ECON 426 Lecture Notes - Lecture 23: Bayes Estimator, Nash Equilibrium
13 Jun 2018
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Department
Course
Professor
Based on preference difference
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In a very competitive environment, unless you have some surplus wealth to fund your
taste for discriminating, you'll be driven out of the market
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Taste discrimination is something you must pay for (as an employer)
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Ability to choose between employers
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Competition "protects" against discrimination; tends to alleviate discrimination in the market
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Trading (segregation) is costless - makes it easy to segregate groups out
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The presence of TBD will typically lead to lots of segregation
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Taste Discrimination - Employer Discrimination
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Segregated work force, but no persistent wage gaps
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Similar patterns for employee discrimination
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Model has a hard time explaining why persistent wage differences exist even though labor markets are
quite flexible and competitive
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Trading isn't as costless as we assume, maybe
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Minimum wage laws could raise wages, but we may see decreased employment
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If we see that African Americans are paid 30% less on average (controlling for education and
experience), then to explain that with TBD means that it shouldn't be possible for an alternative
employer to compete in the same market who's not discriminatory and can lower their wage bill by
20% by employing the minority group and not out-compete the discriminatory employers
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Why do racial wage differences persist even though labor markets plausibly quite flexible?
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People don't care whether they employ a man/woman, Asian/White/Black, French/English
speaking
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They only thing they care about is how much profit they can make
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No one will have distaste for employing people of a minority; born of "rational prejudice"
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Statistical Discrimination: rational prejudice based on group identity
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Taste Based Discrimination
The model of statistical discrimination posits that employers rationally use group identity to infer
individuals' skills
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Implies workers don't directly see who's productive/unproductive
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Not appealing to fundamental reasons why one group may be more productive than another
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No preferences underlying this
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--> members of group acquire fewer skills
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A self-fulfilling prophecy ensues
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These rational inferences lower returns to the minority group to acquiring skills
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No statistical mistake
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Outcome could be that the only reason employers are right is because their beliefs make
women acquire fewer skills
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Beliefs employers hold aren't "mistakes" - evidence supports it but only bc these beliefs are
encouraging it →cyclic
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This is because wage differences for persist a long period
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Model must be internally consistent
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A self-fulfilling prophecy:
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Statistical Discrimination
Bayes Rule describes how to form conditional beliefs of event probabilities given other events
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P(A), P(B), P(A and B)
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What about P(A|B) or P(B|A)?
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Consider events A and B:
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Rational Inferences: Bayes Rule
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Bayes' Rule
This is what the employers care about
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There are two levels of skill: h = 1 or h = 0
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This is what differentiates the two groups
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The share of high types in the economy is
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Prob(Pass|h = 1) = 1
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Prob(Pass|h = 0) = p
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Level of skill is unobserved, but it's possible to administer an imperfect test
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What is the expected productivity of a worker who passes the test?
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A Model of Group Based Discrimination
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Wage conditional on passing is increasing with
Increases in → prior belief about skill level in group
1.
And using Bayes' Rule:
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Wages Conditional on Passing the Test
Lecture 23 - Race and Gender in the Labor Market II
Wednesday, April 11, 2018
4:12 PM
ECON 426 Page 1
Document Summary
Lecture 23 - race and gender in the labor market ii. Competition protects against discrimination; tends to alleviate discrimination in the market. Taste discrimination is something you must pay for (as an employer) In a very competitive environment, unless you have some surplus wealth to fund your taste for discriminating, you"ll be driven out of the market. The presence of tbd will typically lead to lots of segregation. Trading (segregation) is costless - makes it easy to segregate groups out. Segregated work force, but no persistent wage gaps. Model has a hard time explaining why persistent wage differences exist even though labor markets are quite flexible and competitive. 20% by employing the minority group and not out -compete the discriminatory employers. Trading isn"t as costless as we assume, maybe. Minimum wage laws could raise wages, but we may see decreased employment. Statistical discrimination: rational prejudice based on group identity.
