LABOUR MARKET DISCRIMINATION: AQA Economics Specification Topic 4.1

Topic 4.1 - Individuals, firms, markets and market failure

Snapshot of the AQA syllabus topic area we’ll be covering in this post.

LABOUR MARKET DISCRIMINATION: THE LABOUR MARKET

AQA students must understand the following content [taken from the syllabus]

• The conditions necessary for wage discrimination.

• The impact of gender, ethnicity and other forms of discrimination on wages, levels and types of employment.

---

ESSENTIAL INFORMATION

[NOTE: supplementary knowledge, supporting diagrams and questions at the end]

INTRODUCTION

In the previous post, we discussed the national minimum wage, its impact on the labour market and how it can improve welfare but also create labour market failure in some instances. In this post we will explore the idea of labour market discrimination and what it means for the outcome of labour markets and the resulting inefficiencies.

Labour market discrimination is still a problem in economies all around the world. Despite improvements in the promotion of equality, certain people still experience discrepancies in earnings, levels, and work types depending on things like gender, ethnicity, and other traits. In order to shed light on this ubiquitous issue, this page examines the prerequisites for wage discrimination, considers the effects of different types of discrimination on labour market results, and provides actual examples. Readers will also learn how to weigh the benefits and drawbacks of wage discrimination for employees, businesses, and the whole economy.

CONDITIONS NECESSARY FOR WAGE DISCRIMINATION

Wage discrimination can occur under specific conditions that perpetuate unfair treatment in the labour market. Factors contributing to this phenomenon include:

1. Prevalence of Stereotypes:

The persistence of wage discrimination is significantly influenced by ingrained prejudices and biases based on factors such as gender, colour, ethnicity, or other traits. These prejudices frequently result in presumptions regarding productivity, capacity, and value, which have an impact on hiring choices, chances for promotions, and compensation determination.

2. Information Asymmetry:

Information asymmetry, which occurs when employers a greater deal of information about applicants than applicants do about their employers, might facilitate discriminatory practices. Applicants can have unequal bargaining power due to the fact that there might be a lack of transparency in the application process. For example, applicants might not know what the fair wage is for a certain position, because they don’t have access to information about what other people in the same role are being paid.

3. Occupational Segregation:

Wage discrimination may result from the overrepresentation of certain groups in particular professions or businesses. For instance, women are frequently overrepresented in lower-paying industries and given responsibilities that are undervalued, which exacerbates salary discrepancies when compared to male colleagues.

IMPACT OF DISCRIMINATION ON WAGES AND EMPLOYMENT

1. Gender-Based Discrimination:

Gender discrimination still has a big impact on salaries and employment opportunities. Studies repeatedly show that there is a gender pay difference, with females generally earning less than males. Discrimination hinders women's career advancement, prevents them from obtaining higher-paying jobs, and threatens economic equality in general.

2. Ethnicity and Racial Bias:

Race and ethnicity have a significant impact on labour market outcomes as well. In comparison to their majority counterparts, minority groups frequently have poorer earnings, fewer job prospects, and higher unemployment rates. Racist and racial discrimination impedes social mobility and reinforces inequities.

REAL-WORLD EXAMPLES

To illustrate the stark reality of wage discrimination, consider the following real-world examples:

1. Gender Wage Gap:

Studies regularly draw attention to the gender wage difference in various nations. For instance, institutional discrimination still exists in all industries and vocations in the United States, with women earning, on average, 82 cents for every dollar earned by men.

2. Ethnic Pay Disparities:

People from minority ethnic backgrounds face pay discrepancies in a number of European nations. According to studies, people from immigrant backgrounds frequently experience lower earnings, less job possibilities, and occupational segregation, underscoring the existence of prejudice.

ARGUMENTS FOR AND AGAINST DISCRIMINATION

Advantages:

• Employers may benefit from cost savings associated with paying lower wages to certain groups.

• Wage discrimination can, in some cases, be attributed to market forces and differences in labour supply and demand.

Disadvantages:

• Workers subjected to wage discrimination experience lower earnings, diminished job satisfaction, and reduced motivation, leading to potential negative impacts on productivity.

• Labour market discrimination perpetuates income inequality and hampers social cohesion, potentially leading to social unrest.

• The economy as a whole suffers when talented individuals are excluded or discouraged from fully participating in the labour market, leading to inefficiencies and lost economic potential.

Conclusion:

Discrimination in the workplace, which might manifest itself as wage gaps based on criteria including gender, race, and other considerations, is still a major problem. Other types of discrimination might be certain groups of workers not having the same promotion opportunities as others, or being treated differently altogether. We may try to create more inclusive and equitable societies by understanding the factors that lead to wage discrimination and researching its effects on labour market results. To combat prejudice, businesses, policymakers, and society as a whole must work together to create a workplace where everyone has access to equal opportunities, fair salaries, and a level playing field.

---

SUPPLEMENTARY KNOWLEDGE

• Workers might be treated differerntly because:

  • race

  • gender

  • age

  • sexuality

  • religion

  • disabilities

• The gender pay gap refers to the disparity of pay between men and women

• Racial discrimination in the workplace occurs when employers hire according to their preference for a particular racial group

• The Equality Act in 2010 made it illegal to discriminate against workers in the UK

• Misinformation is the leading factor behind discrimination in the labour market

• Discrimination can worsen income inequality - as certain groups of people are paid less than other groups

• Discrimination against a certain group of people could be positive or negative

  • paying one group of people because you believe them to believe more productitive than another (the believe marginal revenue product [MRP) is higher than what it truly is)

  • paying another group of people less than fair wages because you believe them to be less productive (believed MRP is below the true MRP)

• Labour market discrimination costs the economy and the government money

  • it costs the government because certain groups of people won’t get hired or will earn less - this means more benefit payouts and less income tax received - this could worsen the potential for the government to pay off its debts

  • discrimination can lead to increased costs of production - as the most suitable person for the job isn’t always being hired - this can lead to a lack of international competitiveness and harm the economy’s trade balance and GDP output

• Wage discrimination and labour market discrimination are similar but different

  • labour market discrimination is a broader term that refers to how employers might make decisions based on misinformation and prejudice towards other groups - this could manifest itself in different ways

  • wage discrimination focuses purely on the wage disparities between different groups of workers and not necessarily the treatment of those workers

    • a kind of wage discrimination is when monopsonies pay different wages to different workers doing the same job - this might not have anything to do with race, age, gender etc - it might just be because some people are more accepting of lower wages

    • for example two cleaners might accept different rates of pay to clean the same office - it could be that one cleaner needs the money more than the other and won’t turn the job down

    • wage discrimination is quite similar to price discrimination (covered in a previous post)

---

SUPPORTING DIAGRAMS

labour market discrimination diagram - this shows the true MRP of workers at point A - a disadvantaged group has a perceived MRP at Point B, leading to fewer of those workers hired - an advantaged group has a perceived MRP at Point C - this leads to more of those workers hired - this can lead to economic inefficiencies as certain groups of people are paid less than deserve, and other groups of people are paid more than what they deserve - this can lead to income inequalities throughout society

diagram to show wage discrimination in the labour market. The employer gains extra welfare if they are able to pay workers their transfer earnings only. To do this, they would need perfect information, which is not realistic - wage discrimination might not be based on somebody’s gender, age, race etc - wage discrimination refers to how different people are willing to accept different wages for the same jobs - if employers know a person’s acceptable wage rate, they can exploit this

---

SUPPORTING QUESTIONS

Question 1: What are the key factors that contribute to labour market discrimination?

Answer:

Implicit biases, prejudices, societal norms, institutional hurdles, and unequal access to education and training opportunities are some of the variables that can affect labour market discrimination. In the labour market, discriminating practices and attitudes are also significantly shaped by historical and cultural factors.

Question 2: How does labour market discrimination impact wages and employment opportunities?

Answer:

Due to salary inequalities and restricted access to higher-paying employment for some groups, discrimination in the labour market can occur. Women, members of racial and ethnic minorities, people with impairments, and older workers sometimes earn less money and encounter obstacles when applying for managerial or high-skilled roles. Discrimination can also result in occupational segregation, where a group of people is concentrated in low-status, low-paying occupations, which restricts their ability to advance in their careers and increase their income.

Question 3: What are the consequences of labour market discrimination for individuals, employers and the economy?

Answer:

Discrimination in the workforce has a negative impact on people, employers, and the economy as a whole. It can result in poorer salaries, less job satisfaction, less career opportunities, and the continuation of social inequality for an individual. Employers may overlook outstanding people and various viewpoints, which could have an effect on productivity and innovation. On a macroeconomic level, underutilising the abilities and talents of marginalised groups in the labour market can lead to inefficiencies, impede economic progress, and contribute to income inequality.