil Rights Act of 1964 Title VII of the Civil Rights Act of 1964 makes it unlawful to

refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his [her] compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin.

To date, most of the litigation brought under this statute has focused on the meaning of the phrase to discriminate, requiring a plaintiff to show that an employment practice inflicts a “disparate” or unequal impact on members of a minority group, as compared to its impact on others. Once this has been demonstrated, the burden shifts to the defendant (the employer) to show that its employment practices are related to employee performance or are otherwise a matter of “business necessity.” Plaintiffs may sue for a full range of remedies, including back pay, reinstatement, court costs, attorney’s fees, and punitive damages.

Executive Order 11246—Affirmative Action In 1965 President Lyndon Johnson issued Executive Order 11246. A key provision of this order required that firms doing at least $50,000 in business with the federal government submit an affirmative action program that includes a detailed analysis of their labor force.

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Affirmative action programs have been controversial from the outset. Critics see such programs as “enforced quotas,” whereas supporters see them as a way of breaking down discriminatory hiring barriers. Further, affirmative action has extended to other selection criteria such as college admissions.

In the summer of 2003, the U.S. Supreme Court ruled in the University of Michigan case (Gratz v. Bollinger) that adding a large specific numerical adjustment for minority group status to university admission criteria was unacceptable. The Law School at Michigan, on the other hand, simply took race into account in a nuanced approach to improving diversity of the class. The Supreme Court found this approach acceptable (Grutter v. Bollinger).

Age, Disabilities, and Sexual Orientation Two other acts were designed to reduce discrimination based on age and physical or mental disabilities. The Age Discrimination in Employment Act of 1967 protects workers over age 40 from discrimination based on age. The Americans with Disabilities Act of 1990 prohibits discrimination against people with a physical or mental disability who could still perform a job with reasonable accommodation by an employer. What constitutes “reasonable accommodation” has been a point of contention in many recent court cases. Lastly, the proposed Employment Non-Discrimination Act would prohibit discrimination against employees on the basis of sexual orientation or gender identity by civilian, nonreligious employers with at least 15 employees.