Discrimination

It is a real and ugly fact that throughout history there has been discrimination against workers who are considered to be of the wrong race, ethnicity, gender, or other characteristics. How does this fit into our economic models?

The main insight economic analysis offers is that discrimination is not a natural consequence of market competition. On the contrary, market forces tend to work against discrimination. To see why, consider the incentives that would exist if social convention dictated that women be paid, say, 30% less than men with equivalent qualifications and experience. A company whose management was itself unbiased would then be able to reduce its costs by hiring women rather than men—and such companies would have an advantage over other companies that hired men despite their higher cost. The result would be to create an excess demand for female workers, which would tend to drive up their wages.

But if market competition works against discrimination, how is it that so much discrimination has taken place? The answer is twofold. First, when labor markets don’t work well, employers may have the ability to discriminate without hurting their profits. For example, market interferences (such as unions or minimum-wage laws) or market failures (such as efficiency wages) can lead to wages that are above their equilibrium levels. In these cases, there are more job applicants than there are jobs, leaving employers free to discriminate among applicants. In 2011, with unemployment over 9%, the Equal Employment Opportunity Commission, the federal agency tasked with investigating employment discrimination charges, reported that the complaints from workers and job-seekers had hit an all-time high, the most logged in the agency’s 46-year history.

!worldview! FOR INQUIRING MINDS: How Labor Works the German Way

Germany is home to some of the finest manufacturing firms in the world. From the automotive sector to beer brewing, and from home appliances to chemical engineering and pharmaceuticals, German products are considered among the highest quality available. And unlike in the United States, blue-collar jobs—those that don’t require college degrees—pay high enough wages that they are still prized. If you ask Germans what accounts for their ability to combine a highly successful manufacturing sector with well-paying blue-collar jobs, two overlapping institutions will top their lists: Germany’s works councils system and their apprenticeship system.

Enshrined in the German constitution, works councils exist in every factory to encourage management and employees to work together on issues like work conditions, productivity, and wages, with the goal of discouraging costly conflict. Workers are given seats in supervisory or management organizations such as a company’s board of directors. This collaborative environment, in turn, supports higher levels of unionization within German manufacturing. As a result, German unions are more successful at raising the wages of their members.

Thanks to the German apprenticeship system, young manufacturing workers start with higher levels of job-specific human capital than their American counterparts.
Oberhaeuser/Caro/Ullstein Bild/The Image Works

But what allows German manufacturing to compete successfully while paying higher wages? One explanation is the German apprentice system. For example, in 2012, the average hourly wage of a German autoworker was $58.82 compared to $45.34 (at the high end) for an American autoworker, and $14.50 (at the low end) in newly opened automotive plants in the United States. Promoted and accredited by the German government, apprenticeship programs provide hands-on training to young workers in specific skills from automotive electronics to hairdressing. About 60% of German high school students train in an apprenticeship program, graduating with a formal certificate, and often landing a permanent job at the company where they were trained. As a result, the typical German manufacturing worker starts a job with higher levels of job-specific human capital than his or her American counterpart.

So integral is the apprenticeship system to the success of German manufacturing that German companies have been replicating it at their plants in the United States. In South Carolina, where BMW and Tognum, a German engine maker, have recently located, apprenticeship programs have been created in partnership with local and state governments to assure that young workers are trained in the skills that the companies need. And, needless to say, the apprentices welcome such training and the well-paying jobs that it will bring.

In research published in the American Economic Review, two economists, Marianne Bertrand and Sendhil Mullainathan, documented discrimination in hiring by sending fictitious résumés to prospective employers on a random basis. Applicants with “White-sounding” names such as Emily Walsh were 50% more likely to be contacted than applicants with “African-American-sounding” names such as Lakisha Washington. Also, applicants with White-sounding names and good credentials were much more likely to be contacted than those without such credentials. By contrast, potential employers seemed to ignore the credentials of applicants with African-American-sounding names.

Second, discrimination has sometimes been institutionalized in government policy. This institutionalization of discrimination has made it easier to maintain it against market pressure, and historically it is the form that discrimination has typically taken. For example, at one time in the United States, African-Americans were barred from attending “Whites-only” public schools and universities in many parts of the country and forced to attend inferior schools.

Although market competition tends to work against current discrimination, it is not a remedy for past discrimination, which typically has had an impact on the education and experience of its victims and thereby reduces their income.