Discrimination Pays Equally Productive Workers Differently

1. Labour market discrimination pays or hires workers of equal productivity differently.
2. It is based on gender, ethnicity, age or other characteristics, not ability.
3. Employer prejudice can lower the demand for an affected group.

Prejudice Lowers the Group's Wage and Employment

1. Prejudice shifts the labour demand curve for the group left.
2. This lowers their wage and level of employment.
3. It can also push them into lower-status jobs.

Conditions Necessary for Wage Discrimination to Persist

1. An employer, co-workers or customers must hold a preference or prejudice against a group that is unrelated to that group's productivity.
2. The labour market must be imperfectly competitive, with some employer market power or barriers to entry, since in a perfectly competitive market a non-discriminating firm could profit by hiring the same-productivity workers more cheaply, competing prejudiced firms out over time.
3. Imperfect information allows statistical discrimination, where an employer judges an individual by the average characteristics of their group rather than their own productivity.
4. Weak enforcement of anti-discrimination law lets these preferences and generalisations translate into unequal pay or hiring without a legal or reputational cost to the employer.

Discrimination Harms Workers and the Wider Economy

1. The affected workers lose income and opportunities.
2. The economy wastes talent, lowering output and efficiency.
3. Anti-discrimination law and enforcement can reduce it, but gaps persist.
4. On balance, discrimination harms both the individuals affected and the wider economy through the underuse of talent.

Hold Productivity Constant

Worked Example: Calculating a Gender Pay Gap

1. Suppose average hourly pay is £20.00\pounds 20.00£20.00 for men and £17.60\pounds 17.60£17.60 for women in a given occupation.
2. The absolute pay gap is £20.00−£17.60\pounds 20.00 - \pounds 17.60£20.00−£17.60, i.e. £2.40\pounds 2.40£2.40.
3. The percentage gender pay gap is £2.40£20.00=\dfrac{\pounds 2.40}{\pounds 20.00} =£20.00£2.40​= $12\%$.

Describing the Discrimination Diagram

1. The vertical axis measures the wage rate (W) and the horizontal axis measures the quantity of labour (QL) for the group being discriminated against.
2. Without discrimination, the group's demand curve D0 and supply curve S would cross at the non-discriminatory wage Wc and employment Qc, matching what an equally productive comparison group would receive.
3. Employer prejudice shifts the group's demand curve leftward to D1, since employers now value hiring this group as if its MRP were lower than it truly is.
4. D1 crosses S at a lower wage W1 and lower employment Q1 than Wc and Qc, even though the group's actual productivity has not changed; the vertical gap between D0 and D1 at Qc represents the wage penalty from discrimination.