Discrimination in the Labour Market (AQA A-Level Economics): Revision Notes

Discrimination in the Labour Market

The nature of wage discrimination

In markets where employers have significant control over wage-setting, they can reduce their total wage costs through a practice known as wage discrimination. This occurs when an employer pays different workers different wages for performing identical work. The ability to engage in wage discrimination typically requires the employer to possess some degree of market power, allowing them to influence wages rather than simply accepting the market rate.

To understand how wage discrimination operates, consider a competitive labour market where all workers initially receive the same wage ($W_1$), which is determined by the intersection of labour supply and demand. In this scenario, the employer's total wage expenditure equals the area represented by rectangle $OW_1AL_1$.

However, when an employer engages in wage discrimination, they pay each worker only the minimum amount that worker is willing to accept, rather than the competitive market wage. This reduces the total wage bill to the shaded area $OBAL_1$, transferring income from workers to the employer. This practice represents one reason why firms pursue discriminatory wage policies, and why trade unions often resist such arrangements.

Understanding the mechanism

For wage discrimination to succeed, employers must be able to identify and separate different groups of workers who supply similar types of labour. This separation becomes possible when workers possess varying levels of knowledge about the labour market and have different abilities to seek alternative employment opportunities.

Types of wage discrimination

Wage discrimination takes many forms across different labour markets. While we'll examine gender discrimination as a primary example, it's important to recognise that discrimination operates along multiple dimensions. Different groups experience discrimination based on various characteristics including:

• Race and ethnicity
• Religion
• Gender identity
• Sexual orientation
• Disability status

Each type of discrimination shares common economic mechanisms but may have distinct causes and consequences in different market contexts.

Gender discrimination in the labour market

Gender-based wage discrimination remains a significant issue in the UK labour market. Despite equal pay legislation being in place since 1972, women's average pay continues to fall short of men's pay, even when controlling for similar work and qualifications.

The scale of the gender pay gap

Recent data reveals the persistent nature of gender pay inequality. In 2017, the Fawcett Society reported that progress in closing the gender pay gap had stalled, with the gap standing at 14.1% - unchanged from 2015 and 2016. The organisation warned that at the current rate of progress, the gap would not close until 2117, over a century away.

Further analysis revealed substantial differences based on ethnicity, with Pakistani and Bangladeshi women facing a 26% pay gap, and Black African women experiencing a 24% gap.

The extent of low pay also disproportionately affects women. Women are 1.8 times more likely than men to earn below the statutory minimum wage, with 221,000 women earning less than this legal threshold compared to 100,000 men.

Reasons for gender pay inequality

Several interconnected factors explain why women earn less than men on average:

Occupational segregation and industry choice: Women tend to work predominantly in lower-paid industries and occupations. Even within specific occupational categories, women often receive lower pay than men. This pattern partly reflects women's under-representation in higher-paid positions within any given occupation, though it also stems from women being paid less for performing identical work.

Discrimination in labour markets: Direct discrimination against women in hiring, promotion, and pay decisions contributes to these pay differences. Women face disproportionate representation in industries characterised by smaller average firm sizes and plant sizes. These smaller organisations typically offer lower wages and fewer promotion opportunities compared to larger firms and industries.

The diagram above illustrates how discrimination affects the labour market for female workers. The demand curve labelled "Demand with discrimination" (represented by the MRP curve) lies to the left of where it would be without discrimination. This results in fewer women being employed ($Q_2$ instead of $Q_1$) and at lower wages ($W_2$ instead of $W_1$).

Labour force attachment and career interruptions: Women's weaker average attachment to the labour force significantly impacts their pay progression. Both men's and women's pay increases by an average of 3% for each year of work experience. However, when women leave the labour force, typically to care for young children, their potential pay falls by 3% for each year away from employment.

Higher labour turnover costs: Women generally experience higher rates of labour turnover than men, which imposes costs on employers. These include expenses for training replacement workers. This consideration may reduce employers' incentive to invest in training female workers, as they perceive a lower return on this investment. Similarly, some women may have less incentive to invest in their own education and training if they anticipate receiving fewer benefits from these investments over their working lives than their male counterparts.

Effects on labour markets

Gender discrimination in one labour market creates ripple effects in other labour markets. As the diagram below demonstrates, when discrimination occurs in one market, it affects the supply of labour to other markets where discrimination is not occurring.

Real-world evidence: the glass ceiling

The concept of the "glass ceiling" describes invisible barriers that prevent women from progressing to senior positions despite having the qualifications and capabilities to do so. In 2017, Nicola Brewer, chief executive of the Equality and Human Rights Commission (EHRC), warned that this ceiling had transformed from glass to "reinforced concrete."

The EHRC described progress as moving at "a snail's pace," with young women's aspirations at risk of giving way to frustration. The commission noted that despite women excelling in education and achieving success in higher education, workplaces remain structured in ways that place excessive barriers in their path, resulting in an avoidable loss of talent at senior levels.

Evidence from Parliament reflected this slow progress. The 2017 General Election saw a record 208 female MPs elected, representing 32% of all MPs. While this marked an increase from 191 in the 2015 election and represented the highest proportion in UK electoral history, it still fell well short of the government's 25% female membership target set for 2015.

Historical example: Ford car workers and the Equal Pay Act

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