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Economics explains discrimination in the labour market
Economics explains discrimination in the labour market

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1 Synopsis

1.1 A contentious issue

This course discusses a contentious issue in economics: why particular groups, such as women or minority ethnic groups, are disadvantaged in the labour market. It compares different theoretical and empirical explanations for why such systematic labour market disadvantage is experienced by some groups in society.

Click to view 'The neoclassical school of thought and its rivals' [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]

Neoclassical theory would predict that profit-maximisation considerations by competitive firms would ensure that all workers are paid their marginal revenue product. Therefore, if one group of workers is systematically paid less than another it should be that the groups differ in their productivity. If this is not the case and workers of equal productivity are paid differently, then there is discrimination. Therefore, discrimination is due to a failure of competition that allows non-profit maximising behaviour to persist. Two neoclassical theories of how such discrimination could occur are examined in this course. Both explain labour market disadvantage in terms of discrimination against workers who have, or are thought to have, particular characteristics.

Click to view 'The institutional school of thought'.

This course also introduces an alternative institutional approach known as ‘segmented labour market theory’, which views the labour market as a collection of parts or segments. Using the idea of a distinction between primary and secondary labour markets, this theory argues that some groups of workers are restricted to secondary labour market jobs. These workers are then low paid because of the jobs they do. Labour market disadvantage, then, is not due to the characteristics of the workers, but the characteristics of the jobs that they do. The issue then becomes why such different labour markets exist and why particular types of workers are restricted in their access to the better jobs in the primary labour markets.

This course also provides good examples of how different theoretical perspectives lead to different policy prescriptions.

Neoclassical economists believe that making the world more like the characteristics of the neoclassical model of perfect competition will remove many problems. In particular, promoting competition will make discriminating employers go out of business, and improving information about individual workers would help remove statistical discrimination, so that firms did not need to use stereotypes based on group characteristics in deciding whom to employ.

Institutional economists, on the other hand, believe that the causes of labour market disadvantage are structural, built into the institutions of the economy, therefore effort has to be put into tackling the low pay and poor working conditions of secondary labour market jobs. Competition alone will not do this, nor will it remove the barriers that workers trapped in such jobs face in getting into better jobs. Institutionalists would be likely to advocate direct government intervention, possibly by promoting affirmative action or tackling low pay through equal pay legislation. In this case, as one might expect, a theory that sees these causes of labour market disadvantage as institutional promotes an institutional solution.