Discrimination in the labour market

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

What is discrimination?

Nobel-prize winning economist Kenneth Arrow has defined discrimination as “the valuation in the market place of personal characteristics of the worker that are unrelated to worker productivity”.

These personal characteristics may be sex, race, height, appearance, age, national origin or sexual preference – or indeed any other identifiable characteristic.

Discrimination is a cause of labour market failure and a source of inequity in the distribution of income and wealth and it is usually subject to intervention e.g. through regulation and legislation.

Discriminatory treatment of minority groups leads to lower wages and poor employment opportunities, including less training, job insecurity and fewer promotions. The result is that groups exposed to discrimination earn less than they would and suffer a fall in relative living standards.

Why does discrimination occur in the labour market?

The 'Taste' Model (Gary Becker) - Discrimination arises here because employers and workers have a  ‘distaste’ for working with people from different ethnic backgrounds or final customers dislike buying goods from sales people from different races i.e. people prefer to associate with others from their own group. They are willing to pay a price to avoid contact with other groups. With reference to race, this is equivalent to racial prejudice.

Employer ignorance – Discrimination arises because employers are unable to observe directly the productive ability of individuals and therefore characteristics such as gender or race may be used as ‘proxies’ – the employer through ignorance or prejudice assumes that certain groups of workers are less productive than others and is less willing to employ them, or pay them a wage or salary that fairly reflects their productivity, experience and applicability for a particular job.

Occupational crowding effects – Females and minorities may be crowded into a cluster of lower paying occupations.

Younger workers are often among the most vulnerable in the labour market. Since the 2008-09 recession employment among workers aged 18-24 has contracted by nearly 400,000 and the unemployment rate among this group has jumped from 12% to over 18%. Little wonder that politicians are under great pressure to invest extra funds in improving job prospects for this segment of the labour force

Discrimination against female workers - the “gender pay gap” in the UK

There is little doubt that a permanent gap exists between average pay rates for females and males in the UK labour market. Evidence of the gender pay gap comes from the New Earnings Survey.

The gender gap, measured by full-time median hourly pay rates excluding overtime, shrank from 12.2 per cent to a record low of 10.2 per cent in the year to April 2010, according to an annual survey of hours and earnings by the Office for National Statistics. Men’s median hourly earnings were £13.01, while for women the rate was £11.68. The median is the level at which half of workers fall above and half below.

In 1997 the gender pay gap in median earnings for full-timers was around 17 per cent and now it’s dropped to around 10 per cent. The median gender gap for all employees, including part-timers, in 2010 fell from 22 per cent to 19.8 per cent. The gender gap was widest in south-east England and narrowest in Northern Ireland.

What factors explain the gender pay gap in the UK?

1. Human capital: i.e. there are differences in educational levels and work experience between males and females. Breaks from paid work, including time to raise a family, can impact on women's level of work experience.
2. Part-time working: a significant proportion of women work part-time and part-time work typically pays less well than full-time jobs. Fewer hours worked inevitably has an effect on the weekly gross earnings of female workers compared to men.
3. Travel patterns: on average, women spend less time commuting than men with the result that they will have a smaller pool of jobs to choose from. It may also result in lots of women wanting work in the same location near to where they live which will result in lower equilibrium wages for those jobs.
4. Occupational segregation: 60 per cent of women work in just 10 occupations. Occupations which are female-dominated are often relatively poorly paid jobs (e.g. Caring, Cashiering, Catering, Cleaning and Clerical jobs) and there is continued under-representation in higher paid jobs within occupations – the so-called "glass ceiling" effect.
5. Employer discrimination: Work by the LSE calculates that up to 42% of the gender pay gap is attributable to direct discrimination against women. Since 1995 the number of equal pay cases registered with employment tribunals has more than doubled.
6. The effects of monopsony power: Females may be relatively geographically immobile (because they are tied to their husbands' place of employment) and may be paid less than a competitive wage by a monopsonist employer.

Government Intervention to reduce the gender gap

The Equal Pay Act introduced in 1970 sought to provide legal protection for female workers and encouraged employers to bring the pay for males and females into line.

The Sex Discrimination Act of 1975 outlawed unequal opportunities for employment and promotion in the workplace because of gender and it set up the Equal Opportunities Commission.

Attention has switched in recent years away from legislation towards encouraging more women to stay on in further and higher education providing and targeted assistance for single parents to find work and thereby increase the labour market participation ratio among female workers.

Theory of labour market discrimination

We can model the effects of discrimination using a simple labour demand and supply framework

It is difficult to be precise about the effects of discrimination in the labour market. Employers rarely have full information about the productivity of all of their workers, let alone prejudiced or ignorant views about the relative merits and de-merits of different groups. Increasingly employers’ organisations along with trade unions are working hard to break down barriers to the employment of different minority groups and in highlighting instances of discriminatory behaviour.

The issue of labour market discrimination will remain with us for many years. It is closely linked to the issue of labour migration and in particular, the risks of discrimination of the many thousands of workers from Eastern Europe who have come into the UK either on a temporary or permanent basis now that twelve countries have joined the European Union.

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