Effects of Wage Discrimination

8/13/2019 Effects of Wage Discrimination

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THE EMPLOYMENT EFFECT S OFWAGE DISCRIMINAT ION AGA INST BLACK MEN

MARJORIE L. BALDWIN and WILLIAM G . JOHNSON*

Whcn labor supp ly curves are upward-sloping, wage d iscriminaiionagainsc black men reduces not only their relatve wagcs , bu l also theirrelative employment races. Using data from the 1984 Survey of Incomcand Program Participation , the authors es tmate wage discriminaiionagainst black men and, for the first time, quantify the effects of thaidiscriminaiion on the employment of black and white men. They indthat 62% of the difference in offer wages to black and white men . and67% of the difference in their observed wages, cannot be attributed todifferences in productivity. Assuming that the unexplained wage diffcr-ential is attributable entirely to emphjyer discriminaiion , then thedisincentive effects of wage discriminai ion reduced the relai ive employ-men t rate of black men from 89% to 82% of white mens employmen trate. Thus, wage discr iminaiion and its employmen t effects resulied ina substantia l transfc r of resources from b lacks to wh ite s in 1984 .

T here have been numerous cmpirica lstud ies of labor m arket d isc im ina-tion in the United States since the publica-tion of Becker's Economics ofDiscrim inaiion(1971) . Although the rescarch is moti-vated by Beckers models , it has not fullytestcd Beckers predictions . Onc impor-tan t omission relates to the cffcc t of wagediscrimination on employment .Becker's model of employcr discrimina-tion predicts thatprejudiced employers willhire more than the optimal number ofmajority workers and less than the optimalnumber of minority workers. The ineffi-

.Marjorie L . Baldwin is Associaie Professor ofEconom ics ai Easl Carolina Univcrsity . Creenville ,North Carolina, and William O. Johnson is Professorof Healih Economics in th e Schoo l of Healih Adm in-istracin and Policy and Professor of Economics, De-parcmem of Econom ics. ac Ar izona Siate Universicy .Tempe, Aizona

cient mix of majority and minority laborreduces profits, but the model assumes thatemployers view the loss of proits as anacceptable price for the satisfaction of theirtastes for discrim ination . The pecuniarybeneits of d iscrimination are , therefore ,restr icted to those majoity workers whoareemployed atproductivity-adjusted wagesthat exceed non-discriminatory offer wages .These predictions are the most importantd istinc tion s between Beckers mode l andMarx ian or rad ical theories that conce iveof disc imination as a too l that employersuse to maximize profits (Reich 1981 ;Roemer 1979).A daca appendix with addilional resulcs, and cop -ies of the compuier program s used lo genrale iheseresulcs , are ava ilable from Marjorie Baldwin . Dcpan -

men t of Econom ics. East Carolina Liniversity .C reenville , Norch Caro lina. 27858-4353

Induslrial and Labor R lat ions Review, Vol . 49 . No. 2 Januarj 1996 ) by Cornel l Universil) .0019-7939/96/4902 $01.00

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EMPLOYMENT EFFECTS OF WAGE DISCRIM INATION 303

A test of the hypothesis that prejudicedempioyers use ine fficient combina tions ofa inorityandm ajorityworkers rcquires thatthe employment effects of disciminationbe estimated. W ith two exceptions, how -ever, studies ofwage discrimination againstblacks have ignored the wage-cmpoymentrelationship, implicitly assuming that laborsuppiy schedules are perfectly inelastic(Cain 1986) . Shulman (1987) used com-plaints to the EEOC as a proxy for theincidence of employer discrimination, andfound that discim ination reduced the prob-abili ty of employment for black workers.The indings were not, however, linked toestimates of wage disrimination. Gilman(1965) decomposed the black -white unem -ployment differential to determine the ef -fcct of employer discrim ination on blackunemployment rates. The article focusedon the demand for minority labor . Suppiyresponses to discriminatorywage rateswereno t considered .Thurow (1975) was the irst to develop amodel o f d iscrimination that considers theimplications of upward-sloping suppiycurves. He provided a theoretica l analysisof the we lfare effects ofd isc im ination thatincluded expressions for the employmentlosses to blacks. The present study is theirst to prov ide empirica l estimates of theemployment effects described in Thurowsmodel, direcy linked to estimates of wagediscrimination against black men.The data for this study come romWave IIIof the 1984 panel of the Survey of Income andProgram Participation (SIPP) . The SIPP is anationally represeniative survey of the non-institutionaiized population of the UnitedStates that provides detailed information onrespondents earnings and employment .Wave III was selected for this study because itinc ludes supplemental information on edu-cation and work history . Our estimates ofwage discim ination and its employment ef-fects are de ived from a sample 13,414 menwho pardcipated in the 1984 panel .

Discrimination and EmploymentEveryone assumes that discriminationincreases the wage s of white workers and

reduces the wages of black workers. Unlesslabor supp iy curves are perfecy inelastic,however , th is assumption implies that dis-cimination also increases the employmentof white workers and reduces the employ-ment of black workers. Using Thurows(1975) model, we derive express ions forthe effec t of discimination on the employ-ment and wages of black workers and whiteworkers in a perfectly competitive labormarket.The Thurow Mode lThurow adopted Becker's assumptionthat white empioyers maximize a utility

function that includes proits and tastes fordiscrimination against blacks . When facedwith a wage rate, W , white empioyers act asif the black wage were W(l + D) , where D,the market d iscim ination coef icient, isa function of the number of discriminatingempioyers in the market and the intensityo f their tastes fo r d iscrimination . Thurowno ted that d isc im ination sh ifts the demandfor black workers t the left. The effecto fdiscrimination on the employment of blackworkers depends on the magnitude of Dand on the elasticities of suppiy and de-mand for b lack labo r.

Let Wa and N B (W 0 and iVoa) be the equi-librium wage and employment of blackswhen empioyers are (are not) discrimina-tory. If the black suppiy curve is perfectlyinelastic, then employer discriminacinreduces wages and has no effect on employ -ment . In this case , the loss to blacks equalsthe wages lost by black workers:(1) {W0-W B) N0B.At the opposite extreme, if the black suppiycurve is perfectly elastic , black employmentfalls with discim inat ion bu t b lack workersearn the same wage as whites. In this case,the loss to blacks equals the wages lost byb lack workers who wou ld have been em -ployed in the absence of discrimination:(2 ) = (NBB - NB) W 0.In the more realistic case where the b lacksuppiy curve is upward-sloping , discrimina-tion imposes wage and employment losses


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304 INDUSTRIAL AND LABOR RELATIONS REVIEW

Figure 1. Gains and Losses fromDiscrimination .3

Nb Nob Employment

N ow Nw EmploymentaPanel A shows wage and emp loyment losses forblacks , and Pane l B shows wage and employmentgains for whites. The figu res are vaation s ofThurow's (1975 :158) diagrams showing white gainsand losses from disc im ination .

on blacks (Figure 1. Panel A). In thai case ,the tota l losses to blacks cqual(3) Li+L iWtrWM+ WKThe possible effecw of backward-bending por-lions of ihe supply curve of labor are not considered

in (h e models, bu l ou r metho ds ofeslimalion do no texcludc (he possibili ty that such effecis exisi We do

the sum of the wages lost by employedblacks and the wages lost by blacks who areunemployed as a result of discrim ination .Relative losses depend on the elasticitiesof supply and demand for black labor . E |and e , and on the size of the market d is-crim ina tion coeficien t . If we substitu tethe appropate elasticities into equation(1), the wage loss to employed black s canbe expressed as a function of the non -disciminatorywage and employment rates:(4) t.*t4where e OH /e ejequals thechange inblack employment.1 The wage loss to blackswho are not employed at the discrimina-idty wage is obtained by substitutng intoequation (2),(5)Thurow d id no t consider the effect ofdiscrim ination on white employment. -Ifb lack s and wh ites are subs tutes, however,discriminatory employers wil l hire relatively

mo re white workers than w ill non-discrim i-natory employers. The next section ex-tend s Thurows analysis to deive expres-sion s fo r the effec t ofd iscim inat ion on thewages and employment of whites .Effects on Wh ite EmploymentAssume that discriminating employersseck to replace blacks , who w ill not work forthe discriminatory wage rate, by hiring ad-d itiona l wh ite s. The demand for wh iteworkers incrcase s by ANg , the change inblack employment. In the un likely ase inwhich the market supply curve of whiteworkers is perfectly elastic , a prejud icedemploye r cou ld discr imnate withou t los-ing proi ts. In the more likely case in which

not think the discussion u worth (he complexuy ihaiit wou ld in troduce , since (he poisbilUy has no t beencon sidered in model s o f d iscrim inalion .In Thurows (1975:246) no iation , P0 is (h e non-discriminalory wage rate and rand r are (h e elasuci-(ics of supply and demand for black labor .


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EMPLOYMENT EFFECTS OF WAGE D ISCRIM INAT ION 305

the market supply curve for white labo r isupward-sloping, equil ibrium wages andemployment of white workers increasc.Let and Nw (W0 and A/0J be theequilibrium wage and employmentofwhiteswhen employers are (are not) discrim ina-tory . The total gains to whites from em -ployerdiscriminationagainstblack s.shownin Panel B of Figure 1, equal(6) G , + G, = {Ww- W0)A + {Nw- N0J Ww.the sum of the wage gains to whites whowould be employcd in the absence of dis-criminaron (G,) and to those who are em-ployed to replace blacks (C2) . As before,the relative ga ins depend on the elasticitiesof supply and demand for white labor , r]and r\J . The wage increase to whites whowere employed at the non-discriminatorywage equals(7) SlN.and the gains to employed white workerswho wou ld no t work at the non-d iscrim ina-tory wage equal(8) C, . n. 1Equations (5) and (8) represent theemployment cffccts ofwage discriminationthat resu lc from the incen tive and d isincen-tive effects of discriminatory wage rates.'Befo re 1992 , stud ies of d iscrim ination mea-sured wage losses to employed minorityworkers but omitted the employment ga insand losses to majority and minority work-ers, implicitly assuming that supply sched-ules are perfcctly inelastic. This article uses

a method introduced by the authors tomeasure the employment effets of wagediscrim ination against black men (Baldwinandjohnson 1992a) . The methods of esti-mating disc iminatory wage differentialsand the d isincen tive effects associated withthe differen tials are described in the nex tscct ion .

Measuring Wage DiscriminationWe use Oaxaca's (1973) decompositionto estmate the extent of wage discrimina-tion against black men . Wage equations ofthe form

(9) W = PX . + cX + e ,are estimatcd separately for blackand whitemen . The dependent vaiable (W) is thehourly wage ratc of the ith workcr ; X is avec to r that includes a constant tcrm and aset o f variab les, such as educat ion and ex -pe rience, that represen t workers produc-tivi ty ; X is the sample selection variable ;and is a mean-zero random d isturbanc eterm .4Following Reimers (1983) , the mean of-fer wage differentia l between white (W )and black (B ) workers can be expressed as

(10)

where / is the identity matrix and 5 is avector of weights The vector of wcights , 5 ,represents the relationship between thenon-disciminatory wage structure and ob-served wages.5 We use Cottons (1988 )We assume that supply curves are cominuous andupward-sloping . This excludc s (he possibili ty , sug-gested by Cilman (1965) , that a federally mandaiedm nimum wage, or acollectively bargained wage floor,transales wage discrimination into reduclions in thecmploymenl of minority workers. Cilmans logic isappea lingly simple. An employer whose tastes fordiscrimination would Icad him to hire minority work -ers at wages that are below the legislatcd or collec -tively bargained mn imum will not hire those work-

ers .

4Our primary results use the non-log specificalionof the wage equ ation so that (he estimates can bepresented in dollars as wel l as percentages Resulisfor the semi-log specifications are available from theau tho rs .

If the nond iscriminatory wage structure is iheobserved wage structure for white men {that is. d is-crimination reduces black men s wages bu t does notaffect the wage s of white men). then 8 . L If ihcnondiscr iminatory wage structure is the observedwage structure for black men. then 5-0 S ince


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weighting scheme , setting 5 equal to theproporon (5 = 0.90 ) of employed workerswho are white.4The left-hand side of equa tion (10) rep -resen ts the difference be tween the meanofer wages of black and white workers.The first tcrm on the ight-hand side repre-sents the pan of the offer wage differentialthat is attribu table to differences in work-ers productivity . The second term repre-sents the part of the diferential that isattributab le to employer discimination anda residual efect .The Oaxaca decomposition has been themethod used to esmate wage discrimina-tion for more than twenty years. The es ti-mates in this study incorprate the im-provements introduced by Reimers (1983)and Cotton (1988) . The improvements donot , however , solve what has long beenrecognized as a limitation of Oaxacas ap-proach, namely, the assumption that dis-cim ination can be measured as the re-sidual (the second term in equation (10)) .Although the residual can be further de-composed into disciminatory and non-dis-criminatory components (Blinder 1973),the results are not robust (Jones 1983) .Thus, in practice one must assume that theestimates ob tained in th is manner are anupper bound on wage discrim ination . Onlyin the unlikely situation in which all of thesignificant influences on wages are includedin the estimating equations would the re-sidual term be equal to the discriminatorywage differential. The results of this study,like the results of al l of its predecessors,must be interpreted with that lim itation inm ind .

the true non-discrim inatory wage is unobservable,Reimers (1983 ) suggested setting 5 equal to 0.5 . themidpoint.Cotton'j method is based on the assumptions that(I) absent discrimination , the wage structure w ill besome function of exisng black-white wage struc-tures, and (2) the non-discriminatory wage structurewil l be closer to the white wage structure than to theblak wage structure. Baldwin andjohnson (1992b)demonstrated tha t these popula non weights are con -sisten t with Beckers mode l of the effect of d iscrim i-nation on employment-

We nex t desc ibe the use ofBaldwin andJohnson's (1992a) estimator to measurethe efect of disc im inatory wage diferen-tals on the employment of black and whitemen .

The Employment Effectsof Wage DiscriminationThe BaldwinJohnson estimator is a three-step technique that estimates the employ -ment efects ofwage discimination in termsof probabilities of employment for the av-erage majoity or minoity worker . The

irst step is to es tmate the observed prob-abilityofemploymentfor the average black(white) man, TI (J= B, W) , as a function ofch racteistics that inluence employersofer wages, workers reservation wages, orboth . Estimates offl are ob tained from thecoe ficient estimates of a probit likelihoodfunction in which the dependent variablecquals one if the individual is employedand zero o the rwise . If we let Zbe a vecto rthat includes ofer wage and reservationwage vaiables, the probit likelihood func-tion isti?]

(j-B.W )where E represents individuis who work , represents individuis who do not work ,and is the cumulative d istibu tion func-tion of a standard normal random variable .Assuming that an individual accepts em -ployment if the ofer wage is ai least equalto his reservation wage, probit estimates ofthe coeficien t vector Y/ cr , yield an est-mate of the ofer wage-reservation wagedi ferentia l that is correct to the adjust-ment factor, o (Ki llingsworth 1983 ) . Theobserved probab ility of employment forthe average black or white man is thengiven by

(12) {j = B . W).


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EMPLOYMENT EFFECTS OF WACE DISCRIM INAT ION 307

The sccond step is to esmate the prob-ability of employment for the average mann the absence of discrimination (FT ) bycorrec tng the offer wage-reservation wagedifferenal for the effect of employer dis-crimination on offer wages. By the proper-lies of least squares es tma ton, the offerwage to the average worker is

The third step is to estmate the differ-ences in employment , AJV , resulting fromthe disincentive effects of wage discrimina-tion . For both black and white men ,

(13)where (/ = VV , B) is a vector of meanvales of variables in the wage equation andP is the vector of esmated coefTlcients.Assum ing that the nondiscrimina loryofer wage struc ture is determined by theproporons of white and black workers inthe labor forc , the ofer wage of the averag eworker in a non-discim inatory market is(14) . (0.90 +0.10 P,) .

(j-B,W)It follows that the discriminatoryofer wagediferenal is J, - W and 7(15 ) 0> ' o,Clea rly, n 0j can be estmated on ly if weobtain estimates of the adjustment factor ,a , distinct from y/G . We use Heckmans(1976) method to esmate a .*Note that W?. W ispositive forblacksand nega-ve fo r wh ites wnen there is d iscrim ination . There-fore . n oj> n,, and the probability of employment forblacks increases in the absence of wage discrimina-tion. Similarly. n ,, < n H and the probabili ty ofemployment for whites decrease s in the absence ofwage discrimination.Assuming that hours worked are proportiona l tothe difference between the offer wage and the reser-vation wage . a; can be estmated from

and the sample selection variable , X, . Regressinghours worked on (v, * \) yields an estmale oa/n ,where (l is a factor of proportionality relating theoffer wage-resr rvaon wagedfTerentia l to tota l hoursworked . An estmate of (and . therefore . 0;) can beobtained bv dividing the coefficient of the job expe-

(16 )j=B , W ,

where n is the popuiation size . Since nw


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disabili ty, equa l to one if the worker has ahealth impairment that s subject to prcju-dice, is included to con trol for disc mina-lion against mcn with disabilities . Thehealth limitation vaiables are generatedflrom a factor analysis of 12 measures ofworkers functional and sensory capac itiesand increase in valu with poorer health.11Measures of work experience include yearsworkcd with currentemployer, yearsworkcdwith other employers, and years not work-ing and not in school. Years worked withthe current employer is also included as asquare term to capture dim inishing invest-ments in job-specific human capital overtime. The vaiables that representjob char-acteristics con trol for b lack-white d iffer-ences in unin membership, public sectoremployment , part-time employment , em -ployment in a capital-intensive industry ,and occupation .The samplc selection variable, X, is acontrol for sample selection bias becausewagcs are unob served for nonworkers. It isconstructed from probit employment func-tions estimated for the fu ll samples of blackand white men .lsMeans of the variables in the wage equa-tions are presented in Table 1. The ob-served wage differential of $2 .94 is approxi-mately 28% of the white male wage. Al-though the wage differential is large , thesamples of black and white men are sim ilarin many respee ts . The average differencein education is less than one year . Approxi-mately the same proportion of employedblacks and whites are physically impaired ,and there is Hule difference in years workedfor current employe r or in the proportion

For a more detaled descipiion of the disabili tyindicator, see Baldwin andjohnson (1994). Functiona l capacities include, for examplc , theability to walk one-quarter of a mile, li ft a weigh i asheavy as 10 pounds. and climb a light of stairs.Sensory capacities include the abiliiy to read wordsand leliers in ordinary newsprint, to hear normalconversation , and to spea k clearly. The factor analy-sis procedure is described in Lambrino s (1981).Deuils are availab le from the autho rs . Estmales of the probi t funcuon are reponed inAppendix Table AI.

of men employed in capital-intensive in-dusties.Employed blackmen are, however , morelikely to be working part-time and morelikely to be employed in low-skill oceupa-tions than white men. Although the aver-age duration of employment with the time-of-interview irm is nearly equal for the twogroups, black men have many more spellsofnon-employmentduring their labor forcyears than do white men .The higher prevalence of part-time workamong blacks implies that the productivity-conirolled wage differentials that we est-mate are too small . Employee beneits,which represented 16% of the total com-pensation of labor during the 1980s(Ejacentin i and Cerino 1990) , are omittedfrom our calculations.14 Since part-timeworkers typically receive less generousfringe beneiu than do full-time workers,the true black-white wage differentials arelarger than our estimates.15The estimated coefficients of equation(9) are the basis for our estimates of wagediscrimination and ks employment effee ts .These resuks are reponed in the followingsection.

Wage DiscriminationWeighted least squares estimates of theparameters of equation (9) for black andwhite men are reponed in Table 1 . Nearlyall the coeficients are statistically signii -cant and display the expected signs. In

Employee benei ts included in the 16% estmaleare retiremem in come benefits . hea lth beneits. andother bene its (unemployment insurance, workerscompensaon. Ufe insurance. disability insurance) .but not paid leave. In general , questions on fringebeneits are not included in the core queslionnare ofSIPP . Data on fringe beneits wcre collected in alopica l module that accompanied Wave 6 of the 1984panel.

In 1984 , employers provided retiremem bene i tsto 51.4% of full-time workers bul only 10.9% of pan -time workers . Hea lih benefus were provided to 72 .2%of full-lime workers but only 16.3% of pan-lime work-ers (Piacen tin i and Cerino 1990) . One imponani cxcepiion is ihe resull thai ihccoe ficieni for periodsof workabsences. ihai is. yea rs


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Table I. Means and Weighted Least Squares Estimates for Hourly Wage Equaons.(Standard Etrors in Parentheses)Whiu B lack

VanabU (N- 10.137) (Pop. - 46.082.859)' (N - 980 ) (Pop. - 4.877.024 )M ean Co eJJicient M ean Coefftcient

Wage 10 .34 7 .40(5.01) (10.11 )Health :

FACTOR 0.05 0.229 0 .05 0 .199(0.20) (0.217) (0.76) (0 .351)FACTOR2 0.19 0 .211 0.17 0 .229(0.29) (0.185) (1-00) (0.302 )FACTOR3 0 .02 -0.117 0 .01 0 .164(0.34) (0.129) (155) (0.179)

Years of Edu cacin 13 .03 0 .553 12 .22 0.485(1.90) (0.029) (6.40) (0.056)DUabled 0 .04 0.749 - 0.04 0 384(0.15) (0.363) (0 .45) (0.680)Unin Member 0 .23 S 1.029* . 0 .29 1.417

(0.28) (0.161) (1.02) (0.274)Pub lic Secto r Worke r 0 .15 1.835 0 .20 0 .150(0.24) (0.191) (0 .90) (0.311)Part-T ime (Works < 35 hrs./wk.) 0.10 0 .788 0.14 1.136(0.20) (0.234) (0.78 ) (0.358)Years Worked :Curren l Employer 7.75 0.376 7 .56 0 .302

(5.83) (0.022) (18.47) (0.042 ) .Current Employer (Squared) 0 .005 0005(0.001) (0.001)Oiher Employers 9.16 0 .259 8 .46 0.109(6.63) (0.020) (20.75 ) (0.040 )Otber Employers (Squared) 0 .005 0 .002

(0.001) (0 .00 1)Year s Not Worked and 0 .55 0.080 1.30 0 .036Not in Sch oo l (140) (0.030) (7.90 ) (0.035 )Works in Capital-Imensive Induicry 0.40 0.825 0.39 0 .940(Mfg. . Mining . Transporiaon) (0.33) (0.146) (1.10 ) (0-281)-Occupaiion :Professional-Manager 0 22 3 -3 18 0.12 2-924(0.28) (0.202) (0.73) (0.459 )Service 0.10 1.892 0.18 0 .49 1

(0.20) (0.252) (0.87) (0.411)Skilled 0 .21 0 .614 0.16 0.370(0.27) (0,202 ) (0.82) (0.418)Semi-Skilled 0.17 1.594 0 .22 0 -830-(0.25) (0.225) (0.94 ) (0 -402)Laborer 010 1.90 1 .. 0 17 0 .28 1(0.20) (0.254) (0.85) (0.4 15)

X 0.22 1.681 0 .39 0 .333(0.13) (0.536 ) (0.59 ) (0.703)Intercepc 10 0 .509 1.0 1.445(0.507 ) (1.091)f? 0309 0 .399F-value 227 .508 33 .526

Population lotals equal sum of the sample weighis..Omilled occupation: cleical and sales -.Significani ai ihe 05 level: ai ihe .0 1 leve l (two-iailed lesis) .Source: S1PP. WAVE 111 (1984) .


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mates, we also present results from amodelthat exeludes the occupational controls ,providing a range within which the upperbound of the discrim inatory dierential islikely to be found.The results, which are presented in thelast column of Tab le 2 , are based on thecoefficient estimates reported in AppendixTable A2. Compared to the oceupation-controllcd estimates, the offer wage differ-ential is $.20 larger and the discriminatorywage differential plus residua l inreases to75% of the offer wage differential . Exclud-ing the oceupation variables increases thesize of the components of the differentialattributed to education , experience, uninmembership (reduction in a negative num-ber) , and part-time work.I l is tempting to speculate that the vari-ables just described account for the non-discr iminatory components of the effee tsof oceupation on wages and the residual ofthe equation now includes the discimina-tory effeets. Lacking strong priors for theeffect of discimination on occupationalstatus, we suggest only that our primaryestimates may not be the upper bound ofthe true disciminatory wage differential .Our basic results are comparable to esti-mates of the unexplained black-white wagedifferential reported by Donohue andHeckman (1991:1610) . Using CPS data,they estimated a single earnings equationcontrolling for age, education , regin , ur-ban residence, and race . The unexplainedearnings dficit for blacks was approxi-mately 20% in 1983 and 18% in 1985. Tosee how much we gain by including con-trols for sample selection bias , experience,and oceupation in our model , we repli-cated the Donohue -Heckman speciicationusing the 1984 SIPP data . The unexplainedearnings dficit for blacks increases from18% to 23% of the white male wage.

Employment EffeetsWage discrimination discourage s someblack men from working and eneouragessome white men to accept employment.Estimates of the employment effeets ofwagediscrimination are derived from the probi t

TabU 2. Decompositions ofRacial Wage Differentials .With WithoulOccupatumal OccupalionalDescnption ofDifferential Var iabUs VaiabUs

Observcd Wage DfTerencia l J2.94 $2.94OfTer Wage Differen tial $3 .17 $3.37Components of the OfferWage Differential'Hea lth Facto rs $0 .0 1 $0.0 1Edu cation $0.44 $0.7 1Experience ' $0.01 $0.02Oceupation $0.67 Un in $0.06 $0.02Public Secto r $0.09 $0.07Par t-T ime $0.03 $0.05Capital-Incensive Industry $0 .0 1 $0 .0 1D isabled $0 00 $0 .00Ofer Wage DiferentialNo t A t tibu tab le toD iscrim ination 1.20 $0.84Discriminatory Ofer WageDiferen tial 1.97 $2.53.Entry equals (x XgXO.QOp. t pg)Algebraic sum of a for a vector of coefficients Source: SIPP. Wave II I (1984) .

estimates of the employment function(Table Al ) and the least squares estimatesof the wage function (Table 1) followingequations (12) , (15) , and (16) . The resultsare repor ted in Table 3.Wage discrimination reduces the prob-abili ty of employment for black men by vepercentage po ints , a loss of 375,000 jobs.Discrimination increa ses the probabili ty ofemployment for white men by 0.2 percent-age points, a gain of 99,000 jobs.20 Waged iscrimination , therefore , results in a ne tloss of 276,00 0 jobs suppordng Becker's(1971) prediction that discrimination re- Ideally. the emp loyment func tion shou ld inc lud eall the variables in the offer wage function (X ). Someof these variables, such as the controls for experienceandjob characteristics, are unobsened for non-work-ers and are, therefore , omitted from the probit func-tions. This limits the selectivity correction in ihemodel. Whe n the estimates of emp loymen t efeetsare based on wage equations that are not correctedfor selectivity bias , black men lose 320 ,000 jobs andwhite men gain 86,000 jobs.


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INDUSTRIAL AND LABOR RELAT ION S REV IEW12

TabU 3 . Wage and Employmenl E fTecisof Discmination Against Black MenWge Effect'Observed Wage Diffcren al (VW- Wa] $2 .94O fer Wagc Differcnal $3 .17('/vQ tXW 29.6%Wage Difference Due to Endowments $1.20A .gopw* .IOM w- )Wage Diference due lo Discimina iion $1.97A A - A'(i/VV Jx lOO 18.4%Employment EffectsDiference s in JobsAW, = [n , I J . n; ; - Wh i te 99 .326

; . Black -375 .880Nec Diference in Jobs -276,554Annual Wage Gains to Whites ( billion)Employed : C, .( -W K ,, 22.1Add ional Emp loymenl: Cj-A , Wy, 2-1Annual Wage Lo sses to Blacks ($ billion)Employed: LX[v t-WB)NB 16.9Not Emp loyed : j.Al w;s 7.0

.Blacks : Wt = i 7.40; VV . 7.53 ; g = 9.26 .Whites : HV = 10.34; -$10.70; Wjw. 10 .46Source: S1PP , Wavell l (1984) .

duces omput and results in an ine ficientuse of labor.*1Black men who were employed at dis-criminatory wages lost a total of S16.9 bil- Our resul ts mayunderstate the efec t ofdiscrimi-naiion on black employmenl because we limil oures limates lo discriminaiion within occupalion andbecause we cannotmeasure the d isinceniive efects ofdiscr iminaiory wages on ihe hours worked by em -ployed b lack men. If . for examp le, the eslimates ofemploymenl efects are based on equa iions fromwhich the occupa lion variables are excluded, blackslose 449.000 jobs and whites gain 112.000 Job s . Onthe oiher hand. our results may oversiate the efect ofdiscr iminaiion on black employmenl because we havespecified the wage equ ation in non-log form. Whenthe eslimates of employmenl effects are based onlog linear wage equ ations , blacks lose 99,000job s andwhites gain 31,000 jobs .

lion in wage income in 1984. Our estimatesof the employmenl effects, however , makeit clea r tha t b lack workers who are em -ployed at discrim inaiory wages are not theonly losers from wage discrim inaiion . Weestmate that more than 375,000 black menwere not employed because their rcserva-tion wages were higher than the discrimi-naiory wage rate offered to blacks bul lowerthan the non-discriminatory offer wage .Assuming that these men could have workedfull-time at the non-discriminatory wagerate , their lost income in 1984 is $7 .0 bil -lion . We cannot estmate how many ofthese b lack men connue lo scek better-paid jobs and how many become discour-aged and leave the labor forc, bul it islikely that the disincen tive effects of wagediscriminaiion both increase the unemploy-ment rate and reduce the labor forc par-ticipation rate for black men .B lack men who are discouraged by lowdiscriminaiory offer wage rales and chooseto leave the labor forc mustseek altrnatemeans of supprt. Thus, by narrowing thegap between the offer wage and transferpayments , wage discriminaiion reinforce sthe disincentive effects of public assistancep rog rams.Becker's (1971) model prediets thatmajority workers are the only winne rs from wage discim inaiion . White men ga infrom wage discrim inaiion against blacks intwo ways. Firsl , employed white men earn adiscriminaiory wage premium. Second ,some of the wh ite men who wou ld no t workat the non-discrim inatory wage accept em -ployment at the higher , discriminaiorywage . In 1984 white men gained nearly100,000 jobs as a result ofwage discimina-iion against black men. The total incomegained was $24.2 billion .The effect of wagc discriminaiion onemploymenl depends on the wage elasici-tics of supply and demand for black andwhite labo r.** One test o f whether or no t

The wage elasticity of labo r supply , Q , is com-puied from il %A/,//%ilVV , where %A/> ( -p/expression for %A/.(, Z.( = the weighied total of work-


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EMPLOYMENT EFFECT S OF WAGE DISCRIM INATION 315

T abte A2Weighted Leas Sq tures Esmales for Wage Equations with No Occupaton Variables(Standard Errors in Parentaeses)White B la ck

Variable (N - 10,137)(P - 46,082,859} - (N - 950){P-4,877.024) -Interccpt 5.405 3.397 (0.445) (1.026 )HealthFACTOR 0.159 0 .139(0.22S) (0.364)FACTOR2 0 .163 0 .130(0.190 ) (0.312 )FACTOR3 0.114 -0 .2 12

(0.132) (0.185 )Years of Educa tion 0.90 1 0.641

(0.025 ) (0.054 )O isab led 0.574 0.015(0.373) (0.699 )Un in 0 .29 1 1.107

(0.162 ) (0.281)Pub lic Sector Worker 1.438 0 .098(0.193 ) (0.318 )Part-T im e 1.226 1.217(0,237) (0.367 )Specific Experience 0.437** 0.328(0.022) (0 .043 )Spcciic Experience Squared 0 .006 0.005 (0.001) (0001)Genera l Experience 0 297 .. 0.096 (0.020) (0.041)Genera l Experience Squared 0 .005 0 .00 1(0.001) (0.001)Missing Exper ience 0 .088 0 030(0.031) (0.036 )Capital-lntensive Industry 0 .643 0.613(0.143 ) (0 .261)A . 2.06 2 0 .025 (0.548) (0 .723)0.268 0 .353F-va lue 248.3 10 36.662

Populaiion roais equal sum of the sample weighls .Siaiisiica lly signiHcant at the .05 level ; ai the .01 leve (two-tailed tests) .Sourcn SIPP . Wavelll (1984) .


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316 INDUSTRIAL AND LABOR RELAT IONS REVIEW

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Effects of Wage Discrimination