economic discrimination essay

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19.3 The Economics of Discrimination

Learning objectives.

Define discrimination, identify some sources of it, and illustrate Becker’s model of discrimination using demand and supply in a hypothetical labor market.
Assess the effectiveness of government efforts to reduce discrimination in the United States.

We have seen that being a female head of household or being a member of a racial minority increases the likelihood of being at the low end of the income distribution and of being poor. In the real world, we know that on average women and members of racial minorities receive different wages from white male workers, even though they may have similar qualifications and backgrounds. They might be charged different prices or denied employment opportunities. This section examines the economic forces that create such discrimination, as well as the measures that can be used to address it.

Discrimination in the Marketplace: A Model

Discrimination occurs when people with similar economic characteristics experience different economic outcomes because of their race, sex, or other noneconomic characteristics. A black worker whose skills and experience are identical to those of a white worker but who receives a lower wage is a victim of discrimination. A woman denied a job opportunity solely on the basis of her gender is the victim of discrimination. To the extent that discrimination exists, a country will not be allocating resources efficiently; the economy will be operating inside its production possibilities curve.

Pioneering work on the economics of discrimination was done by Gary S. Becker, an economist at the University of Chicago, who won the Nobel Prize in economics in 1992. He suggested that discrimination occurs because of people’s preferences or attitudes. If enough people have prejudices against certain racial groups, or against women, or against people with any particular characteristic, the market will respond to those preferences.

In Becker’s model, discriminatory preferences drive a wedge between the outcomes experienced by different groups. Discriminatory preferences can make salespeople less willing to sell to one group than to another or make consumers less willing to buy from the members of one group than from another or to make workers of one race or sex or ethnic group less willing to work with those of another race, sex, or ethnic group.

Let us explore Becker’s model by examining labor-market discrimination against black workers. We begin by assuming that no discriminatory preferences or attitudes exist. For simplicity, suppose that the supply curves of black and white workers are identical; they are shown as a single curve in Figure 19.11 “Prejudice and Discrimination” . Suppose further that all workers have identical marginal products; they are equally productive. In the absence of racial preferences, the demand for workers of both races would be D . Black and white workers would each receive a wage W per unit of labor. A total of L black workers and L white workers would be employed.

Figure 19.11 Prejudice and Discrimination

If employers, customers, or employees have discriminatory preferences, and those preferences are widespread, then the marketplace will result in discrimination. Here, black workers receive a lower wage and fewer of them are employed than would be the case in the absence of discriminatory preferences.

Now suppose that employers have discriminatory attitudes that cause them to assume that a black worker is less productive than an otherwise similar white worker. Now employers have a lower demand, D B , for black than for white workers. Employers pay black workers a lower wage, W B , and employ fewer of them, L B instead of L , than they would in the absence of discrimination.

Sources of Discrimination

As illustrated in Figure 19.11 “Prejudice and Discrimination” , racial prejudices on the part of employers produce discrimination against black workers, who receive lower wages and have fewer employment opportunities than white workers. Discrimination can result from prejudices among other groups in the economy as well.

One source of discriminatory prejudices is other workers. Suppose, for example, that white workers prefer not to work with black workers and require a wage premium for doing so. Such preferences would, in effect, raise the cost to the firm of hiring black workers. Firms would respond by demanding fewer of them, and wages for black workers would fall.

Another source of discrimination against black workers could come from customers. If the buyers of a firm’s product prefer not to deal with black employees, the firm might respond by demanding fewer of them. In effect, prejudice on the part of consumers would lower the revenue that firms can generate from the output of black workers.

Whether discriminatory preferences exist among employers, employees, or consumers, the impact on the group discriminated against will be the same. Fewer members of that group will be employed, and their wages will be lower than the wages of other workers whose skills and experience are otherwise similar.

Race and sex are not the only characteristics that affect hiring and wages. Some studies have found that people who are short, overweight, or physically unattractive also suffer from discrimination, and charges of discrimination have been voiced by disabled people and by homosexuals. Whenever discrimination occurs, it implies that employers, workers, or customers have discriminatory preferences. For the effects of such preferences to be felt in the marketplace, they must be widely shared.

There are, however, market pressures that can serve to lessen discrimination. For example, if some employers hold discriminatory preferences but others do not, it will be profit enhancing for those who do not to hire workers from the group being discriminated against. Because workers from this group are less expensive to hire, costs for non-discriminating firms will be lower. If the market is at least somewhat competitive, firms who continue to discriminate may be driven out of business.

Discrimination in the United States Today

Reacting to demands for social change brought on most notably by the civil rights and women’s movements, the federal government took action against discrimination. In 1954, the U.S. Supreme Court rendered its decision that so-called separate but equal schools for black and white children were inherently unequal, and the Court ordered that racially segregated schools be integrated. The Equal Pay Act of 1963 requires employers to pay the same wages to men and women who do substantially the same work. Federal legislation was passed in 1965 to ensure that minorities were not denied the right to vote.

Congress passed the most important federal legislation against discrimination in 1964. The Civil Rights Act barred discrimination on the basis of race, sex, or ethnicity in pay, promotion, hiring, firing, and training. An Executive Order issued by President Lyndon Johnson in 1967 required federal contractors to implement affirmative action programs to ensure that members of minority groups and women were given equal opportunities in employment. The practical effect of the order was to require that these employers increase the percentage of women and minorities in their work forces. Affirmative action programs for minorities followed at most colleges and universities.

What has been the outcome of these efforts to reduce discrimination? A starting point is to look at wage differences among different groups. Gaps in wages between males and females and between blacks and whites have fallen over time. In 1955, the wages of black men were about 60% of those of white men; in 2005, they were 75% of those of white men. For black men, the reduction in the wage gap occurred primarily between 1965 and 1973. In contrast, the gap between the wages of black women and white men closed more substantially, and progress in closing the gap continued after 1973, albeit at a slower rate. Specifically, the wages of black women were about 35% of those of white men in 1955, 58% in 1975, and 67% in the 2005. For white women, the pattern of gain is still different. The wages of white women were about 65% of those of white men in 1955, and fell to about 60% from the mid-1960s to the late 1970s. The wages of white females relative to white males did improve, however, over the last 40 years. In 2005, white female wages were 80% of white male wages. While there has been improvement in wage gaps between black men, black women, and white women vis-à-vis white men, a substantial gap still remains. Figure 19.12 “The Wage Gap” shows the wage differences for the period 1969–2006.

Figure 19.12 The Wage Gap

The exhibit shows the wages of white women, black women, and black men as a percentage of the wages of white men from 1969–2005. As you can see, the gap has closed considerably, but there remains a substantial gap between the wages of white men and those of other groups in the economy. Part of the difference is a result of discrimination.

Source: Table 16. Median usual weekly earnings of full-time wage and salary workers, by sex, age, race and Hispanic origin, quarterly average (not seasonally adjusted) and annual averages, 1970–2006. For years after 1979, http://www.bls.gov/cps/wlf-table_16-2007.pdf

One question that economists try to answer is the extent to which the gaps are due to discrimination per se and the extent to which they reflect other factors, such as differences in education, job experience, or choices that individuals in particular groups make about labor-force participation. Once these factors are accounted for, the amount of the remaining wage differential due to discrimination is less than the raw differentials presented in Figure 19.12 “The Wage Gap” would seem to indicate.

There is evidence as well that the wage differential due to discrimination against women and blacks, as measured by empirical studies, has declined over time. For example, a number of studies have concluded that black men in the 1980s and 1990s experienced a 12 to 15% loss in earnings due to labor-market discrimination (Darity, W. A., and Patrick L. Mason, 1998). University of Chicago economist James Heckman denies that the entire 12% to 15% differential is due to racial discrimination, pointing to problems inherent in measuring and comparing human capital among individuals. Nevertheless, he reports that the earnings loss due to discrimination similarly measured would have been between 30 and 40% in 1940 and still over 20% in 1970 (Heckman, J. J., 1998).

Can civil rights legislation take credit for the reductions in labor-market discrimination over time? To some extent, yes. A study by Heckman and John J. Donohue III, a law professor at Northwestern University, concluded that the landmark 1964 Civil Rights Act, as well as other civil rights activity leading up to the act, had the greatest positive impact on blacks in the South during the decade following its passage. Evidence of wage gains by black men in other regions of the country was, however, minimal. Most federal activity was directed toward the South, and the civil rights effort shattered an entire way of life that had subjugated black Americans and had separated them from mainstream life (Donohue III, J. J. and James Heckman, 1991).

In recent years, affirmative action programs have been under attack. Proposition 209, passed in California in 1996, and Initiative 200, passed in Washington State in 1998, bar preferential treatment due to race in admission to public colleges and universities in those states. The 1996 Hopwood case against the University of Texas, decided by the United States Court of Appeals for the Fifth Circuit, eliminated the use of race in university admissions, both public and private, in Texas, Louisiana, and Mississippi. Then Supreme Court decisions in 2003 concerning the use of affirmative action at the University of Michigan upheld race conscious admissions, so long as applicants are still considered individually and decisions are based of multiple criteria.

Controversial research by two former Ivy League university presidents, political scientist Derek Bok of Harvard University and economist William G. Bowen of Princeton University, concluded that affirmative action policies have created the backbone of the black middle class and taught white students the value of integration. The study focused on affirmative action at 28 elite colleges and universities. It found that while blacks enter those institutions with lower test scores and grades than those of whites, receive lower grades, and graduate at a lower rate, after graduation blacks earn advanced degrees at rates identical to those of their former white classmates and are more active in civic affairs (Bok, D., and William G. Bowen, 1998).

While stricter enforcement of civil rights laws or new programs designed to reduce labor-market discrimination may serve to further improve earnings of groups that have been historically discriminated against, wage gaps between groups also reflect differences in choices and in “premarket” conditions, such as family environment and early education. Some of these premarket conditions may themselves be the result of discrimination.

The narrowing in wage differentials may reflect the dynamics of the Becker model at work. As people’s preferences change, or are forced to change due to competitive forces and changes in the legal environment, discrimination against various groups will decrease. However, it may be a long time before discrimination disappears from the labor market, not only due to remaining discriminatory preferences but also because the human capital and work characteristics that people bring to the labor market are decades in the making. The election of Barack Obama as president of the United States in 2008 is certainly a hallmark in the long and continued struggle against discrimination.

Key Takeaways

Discrimination means that people of similar economic characteristics experience unequal economic outcomes as a result of noneconomic factors such as race or sex.
Discrimination occurs in the marketplace only if employers, employees, or customers have discriminatory preferences and if such preferences are widely shared.
Competitive markets will tend to reduce discrimination if enough individuals lack such prejudices and take advantage of discrimination practiced by others.
Government intervention in the form of antidiscrimination laws may have reduced the degree of discrimination in the economy. There is considerable disagreement on this question but wage gaps have declined over time in the United States.

Use a production possibilities curve to illustrate the impact of discrimination on the production of goods and services in the economy. Label the horizontal axis as consumer goods per year. Label the vertical axis as capital goods per year. Label a point A that shows an illustrative bundle of the two which can be produced given the existence of discrimination. Label another point B that lies on the production possibilities curve above and to the right of point A. Use these two points to describe the outcome that might be expected if discrimination were eliminated.

Case in Point: Early Intervention Programs

Figure 19.13

Navy Hale Keiki School – Kindergarten – CC BY 2.0.

Many authors have pointed out that differences in “pre-market” conditions may drive observed differences in market outcomes for people in different groups. Significant inroads to the reduction of poverty may lie in improving the educational opportunities available to minority children and others living in poverty-level households, but at what point in their lives is the pay-off to intervention the largest? Professor James Heckman, in an op-ed essay in The Wall Street Journal , argues that the key to improving student performance and adult competency lies in early intervention in education.

Professor Heckman notes that spending on children after they are already in school has little impact on their later success. Reducing class sizes, for example, does not appear to promote gains in factors such as attending college or earning higher incomes. What does seem to matter is earlier intervention. By the age of eight , differences in learning abilities are essentially fixed. But, early intervention to improve cognitive and especially non-cognitive abilities (the latter include qualities such as perseverance, motivation, and self-restraint) has been shown to produce significant benefits. In an experiment begun several decades ago known as the Perry intervention, four-year-old children from disadvantaged homes were given programs designed to improve their chances for success in school. Evaluations of the program 40 years later found that it had a 15 to 17% rate of return in terms of the higher wages earned by men and women who had participated in the program compared to those from similar backgrounds who did not—the program’s benefit-cost ratio was 8 to 1. Professor Heckman argues that even earlier intervention among disadvantaged groups would be desirable—perhaps as early as six months of age.

Economists Rob Grunewald and Art Rolnick of the Federal Reserve Bank of Minneapolis have gone so far as to argue that, because of the high returns to early childhood development programs, which they estimate at 12% per year to the public, state and local governments, can promote more economic development in their areas by supporting early childhood programs than they currently do by offering public subsidies to attract new businesses to their locales or to build new sports stadiums, none of which offers the prospects of such a high rate of return.

Sources: James Heckman, “Catch ’em Young,” The Wall Street Journal , January 10, 2006, p. A-14; Rob Grunewald and Art Rolnick, “Early Childhood Development on a Large Scale,” Federal Reserve Bank of Minneapolis The Region , June 2005.

Answer to Try It! Problem

Discrimination leads to an inefficient allocation of resources and results in production levels that lie inside the production possibilities curve ( PPC ) (point A). If discrimination were eliminated, the economy could increase production to a point on the PPC , such as B.

Figure 19.14

Consumer goods per year and capital goods per year

Bok, D., and William G. Bowen, The Shape of the River: Long-Term Consequences of Considering Race in College and University Admissions (Princeton, N. J.: Princeton University Press, 1998).

Darity, W. A., and Patrick L. Mason, “Evidence on Discrimination in Employment,” Journal of Economic Perspectives 12:2 (Spring 1998): 63–90.

Donohue III, J. J., and James Heckman, “Continuous Versus Episodic Change: The Impact of Civil Rights Policy on the Economic Status of Blacks,” Journal of Economic Literature 29 (December 1991): 1603–43.

Heckman, J. J., “Detecting Discrimination,” Journal of Economic Perspectives 12:2 (Spring 1998): 101–16.

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How Discrimination Harms the Economy and Business

By Kilian Huber
July 15, 2020
CBR - Economics
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Racism, xenophobia, and other forms of discrimination against minorities are, sadly, common phenomena—throughout history and in the current moment. In the United States, the Black Lives Matter movement and the protests that followed the murder of George Floyd in Minneapolis highlight that many Americans consider discrimination a serious problem in the country today.

In recent research, my coresearchers— Volker Lindenthal and Fabian Waldinger , both at the University of Munich—and I consider how discrimination affects a country’s economy. Discrimination is extremely hurtful to individuals from targeted minorities. But, as we demonstrate, the effects of excluding talented individuals from economic opportunities tend to go further: when a society discriminates against a specific group, its entire economy can suffer.

The case we analyzed involves discrimination against Jews in Nazi Germany. We looked at the period after the Nazis gained power, on January 30, 1933, when discrimination against Jews quickly became commonplace in Germany. Many Jews were forced out of their jobs. By 1938, individuals with Jewish ancestry had effectively been excluded from the German economy.

The key idea in our study is that whenever discrimination interferes with the optimal allocation of talent, the economy suffers. This idea has its origins in formative work from the 1950s by the late University of Chicago economist and Nobel laureate Gary S. Becker, who argued that employers who are biased against hiring minorities harm themselves by missing out on talented individuals. We developed a technique to estimate how large and persistent the effects of such a loss of talent can be. And in our example, we find those effects are sizeable and long-lasting.

In 1932, Jews held about 15 percent of senior management positions in German companies listed on the Berlin Stock Exchange. When these top managers were kicked out, the companies were unable to replace them adequately. New senior management teams at affected companies were less connected to other companies, less educated, and had less managerial experience. The stock prices and profitability of the affected companies declined sharply after 1933, relative to unaffected companies. These effects were distinct from other shocks hitting German companies after 1933, for example, policies by the Nazi government or changes in demand for companies’ products.

When intolerance prevents individuals from exercising their talents, there tend to be widespread, long-lasting negative economic effects.

The aggregate effects of losing Jewish managers were large: an approximate calculation suggests that the market valuation of companies listed in Berlin fell by almost 2 percent of German gross national product. And besides being drastic, the effects were persistent: the performance of affected companies did not recover for at least 10 years, the end of our sample period. This suggests that the rise of a discriminatory ideology can lead to first-order and persistent economic losses.

Our case study involved dismissals of highly qualified senior managers who ran large, listed German companies. Hence, the discrimination we focused on was targeted at individual business leaders who were at the top of the economic pyramid. This pattern of forcing highly qualified individuals to give up important positions in the economy is all too common in history, bringing to mind the internment of Japanese Americans during World War II or the expulsion of managers who follow the cleric Fethullah Gülen from Turkish corporations in 2016.

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Race Discrimination: An Economic Perspective

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6 The Economics of Discrimination

Caroline Krafft

What is discrimination?

Discrimination is the unjust or unequal treatment of an individual or group based on a specific characteristic, such as their race, age, or gender identity. In the United States, a number of laws forbid discrimination on the basis of age, disability, national origin, pregnancy, race/color, religion, or sex. [1] Globally, the United Nations (UN) has passed conventions on eliminating all forms of racial discrimination and discrimination against women. [2]

Although the definition seems straightforward, identifying when an individual or entity is discriminating in practice is quite challenging. This difficulty is because disparities (differences in outcomes) may be the result of current or past discrimination. The fact that women earn 83 cents for every dollar men earn [3] may reflect employers’ discrimination in setting wages, but may also reflect the fact that women choose different majors, or are more likely to take time out of the workforce to care for children. Of course, that women choose different majors may also reflect discrimination in human capital accumulation.

Likewise, the fact that Black men have a one in three lifetime likelihood of imprisonment, while white men have a one in seventeen chance [4] may be due to a variety of factors, such as historical housing discrimination and poor local labor market opportunities, as well as discrimination in the criminal justice system. Identifying the source of disparities—for instance in the case of imprisonment, whether disparities are due to unequal and discriminatory outcomes around education, employment, or poverty as factors in committing crimes, or in unequal chances of arrests, convictions, or sentences—is critical to addressing and reducing these disparities.

Causes of discrimination

Discriminatory “tastes”.

Economists have two main theories concerning the causes of discrimination. The first theory is that individuals have “tastes” or preferences for discrimination. [5] This taste-driven discrimination theory suggests that factors such as social and physical distance and relative socioeconomic status contribute to tastes for discrimination. Contact with a minority group and the size of a “minority” group matter as well (the minority in this case could actually be a majority that has historically been disempowered, e.g. women). Tastes for discrimination mean that individuals are effectively willing to forfeit income to avoid certain transactions or interactions. For instance, landlords may prefer to rent only to individuals of a certain race or religion, even though they could charge higher rents if they opened up to a broader market.

Statistical discrimination

The second theory is statistical discriminatio n , which assumes discrimination is essentially an information problem. [6] For instance, in the labor market, employers may have imperfect information about the productivity of individual workers. Consider the case of an employer hiring a new carpenter for a construction company. The employer has information from applicants’ resumes on their education, training and past work experience. She can even administer a test to prospective employees to measure their skills, perhaps building a stair rail. The resume information and the test are, however, imperfect signals of the employee’s productivity. This uncertainty and imperfect information cause the employer to take into account another factor: she believes that women are, on average, less productive carpenters than men. This potentially erroneous statistic, combined with the inability of the resume and skills test to fully signal productivity, will lead the employer to conclude that a man is likely to be more productive than an equally qualified woman. The job is then offered to the man instead of the woman.

A “taste” for discrimination and statistical discrimination are often framed as competing theories. However, as we will see in discussing the empirical studies on discrimination below, there is substantial evidence for each theory. One way of reconciling the theories may be to think of taste-driven discrimination as a potential source of assumptions about individuals’ productivity in the face of incomplete information. Additionally, some individuals may change their assumptions in the face of additional evidence, a case which supports the existence of statistical discrimination. Others with more deeply ingrained prejudices would not reevaluate their assumptions, which lends credence to taste-driven discrimination. Different assumptions regarding individuals and groups may be more or less swayed by information.

Box 6. 1 : Economists in Action: Lisa Cook Studies Competition and Discrimination [7]

Dr. Lisa D. Cook is a Professor of Economics and International Relations, currently serving on the Board of Governors for the Federal Reserve. She researches economic growth and development, along with financial institutions, innovation, and economic history. She was a Senior Economist for the Council of Economic Advisors, serving in the White House, and was elected to the board of the American Economic Association (AEA). She directed the AEA Summer Training Program, which increases diversity in the field of economics by preparing undergraduate students for graduate degrees in economics.

One important area of Dr. Cook’s research is creating and analyzing data on discrimination, including gathering data on Jim Crow era firms that were friendly towards African Americans, as well as the creation of a national lynching database. In one of her papers Dr. Cook examines the determinants of firms’ discrimination towards potential consumers during the Jim Crow era and prior to the Civil Rights Act. She shows that firm owners segregated and discriminated against African Americans based on white consumers’ discrimination, a case of taste-based discrimination. Reductions in the number of white consumers reduced discrimination and activism among African Americans also helped.

Labor market models of discrimination and its consequences

Regardless of whether discrimination is taste-driven or caused by statistical discrimination, it can essentially be modeled the same way. The approaches to reducing discrimination will be quite different, but the models for the impact of discrimination will be nearly identical. Consider discrimination for the case of the labor market. Recall that employers’ demand for labor is based on productivity. We are now going to name that productivity the marginal revenue product of workers, how much revenue they create for their employers through their work. Operating under statistical discrimination, productivity is assumed to be lower for certain groups. [8] In the case of gender discrimination, employers may assume the marginal revenue product of women is lower because they disproportionately undertake caregiving responsibilities (a case of statistical discrimination). Alternatively, with taste-based discrimination, hiring a less-preferred group imposes a “cost” on employers, effectively modeled as a decrease in the marginal revenue product.

Figure 1 shows discrimination in the labor market for men and women. To simplify, we assume the same labor supply for men and women. However, the demand, which is equal to the marginal revenue product (MRP) is assumed to be lower for women than for men (discrimination). As a result, the equilibrium outcome is that fewer women are employed and women are earning lower wages than men. Although we focus on models of the labor market here, similar ideas apply to other markets. Housing is another example. A landlord might discriminate in supplying housing to individuals with a different religion than his own. This would shift the supply of housing to differentiate between religious groups, with a higher cost (reduced supply) for those of a different religion.

In all cases, there is a substantial challenge when it comes to proving discrimination. It is difficult to measure the MRP of different workers. This then makes it difficult to distinguish between cases where individuals actually are differentially productive on average, such as workers with more training or experience, and when discrimination is occurring.

Evidence on Discrimination

There are a variety of forms of discrimination and different groups that are discriminated against globally. This section presents just some of the evidence on discrimination, primarily from the U.S., but from other global contexts as well. Economists rely on a host of different techniques to gather evidence on discrimination. One is multiple regression , also called multivariate regression, a statistical technique where economists try to account for differences in observable characteristics. When checking for wage discrimination, for example, these characteristics would include occupation and education. The remainder of the differences in outcomes would then be attributed to discrimination.

Conducting experiments is another method to assess discrimination. Economists can randomize resumes with different characteristics to apply to jobs or randomize the economic equivalent of “mystery shoppers” with different characteristics to apply for housing. These experiments are typically referred to as audit studies . Experiments are the most effective for being certain about cause and effect, but can be challenging to implement and much more expensive than analyzing existing data with multiple regression. This section presents evidence from both multiple regression models and audit studies on discrimination in education, housing, the labor market, and the criminal justice system.

In education

Discrimination in the education system leads to disparate human capital outcomes that also contribute to labor market disparities. [9] Teachers play a key role in education and their discriminatory attitudes can affect students in a variety of ways. For instance, one experiment demonstrated that teachers gave worse grades and lower secondary school recommendations when assignments (essays) had minority (Turkish) names. [10] Teachers also have lower expectations and negative attitudes that affect their behavior towards minority students, which may in turn affect those students’ performance. [11] Gender bias may be particularly important for Science, Technology, Engineering, and Math (STEM) fields. Science faculty presented with otherwise identical student resumes bearing either a female or male name rated women as less competent than men. Faculty were less likely to hire women, offered a lower salary, and were less likely to mentor women. [12]

Housing was one of the areas where discrimination in the United States was first measured effectively. Fair housing audits were developed by housing organizations to identify racial discrimination in housing opportunities after the passage of the Civil Rights Act. [13] For example, in assessing Black-white housing disparities, an audit will send two auditors to a housing agent, one white and one Black, for a random sample of advertised housing units. When individuals receive differential treatment, specifically in different offers of housing, and this treatment depends on their race, the audit indicates discrimination. Historically, as of 1981, Black housing seekers were told about 30% fewer available housing units than whites. [14]

More recent studies have taken advantage of the power of the internet; an experiment in the U.S. rental apartment market varied first names, using those commonly associated with whites and African Americans. In some cases, it also included information about credit history and smoking. African-American sounding names had a 9.3 percentage point lower positive response rate than applicants with white-sounding names, indicating discrimination. The additional information on credit history and smoking did differentially affect the gap in response rates, indicating that information and statistical discrimination contributed to disparities. [15] In India, a study using India’s largest real estate website showed that, while an upper-caste Hindu had a 35% chance of a response to a housing application, this was only 22% for a Muslim applicant. [16] An experiment in Sweden varied distinctive ethnic and gender names in applying for rental housing. Arabic/Muslim names received fewer responses than the Swedish male names, and Swedish female names had an easier time accessing housing than Swedish male names. [17] In addition to long-term rentals, these disparities extend to short-term rentals, such as Airbnb vacation rentals. Applications from guests with African-American names were 16% less likely to be accepted relative to otherwise identical guests with distinctively white names. [18] Discrimination also occurs against Airbnb ethnic minority hosts. [19]

In the labor market

Discrimination in the labor market manifests in substantial hiring disparities by race, ethnicity, gender, and disability status. A study sending fake resumes to help-wanted ads in Boston and Chicago found that white names received 50% more callbacks for interviews than African-American names. [20] A similar study in New York City found that Black applicants were half as likely to receive a callback or job offer than white applicants. [21] In interviews for waitstaff jobs in Philadelphia, job applications from women had a 40 percentage point lower chance of receiving a job offer from high-price (and high earning) restaurants than men, in part embodying customer discrimination. [22] An experiment that randomized disclosure of disability status found disability halved the chances of a callback. [23]

In Toronto, a study demonstrated that individuals with foreign experience or with Indian, Pakistani, Chinese, and Greek names were less likely to be hired than those with English names. [24] In Germany, which has a substantial number of Muslim migrants, especially from Turkey, it is common for applicants to send photos with resumes. A study of female applicants that randomized German names, Turkish names, and whether the migrant was wearing a headscarf found significant discrimination against Turkish names and more so against those wearing a headscarf. This discrimination is so pronounced that a female applicant who wears a headscarf and who has a Turkish name would have to send 4.5 times as many applications to receive the same number of callbacks as a woman with a German name and no headscarf. [25]

In the United States, women’s pay is, as of 2021, 83% of men’s pay. [26] Notably, women and men are approaching convergence in their pay at the start of their careers. Figure 6.2 [27] shows median weekly earnings by sex, as well as the ratio of women’s wages to men’s. Early on in the life course, women’s wages are 93% (ages 16-24) that of men’s. However, pay diverges over the lifespan, with a major expansion in the gender gap. At ages 25-34, women’s pay is 91% of men’s pay. By ages 35-44 women’s pay is only 80% of men’s, dropping to 78% at ages 45-64. Two key drivers for the gap expansion are differences in career interruptions and differences in weekly hours—both largely associated with motherhood. [28] In contrast, when men become parents, they tend to receive a premium, an increase in pay, rather than a penalty. [29] As of 2010, differences in human capital contributed little to the gender wage gap. However, differences in occupations were still important, as women tended to be in traditionally female occupations that are generally lower paying, such as nursing and teaching. [30]

Gender pay gaps can be compounded by racial disparities. Figure 6.3 [31] shows median weekly earnings among workers as a percentage of white men’s earnings. People of color tend to earn less than whites, with disparities further exacerbated by the gender pay gap. For instance, Black and Hispanic men earn 73% of what white men earn. Asian men earn more than white men, at 129% and Asian women earn 101% of what white men earn. In contrast, other groups of women earn less on average. Black women earn 69% of what white men do and Hispanic women 64%. Relative to white women, who earn 83% of what white men earn, Asian women are better off but still at a disadvantage when compared to the relatively higher earnings of Asian men.

Figure 6.3. Median weekly earnings as a percentage of white men’s earnings, by race/ethnicity and sex, 2021

In studying pay gaps by race, what are referred to as pre-market factors, such as human capital, explain an important share of pay gaps. However, an important share of gaps are also discrimination in the labor market—estimated to be at least one-third of the Black-white wage gap. [32] Discrimination feeding into pay gaps can occur in complex ways. For example, when Black job-seekers attempt to negotiate for a higher salary, they are penalized in terms of their salary outcomes. [33] Likewise, women tend to be perceived more negatively than men when they try to negotiate, in part due to gender stereotypes around being “nice.” [34]

In the criminal justice system

Discrimination is a challenge throughout the criminal justice system and contributes to the large disparities in incarceration by race and gender that were discussed in the crime chapter. Racial disparities in drug arrests are not due to differential drug or nondrug offending, nor residing in areas with a police focus on drug offenses; there is strong evidence of discrimination and disparities in police practices driving disparities. [35] Likewise, studies using the differential ability to tell driver race in the daytime versus the nighttime have demonstrated racial bias in traffic stops in some localities, but not others. [36] Once arrested, individuals may be discriminated against in terms of the process from pre-trial processing (for instance, setting bail) through setting their sentences. [37] Offenders who are Black, male, less educated, and lower income receive longer sentences. [38]

Policies to reduce discrimination

Competition.

The idea of taste-based discrimination has, historically, been linked with the idea that competition may play a key role in reducing discrimination. Consider a case where all workers are equally productive, but some employers have discriminatory tastes. It would follow that the non-discriminating employers would be able to make a greater profit by hiring individuals who tend to be discriminated against but are equally productive. This idea would suggest that the solution to discrimination in any market is simply competition. However, empirical evidence suggests that, while competitive markets deter discrimination, firms that have market power exist and do discriminate. [39] Simply “waiting out” discrimination will not be effective. Other interventions are required.

Changing the available information

An important set of interventions to reduce discrimination focus on changing the available information about individuals. Interventions can remove markers of protected categories, such as gender and race, from the set of available information to reduce discrimination. For example, when symphony orchestras adopted blind auditions—where the candidate plays music behind a screen and is not visible to the hiring committee—this approach led to gender equity in hiring, increasing the proportion of women in symphony orchestras. [40] However, policies to remove all potentially revealing information are challenging to design, and employers may be resistant to their implementation. For instance, orchestras have to lay down carpet, to muffle the sounds of heeled shoes that are associated with women, or ask women to take off their shoes.

Removing names from the available information may reduce discrimination in a variety of areas. This approach can be particularly effective for reducing discrimination in models like Uber and Lyft [41] or Airbnb [42] where such information could be readily removed without interrupting transactions. Other approaches to removing potential markers of protected categories include anonymizing resumes and using skills-based tests (like the orchestra auditions) for other jobs as well. A number of European countries have experimented with anonymizing applications. [43] Doing so can reduce disparities and equalize the probability of receiving an interview. However, the process still allows for discrimination in hiring after the interview and precludes affirmative actions for otherwise equivalent applicants. In France, anonymous resumes ultimately led to a lower probability of interviewing and hiring minority candidates. [44]

Depending on the nature of discrimination, there may be cases where removing information could be potentially harmful and adding information may be more helpful. One of the studies that identified discrimination in Airbnb determined that discrimination against African-American names disappeared when there was a positive public review. [45] Essentially, positive information about individuals helped reduce discrimination. Having to report gender-disaggregated information about pay has been shown to reduce the gender pay gap. [46] However, having individuals disclose their past salaries when applying to new jobs can perpetuate discrimination, as new employers will use those as a basis for salary offers. This problem has led some states to ban asking applicants about their salary history. [47]

Box 6. 2 : The Lilly Ledbetter Fair Pay Act [48]

Lilly Ledbetter was an employee of Goodyear from 1979 until 1998. Initially Ledbetter was paid the same as the men in the same position. By 1997, Ledbetter was paid $3,727 per month. Male managers were paid between $4,286 and $5,236 per month. In part because Goodyear kept pay information confidential (as is common practice), Ledbetter did not find out about the pay disparity until long after the disparity had occurred. When she sued, under Title VII of the Civil Rights Act, a 5-4 decision in the case before the Supreme Court determined that she had not filed within the statute of limitations—the legal time frame for filing after discrimination occurs. The case treated the discrimination as the decision about her salary by her supervisor, some time ago, not the ongoing disparate paychecks, because the paychecks themselves did not have discriminatory intent, which is required under Title VII. The problem that faced Lilly Ledbetter, that she learned about discrimination long after it occurred and the statute of limitations expired, led to the Lilly Ledbetter Fair Pay Act. The Act, passed in 2009, broadened the definition of discriminatory practice to include, for instance, each disparate paycheck. The case and subsequent act illustrate some of the challenges in identifying and remedying discriminatory practices.

The “Ban the box” campaign is an example of an information removal effort that appears to have achieved the opposite of its goal. We learned in the chapter on crime that ex-offender rehabilitation depends in part on employment opportunities and holding a legitimate job. Yet employers tend to discriminate against those with a criminal record. [49] Employers commonly ask about past criminal convictions on initial job applications. “Ban the box” campaigns forbid asking at the initial job application stage but allow for the question in interviews and with conditional job offers. The goal was that ex-offenders would have better job opportunities. An additional goal was to reduce racial disparities and discrimination in employment, given racial disparities in the criminal justice system. [50] Although well intentioned, “ban the box” laws appear to be counterproductive in reducing discrimination. Employers, without information on criminal history, operate under statistical discrimination and are less likely to interview young, low-skilled Black and Hispanic men. [51]

Affirmative action

Affirmative action is a “set of procedures designed to eliminate unlawful discrimination between applicants, remedy the results of such prior discrimination, and prevent such discrimination in the future. Applicants may be seeking admission to an educational program or looking for professional employment.” [52] Affirmative action in the United States came about as a 1961 executive order by President John F. Kennedy, with a requirement mandating affirmative action among government contractors. Affirmative action subsequently expanded to other areas, such as education.

Those in favor of affirmative action argue that it equalizes opportunities, benefits qualified women and minorities, and that it is beneficial to society as a whole. Proponents also suggest that affirmative action improves equity and either improves efficiency or has at most minor reductions in efficiency through the reallocation of jobs. Opponents suggest that there are efficiency losses and that the policy itself is inherently racist. [53]

Historically, affirmative action has helped promote the employment of minorities and women. [54] The magnitude of the effects is generally fairly small, although they can cause substantial relative shifts for minority groups. [55] While minorities who benefit on the labor market may have poorer credentials, they have equal performance, suggesting that efficiency concerns have relatively little merit. Further, white males face costs, but they are relatively small. Affirmative action has also increased the probability that under-represented minority groups graduate from selective institutions. However, affirmative action or some approaches to affirmative action have been banned in making university admissions decisions. [56]

Reducing bias in individuals

Individuals’ biases, for example their gender biases, are key drivers of discrimination. [57] Legal changes can potentially change individuals’ attitudes and behavior. For example, the passage of same-sex marriage reforms in U.S. states reduced individuals’ discrimination against sexual minorities. This reduced discrimination in turn contributed to improvements in labor market outcomes for same-sex couples. [58]

Individuals may not be aware of their biases, in which case they are referred to as implicit biases . Training can also reduce implicit biases, particularly those that may be caused by lack of exposure or familiarity with other races. [59] Treating implicit bias like a habit that can be combated through awareness, concern about its effects, and the use of strategies to reduce bias is helpful, particularly for people who are concerned about discrimination in the first place. [60] This suggests that training to reduce bias in individuals requires some commitment on their part to change their thinking and behaviors, and therefore is likely to work better for some individuals and biases than others.

Professionalizing human resources functions may also help reduce bias in the hiring process. Research in Canada demonstrated that employers discriminated against those with Asian-sounding names. Asian applicants had a 20% disadvantage for large employers but double the disadvantage, 40%, for small employers. Larger organizations may devote more resources to recruitment, have professional human resource strategies, and also have more experience with diverse staff. [61] This professionalism may reduce (although not necessarily eliminate) discrimination.

It may even be possible to reduce the role of biased human decision making in areas such as sentencing. Risk assessments are a potential, but controversial, approach to reducing bias in sentencing, parole, and rehabilitation. [62] Risk assessment instruments model the probability of reoffending based on a number of factors, including criminal history. In part because of different criminal histories, the policy can have disparate impact across racial groups. For example, Black offenders receive higher risk assessments, on average, than white offenders. [63] Especially with disparities in the criminal justice system, such instruments may perpetuate disparities. However, improvements in computing, such as machine learning algorithms, have the potential to reduce jail populations and crime rates, including reducing the percentage of minorities in jail. [64] Yet machine learning and artificial intelligence can also pick up and replicate existing biases. [65]

Conclusions

Discrimination occurs in education, employment, housing, and the criminal justice system, as well as many other dimensions of individuals’ lives. Economists tend to understand discrimination through one of two models—based on prejudicial “tastes” for discrimination or based on incomplete information leading to statistical discrimination. Both theories of discrimination show how discrimination contributes to disparate outcomes, such as different wages and employment rates for men and women. Although discrimination is pervasive, the good news is that progress is being made, and (some) disparities have decreased over time as a result of effective policies. Designing effective policies is, however, extremely challenging, as the efforts to “ban the box” illustrate. The challenges of designing effective policies underline an important role for economists and statisticians in the fight against discrimination: carefully evaluating the impact of different policy and program attempts to reduce discrimination.

List of terms

Discrimination
Disparities
Taste-driven discrimination
Marginal revenue product
Multiple regression
Audit studies
Implicit biases

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U.S. Equal Employment Opportunity Commission, 2017. ↵
UN Women, 2009; United Nations Human Rights Office of the High Commissioner, 2017. ↵
U.S. Bureau of Labor Statistics, 2023. ↵
Bonczar, 2003. ↵
Becker, 1971. ↵
Phelps, 1972. ↵
Cook et al., 2020; Cook, 2011; Cook, 2019; Board of Governors of the Federal Reserve, 2022. ↵
Hellerstein, Neumark, and Troske, 2002. ↵
Carruthers and Wanamaker, 2017. ↵
Sprietsma, 2013. ↵
Van Ewijk, 2011. ↵
Moss-Racusin et al., October 9, 2012. ↵
Yinger, 1986. ↵
Ibid. ↵
Ewens, Tomlin, and Wang, 2014. ↵
Datta and Pathania, 2016. ↵
Ahmed and Hammarstedt, 2008. ↵
Edelman, Luca, and Dan, 2017. ↵
Laouénan and Rathelot, 2022. ↵
Bertrand and Mullainathan, 2004. ↵
Pager, Western, and Bonikowsi, 2009. ↵
Neumark, Bank, and Van Nort, 1996. ↵
Bellemare et al., 2018. ↵
Oreopoulos, 2011. ↵
Weichselbaumer, 2019. ↵
Bertrand, Goldin, and Katz, 2010; Bailey et al., 2019. ↵
Lundberg and Rose, 2002. ↵
Blau and Kahn, 2016. ↵
Fryer Jr., Pager, and Spenkuch, 2013. ↵
Hernandez et al., 2019. ↵
Bowles, Babcock, and Lai, 2007. ↵
Mitchell and Caudy, 2015; Welty et al., 2016. ↵
Ritter and Bael, 2009; Antonovics and Knight, 2009. ↵
Schlesinger, 2007; Starr and Rehavi, 2013; Bielen, Marneffe, and Mocan, 2018. ↵
Mustard, 2001; Cook et al., 2020. ↵
Goldin and Rouse, 2000. ↵
Ge et al., 2016. ↵
Krause, Rinne, and Zimmermann, 2012; Behaghel, Crépon, and Le Barbanchon, 2015. ↵
Behaghel, Crépon, and Le Barbanchon, 2015. ↵
Cui, Li, and Zhang, 2016. ↵
Bennedsen et al., 2018. ↵
Abbott Watkins, 2018. ↵
Sorock, 2010. ↵
Pager, 2003. ↵
Henry and Jacobs, 2007. ↵
Doleac and Hansen, 2016; Agan and Starr, 2018. ↵
Cornell University Law School, 2017. ↵
Holzer and Neumark, 2006; Ibanez and Riener, 2018. ↵
Leonard, 1990. ↵
Holzer and Neumark, 2006. ↵
Hinrichs, 2010. ↵
E.g. Moss-Racusin et al., October 9, 2012. ↵
Sansone, 2019. ↵
Lebrecht et al., 2009. ↵
Devine et al., 2012. ↵
Banerjee, Reitz, and Oreopoulos, 2017. ↵
Desmarais and Singh, 2013. ↵
Skeem and Lowenkamp, 2016. ↵
Kleinberg et al., 2017. ↵
Caliskan, Bryson, and Narayanan, 2017. ↵

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How racial and regional inequality affect economic opportunity

Subscribe to the economic studies bulletin, jay shambaugh , jay shambaugh under secretary for international affairs - u.s. department of the treasury @jaycshambaugh ryan nunn , and ryan nunn assistant vice president for applied research in community development - federal reserve bank of minneapolis @ryandnunn stacy a. anderson stacy a. anderson communications manager - the hamilton project @saunique.

February 15, 2019

In a recent Hamilton Project paper, The Historical Role of Race and Policy for Regional Inequality , economists Bradley L. Hardy , Trevon D. Logan , and John Parman examine how the spatial distribution of the black population has evolved over time and how this has interacted with economic mobility and U.S. public policy. Their analysis emphasizes the importance of both place and policy in determining individual outcomes.

The Regional Concentration of the African American Population

Despite the Great Migration of millions of African-Americans from the rural South to cities across the United States, the modern distribution of black Americans closely relates to the historical patterns of the black population. Counties with disproportionately high shares of black Americans today are the same counties that had large black populations before the Civil War, suggesting that historical conditions have had extremely persistent impacts on the outcomes of African-Americans. Moreover, as illustrated in the figure below, poverty in the Deep South tend to be much higher in counties with high black populations.

Differences within regions—across cities, suburbs and rural areas—also affect racial inequality. The black population tends to be more concentrated in the central counties of large metropolitan areas relative to the white population. By contrast, the white population tends to live in smaller metropolitan areas and in rural counties.

This concentration of the African-American population is not accidental. As Hardy, Logan, and Parman detail, influences ranging from discrimination and intimidation, to lender behavior, to white flight from cities, to public policies like redlining or highway construction all combined to keep the African-American population more concentrated in particular communities.

Economic Mobility

Recent research by Raj Chetty and coauthors has illuminated the differing potential for intergenerational mobility that exists across the United States. Overlaying this pattern with the spatial distribution of the black population yields some disturbing results: areas with a large black population are likely to be places where black individuals experience particularly low levels of economic mobility. In the South, these low mobility rates for black individuals are substantially lower than corresponding rates for white individuals. Regions in the North and West, with small black populations, exhibit levels of mobility for black individuals that are both higher and comparable to those of white individuals, but these are regions with relatively small black populations. The regions where the bulk of black Americans live are the ones where their upward mobility is relatively low.

The Connection of Racial and Regional Inequality

The high concentration of the African-American population in particular areas has also meant that policies or practices that disadvantage the black community will wind up reinforcing particular patterns of regional or spatial inequality. While many of the most egregious policies designed to promote and encourage racial discrimination have been outlawed, research has shed light on the ways that their effects linger and interact with contemporary policies.

As Hardy, Logan, and Parman explain, there are a range of policies or practices that continue to disadvantage black individuals and communities throughout the U.S., impacting areas including:

P ublic education , which has often been underfunded in African-American majority schools, limiting skill acquisition and upward mobility for black Americans.
Employment discrimination , which makes it more difficult for black families to escape from poverty or build wealth in their community.
The social s afety net system, where there is an increased likelihood of sanctioning and spending is less generous for black communities.
T he criminal justice system , where poor outcomes for black Americans include higher bail and greater likelihood of monetary sanctions, among other penalties.

Given the history and the concentration of the black population throughout the U.S., regional inequality is often shaped by racial inequality, and taking steps to combat regional inequality will need to recognize this source. Accordingly, identifying mechanisms to not only address, but actually reverse, the ongoing effects of discriminatory policies and practices is not only a moral imperative: it is also a pressing economic concern.

Racism Impoverishes the Whole Economy

While the targets unquestionably suffer the most, denying people equal opportunities diminishes the finances of millions of Americans.

By Lisa D. Cook

Discrimination hurts just about everyone, not only its direct victims.

New research shows that while the immediate targets of racism are unquestionably hurt the most, discrimination inflicts a staggering cost on the entire economy, reducing the wealth and income of millions of people, including many who do not customarily view themselves as victims.

The pernicious effects of discrimination on the wages and educational attainment of its direct targets are being freshly documented in inventive ways by scholarship. From the lost wages of African-Americans because of President Woodrow Wilson’s segregation of the Civil Service , to the losses suffered by Black and Hispanic students because of California’s ban on affirmative action , to the scarcity of Black girls in higher-level high school math courses , the scope of the toll continues to grow.

But farther-reaching effects of systemic racism may be less well understood. Economists are increasingly considering the cost of racially based misallocation of talent to everyone in the economy.

My own research demonstrates, for example, how hate-related violence can reduce the level and long-term growth of the U.S. economy. Using patents as a proxy for invention and innovation, I calculated how many were never issued because of the violence — riots, lynchings and Jim Crow laws — to which African Americans were subjected between 1870 and 1940.

The loss was considerable: The patents that African-Americans could have been expected to receive, given equal opportunity, would have roughly equaled the total for a medium-size European country during that time.

Those enormous creative losses can be expected to have had a direct effect on business investment and therefore on total economic activity and growth.

Other economists are beginning to estimate harm to the economy caused by racism in broad ways.

An important principle suggests that the person who can produce a product or service at a lower opportunity cost than his or her peers has a comparative advantage in that activity. Recent research calculates the effects of the discriminatory practice of placing highly skilled African-American workers, who might have flourished as, say, doctors, into lower-skilled occupations where they had no comparative advantage. Such practices 50 years ago — which linger, to a lesser extent, today — have cost the economy up to 40 percent of aggregate productivity and output today.

Similarly, other research estimates that aggregate economic output would have been $16 trillion higher since 2000 if racial gaps had been closed. To put that total in context, the gross domestic product of the United States in 2019 was $21.4 trillion. The researchers estimate that economic activity could be $5 trillion higher over the next five years if equal opportunity is achieved.

Right now, if more women and African-Americans were participating in the technical innovation that leads to patents, the economist Yanyan Yang and I calculate that G.D.P. per capita could be 0.6 to 4.4 percent higher . That is, it would be between $58,841 to $61,064 per person compared with $58,490 per person in 2019.

This entire line of research suggests that organizations — companies, laboratories, colleges and universities — are leaving colossal sums of money on the table by not maximizing talent and living standards for all Americans.

I have thought and written a lot about remedies. Here are a few ideas aimed at addressing discrimination in the innovation economy. First, we need more training in science, technology, engineering and mathematics (STEM), like the extensive and highly successful program once sponsored by Bell Labs to encourage participation in these fields by women and underrepresented minorities

STEM fields should not be the sole target, however, because the innovation economy encompasses more than this narrow set of subjects. Two of the last three people I’ve talked to at tech firms have a B.A. in international relations and a Ph.D. in political science. Clearly, problem-solving skills matter, but these skills are not unique to the STEM majors.

Second, there is substantial evidence of systemic racism in education, which needs to be addressed. Research shows that professors are less likely to respond to email inquiries about graduate study from Black, Hispanic and female students than from people who are discernibly white and male. A system of incentives — and penalties — could hold those responsible accountable at every level of the education and training process.

At the invention stage, such as at corporate, government and university labs, my research shows that mixed-gender teams are more prolific than those whose members are all female or male. And a large body of literature has documented the positive effects of diversity in teams. Managers at each level should be held responsible for being good stewards of the resources of their companies and promoting diverse teams and behavior and, therefore, better outcomes.

When invention is commercialized and companies sell shares to the public, the wealth gaps are stark. Seven of the world’s 10 richest people on the Forbes list are associated with tech companies that commercialize inventions. Jeff Bezos, Bill Gates, Mark Zuckerberg and Elon Musk are in the top five. None among the top 10 (or 50) is Black.

The statistics for venture capital funding are striking. In 2014, less than 1 percent of venture capital funding went to businesses founded by African-American women, and in 2015, only 2 percent of all venture capitalists were African-American.

A number of worthwhile recommendations have been made to address the lack of diversity at the commercialization stage of innovation. These include:

Enhancing mentoring opportunities through programs such as those of the Small Business Administration .

Seeking and recruiting founders to invest in places like Atlanta, and not exclusively in Silicon Valley.

Addressing systemic racism at every level of management and within venture capital firms.

Diversifying corporate boards so that senior leadership will be held accountable for diversity and workplace climate. (California has done this with women on the boards of public companies.)

The Kapor Center , a think tank that promotes participation by underrepresented minorities in tech fields and education, has proposed noteworthy remedies at many stages, including at the pre-college level.

The social compact most societies have with their governments is that standards of living will rise continually and that each successive generation will be better off than preceding ones. We are robbing countless people of higher standards of living and well-being when we allow racial discrimination to flourish from generation to generation.

Lisa D. Cook, a professor of economics at Michigan State University, is a member of the Biden-Harris transition team.

Gender inequality as a barrier to economic growth: a review of the theoretical literature

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Published: 15 January 2021
Volume 19 , pages 581–614, ( 2021 )

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Manuel Santos Silva 1 &
Stephan Klasen 1

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In this article, we survey the theoretical literature investigating the role of gender inequality in economic development. The vast majority of theories reviewed argue that gender inequality is a barrier to development, particularly over the long run. Among the many plausible mechanisms through which inequality between men and women affects the aggregate economy, the role of women for fertility decisions and human capital investments is particularly emphasized in the literature. Yet, we believe the body of theories could be expanded in several directions.

Gender Inequality and Growth in Europe

Stephan Klasen & Anna Minasyan

The Effect of Gender Inequality on Economic Development: Case of African Countries

Khayria Karoui & Rochdi Feki

The Feminization U

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1 Introduction

Theories of long-run economic development have increasingly relied on two central forces: population growth and human capital accumulation. Both forces depend on decisions made primarily within households: population growth is partially determined by households’ fertility choices (e.g., Becker & Barro 1988 ), while human capital accumulation is partially dependent on parental investments in child education and health (e.g., Lucas 1988 ).

In an earlier survey of the literature linking family decisions to economic growth, Grimm ( 2003 ) laments that “[m]ost models ignore the two-sex issue. Parents are modeled as a fictive asexual human being” (p. 154). Footnote 1 Since then, however, economists are increasingly recognizing that gender plays a fundamental role in how households reproduce and care for their children. As a result, many models of economic growth are now populated with men and women. The “fictive asexual human being” is a dying species. In this article, we survey this rich new landscape in theoretical macroeconomics, reviewing, in particular, micro-founded theories where gender inequality affects economic development.

For the purpose of this survey, gender inequality is defined as any exogenously imposed difference between male and female economic agents that, by shaping their behavior, has implications for aggregate economic growth. In practice, gender inequality is typically modeled as differences between men and women in endowments, constraints, or preferences.

Many articles review the literature on gender inequality and economic growth. Footnote 2 Typically, both the theoretical and empirical literature are discussed, but, in almost all cases, the vast empirical literature receives most of the attention. In addition, some of the surveys examine both sides of the two-way relationship between gender inequality and economic growth: gender equality as a cause of economic growth and economic growth as a cause of gender equality. As a result, most surveys end up only scratching the surface of each of these distinct strands of literature.

There is, by now, a large and insightful body of micro-founded theories exploring how gender equality affects economic growth. In our view, these theories merit a separate review. Moreover, they have not received sufficient attention in empirical work, which has largely developed independently (see also Cuberes & Teignier 2014 ). By reviewing the theoretical literature, we hope to motivate empirical researchers in finding new ways of putting these theories to test. In doing so, our work complements several existing surveys. Doepke & Tertilt ( 2016 ) review the theoretical literature that incorporates families in macroeconomic models, without focusing exclusively on models that include gender inequality, as we do. Greenwood, Guner and Vandenbroucke ( 2017 ), in turn, review the theoretical literature from the opposite direction; they study how macroeconomic models can explain changes in family outcomes. Doepke, Tertilt and Voena ( 2012 ) survey the political economy of women’s rights, but without focusing explicitly on their impact on economic development.

To be precise, the scope of this survey consists of micro-founded macroeconomic models where gender inequality (in endowments, constraints, preferences) affects economic growth—either by influencing the economy’s growth rate or shaping the transition paths between multiple income equilibria. As a result, this survey does not cover several upstream fields of partial-equilibrium micro models, where gender inequality affects several intermediate growth-related outcomes, such as labor supply, education, health. Additionally, by focusing on micro-founded macro models, we do not review studies in heterodox macroeconomics, including the feminist economics tradition using structuralist, demand-driven models. For recent overviews of this literature, see Kabeer ( 2016 ) and Seguino ( 2013 , 2020 ). Overall, we find very little dialogue between the neoclassical and feminist heterodox literatures. In this review, we will show that actually these two traditions have several points of contact and reach similar conclusions in many areas, albeit following distinct intellectual routes.

Although the incorporation of gender in macroeconomic models of economic growth is a recent development, the main gendered ingredients of those models are not new. They were developed in at least two strands of literature. First, since the 1960s, “new home economics” has applied the analytical toolbox of rational choice theory to decisions being made within the boundaries of the family (see, e.g., Becker 1960 , 1981 ). Footnote 3 A second literature strand, mostly based on empirical work at the micro level in developing countries, described clear patterns of gender-specific behavior within households that differed across regions of the developing world (see, e.g., Boserup 1970 ). Footnote 4 As we shall see, most of the (micro-founded) macroeconomic models reviewed in this article use several analytical mechanisms from "new home economics”; these mechanisms can typically rationalize several of the gender-specific regularities observed in early studies of developing countries. The growth theorist is then left to explore the aggregate implications for economic development.

The first models we present focus on gender discrimination in (or on access to) the labor market as a distortionary tax on talent. If talent is randomly distributed in the population, men and women are imperfect substitutes in aggregate production, and, as a consequence, gender inequality (as long as determined by non-market processes) will misallocate talent and lower incentives for female human capital formation. These theories do not rely on typical household functions such as reproduction and childrearing. Therefore, in these models, individuals are not organized into households. We review this literature in section 2 .

From there, we proceed to theories where the household is the unit of analysis. In sections 3 and 4 , we cover models that take the household as given and avoid marriage markets or other household formation institutions. This is a world where marriage (or cohabitation) is universal, consensual, and monogamous; families are nuclear, and spouses are matched randomly. The first articles in this tradition model the household as a unitary entity with joint preferences and interests, and with an efficient and centralized decision making process. Footnote 5 These theories posit how men and women specialize into different activities and how parents interact with their children. Section 3 reviews these theories. Over time, the literature has incorporated intra-household dynamics. Now, family members are allowed to have different preferences and interests; they bargain, either cooperatively or not, over family decisions. Now, the theorist recognizes power asymmetries between family members and analyzes how spouses bargain over decisions. Footnote 6 These articles are surveyed in section 4 .

The final set of articles we survey take into account how households are formed. These theories show how gender inequality can influence economic growth and long-run development through marriage market institutions and family formation patterns. Among other topics, this literature has studied ages at first marriage, relative supply of potential partners, monogamy and polygyny, arranged and consensual marriages, and divorce risk. Upon marriage, these models assume different bargaining processes between the spouses, or even unitary households, but they all recognize, in one way or another, that marriage, labor supply, consumption, and investment decisions are interdependent. We review these theories in section 5 .

Table 1 offers a schematic overview of the literature. To improve readability, the table only includes studies that we review in detail, with articles listed in order of appearance in the text. The table also abstracts from models’ extensions and sensitivity checks, and focuses exclusively on the causal pathways leading from gender inequality to economic growth.

The vast majority of theories reviewed argue that gender inequality is a barrier to economic development, particularly over the long run. The focus on long-run supply-side models reflects a recent effort by growth theorists to incorporate two stylized facts of economic development in the last two centuries: (i) a strong positive association between gender equality and income per capita (Fig. 1 ), and (ii) a strong association between the timing of the fertility transition and income per capita (Fig. 2 ). Footnote 7 Models that endogenize a fertility transition are able to generate a transition from a Malthusian regime of stagnation to a modern regime of sustained economic growth, thus replicating the development experience of human societies in the very long run (e.g., Galor 2005a , b ; Guinnane 2011 ). In contrast, demand-driven models in the heterodox and feminist traditions have often argued that gender wage discrimination and gendered sectoral and occupational segregation can be conducive to economic growth in semi-industrialized export-oriented economies. Footnote 8 In these settings—that fit well the experience of East and Southeast Asian economies—gender wage discrimination in female-intensive export industries reduces production costs and boosts exports, profits, and investment (Blecker & Seguino 2002 ; Seguino 2010 ).

Income level and gender equality. Income is the natural log of per capita GDP (PPP-adjusted). The Gender Development Index is the ratio of gender-specific Human Development Indexes: female HDI/male HDI. Data are for the year 2000. Sources: UNDP

Income level and timing of the fertility transition. Income is the natural log of per capita GDP (PPP-adjusted) in 2000. Years since fertility transition are the number of years between 2000 and the onset year of the fertility decline. See Reher ( 2004 ) for details. Sources: UNDP and Reher ( 2004 )

In most long-run, supply-side models reviewed here, irrespectively of the underlying source of gender differences (e.g., biology, socialization, discrimination), the opportunity cost of women’s time in foregone labor market earnings is lower than that of men. This gender gap in the value of time affects economic growth through two main mechanisms. First, when the labor market value of women’s time is relatively low, women will be in charge of childrearing and domestic work in the family. A low value of female time means that children are cheap. Fertility will be high, and economic growth will be low, both because population growth has a direct negative impact on long-run economic performance and because human capital accumulates at a slower pace (through the quantity-quality trade-off). Second, if parents expect relatively low returns to female education, due to women specializing in domestic activities, they will invest relatively less in the education of girls. In the words of Harriet Martineau, one of the first to describe this mechanism, “as women have none of the objects in life for which an enlarged education is considered requisite, the education is not given” (Martineau 1837 , p. 107). In the long run, lower human capital investments (on girls) lead to slower economic development.

Overall, gender inequality can be conceptualized as a source of inefficiency, to the extent that it results in the misallocation of productive factors, such as talent or labor, and as a source of negative externalities, when it leads to higher fertility, skewed sex ratios, or lower human capital accumulation.

We conclude, in section 6 , by examining the limitations of the current literature and pointing ways forward. Among them, we suggest deeper investigations of the role of (endogenous) technological change on gender inequality, as well as greater attention to the role and interests of men in affecting gender inequality and its impact on growth.

2 Gender discrimination and misallocation of talent

Perhaps the single most intuitive argument for why gender discrimination leads to aggregate inefficiency and hampers economic growth concerns the allocation of talent. Assume that talent is randomly distributed in the population. Then, an economy that curbs women’s access to education, market employment, or certain occupations draws talent from a smaller pool than an economy without such restrictions. Gender inequality can thus be viewed as a distortionary tax on talent. Indeed, occupational choice models with heterogeneous talent (as in Roy 1951 ) show that exogenous barriers to women’s participation in the labor market or access to certain occupations reduce aggregate productivity and per capita output (Cuberes & Teignier 2016 , 2017 ; Esteve-Volart 2009 ; Hsieh, Hurst, Jones and Klenow 2019 ).

Hsieh et al. ( 2019 ) represent the US economy with a model where individuals sort into occupations based on innate ability. Footnote 9 Gender and race identity, however, are a source of discrimination, with three forces preventing women and black men from choosing the occupations best fitting their comparative advantage. First, these groups face labor market discrimination, which is modeled as a tax on wages and can vary by occupation. Second, there is discrimination in human capital formation, with the costs of occupation-specific human capital being higher for certain groups. This cost penalty is a composite term encompassing discrimination or quality differentials in private or public inputs into children’s human capital. The third force are group-specific social norms that generate utility premia or penalties across occupations. Footnote 10

Assuming that the distribution of innate ability across race and gender is constant over time, Hsieh et al. ( 2019 ) investigate and quantify how declines in labor market discrimination, barriers to human capital formation, and changing social norms affect aggregate output and productivity in the United States, between 1960 and 2010. Over that period, their general equilibrium model suggests that around 40 percent of growth in per capita GDP and 90 percent of growth in labor force participation can be attributed to reductions in the misallocation of talent across occupations. Declining in barriers to human capital formation account for most of these effects, followed by declining labor market discrimination. Changing social norms, on the other hand, explain only a residual share of aggregate changes.

Two main mechanisms drive these results. First, falling discrimination improves efficiency through a better match between individual ability and occupation. Second, because discrimination is higher in high-skill occupations, when discrimination decreases, high-ability women and black men invest more in human capital and supply more labor to the market. Overall, better allocation of talent, rising labor supply, and faster human capital accumulation raise aggregate growth and productivity.

Other occupational choice models assuming gender inequality in access to the labor market or certain occupations reach similar conclusions. In addition to the mechanisms in Hsieh et al. ( 2019 ), barriers to women’s work in managerial or entrepreneurial occupations reduce average talent in these positions, resulting in aggregate losses in innovation, technology adoption, and productivity (Cuberes & Teignier 2016 , 2017 ; Esteve-Volart 2009 ). The argument can be readily applied to talent misallocation across sectors (Lee 2020 ). In Lee’s model, female workers face discrimination in the non-agricultural sector. As a result, talented women end up sorting into ill-suited agricultural activities. This distortion reduces aggregate productivity in agriculture. Footnote 11

To sum up, when talent is randomly distributed in the population, barriers to women’s education, employment, or occupational choice effectively reduce the pool of talent in the economy. According to these models, dismantling these gendered barriers can have an immediate positive effect on economic growth.

3 Unitary households: parents and children

In this section, we review models built upon unitary households. A unitary household maximizes a joint utility function subject to pooled household resources. Intra-household decision making is assumed away; the household is effectively a black-box. In this class of models, gender inequality stems from a variety of sources. It is rooted in differences in physical strength (Galor & Weil 1996 ; Hiller 2014 ; Kimura & Yasui 2010 ) or health (Bloom et al. 2015 ); it is embedded in social norms (Hiller 2014 ; Lagerlöf 2003 ), labor market discrimination (Cavalcanti & Tavares 2016 ), or son preference (Zhang, Zhang and Li 1999 ). In all these models, gender inequality is a barrier to long-run economic development.

Galor & Weil ( 1996 ) model an economy with three factors of production: capital, physical labor (“brawn”), and mental labor (“brain”). Men and women are equally endowed with brains, but men have more brawn. In economies starting with very low levels of capital per worker, women fully specialize in childrearing because their opportunity cost in terms of foregone market earnings is lower than men’s. Over time, the stock of capital per worker builds up due to exogenous technological progress. The degree of complementarity between capital and mental labor is higher than that between capital and physical labor; as the economy accumulates capital per worker, the returns to brain rise relative to the returns to brawn. As a result, the relative wages of women rise, increasing the opportunity cost of childrearing. This negative substitution effect dominates the positive income effect on the demand for children and fertility falls. Footnote 12 As fertility falls, capital per worker accumulates faster creating a positive feedback loop that generates a fertility transition and kick starts a process of sustained economic growth.

The model has multiple stable equilibria. An economy starting from a low level of capital per worker is caught in a Malthusian poverty trap of high fertility, low income per capita, and low relative wages for women. In contrast, an economy starting from a sufficiently high level of capital per worker will converge to a virtuous equilibrium of low fertility, high income per capita, and high relative wages for women. Through exogenous technological progress, the economy can move from the low to the high equilibrium.

Gender inequality in labor market access or returns to brain can slow down or even prevent the escape from the Malthusian equilibrium. Wage discrimination or barriers to employment would work against the rise of relative female wages and, therefore, slow down the takeoff to modern economic growth.

The Galor and Weil model predicts how female labor supply and fertility evolve in the course of development. First, (married) women start participating in market work and only afterwards does fertility start declining. Historically, however, in the US and Western Europe, the decline in fertility occurred before women’s participation rates in the labor market started their dramatic increase. In addition, these regions experienced a mid-twentieth century baby boom which seems at odds with Galor and Weil’s theory.

Both these stylized facts can be addressed by adding home production to the modeling, as do Kimura & Yasui ( 2010 ). In their article, as capital per worker accumulates, the market wage for brains rises and the economy moves through four stages of development. In the first stage, with a sufficiently low market wage, both husband and wife are fully dedicated to home production and childrearing. The household does not supply labor to the market; fertility is high and constant. In the second stage, as the wage rate increases, men enter the labor market (supplying both brawn and brain), whereas women remain fully engaged in home production and childrearing. But as men partially withdraw from home production, women have to replace them. As a result, their time cost of childrearing goes up. At this stage of development, the negative substitution effect of rising wages on fertility dominates the positive income effect. Fertility starts declining, even though women have not yet entered the labor market. The third stage arrives when men stop working in home production. There is complete specialization of labor by gender; men only do market work, and women only do home production and childrearing. As the market wage rises for men, the positive income effect becomes dominant and fertility increases; this mimics the baby-boom period of the mid-twentieth century. In the fourth and final stage, once sufficient capital is accumulated, women enter the market sector as wage-earners. The negative substitution effect of rising female opportunity costs dominates once again, and fertility declines. The economy moves from a “breadwinner model” to a “dual-earnings model”.

Another important form of gender inequality is discrimination against women in the form of lower wages, holding male and female productivity constant. Cavalcanti & Tavares ( 2016 ) estimate the aggregate effects of wage discrimination using a model-based general equilibrium representation of the US economy. In their model, women are assumed to be more productive in childrearing than men, so they pay the full time cost of this activity. In the labor market, even though men and women are equally productive, women receive only a fraction of the male wage rate—this is the wage discrimination assumption. Wage discrimination works as a tax on female labor supply. Because women work less than they would without discrimination, there is a negative level effect on per capita output. In addition, there is a second negative effect of wage discrimination operating through endogenous fertility. Since lower wages reduce women’s opportunity costs of childrearing, fertility is relatively high, and output per capita is relatively low. The authors calibrate the model to US steady state parameters and estimate large negative output costs of the gender wage gap. Reducing wage discrimination against women by 50 percent would raise per capita income by 35 percent, in the long run.

Human capital accumulation plays no role in Galor & Weil ( 1996 ), Kimura & Yasui ( 2010 ), and Cavalcanti & Tavares ( 2016 ). Each person is exogenously endowed with a unit of brains. The fundamental trade-off in the these models is between the income and substitution effects of rising wages on the demand for children. When Lagerlöf ( 2003 ) adds education investments to a gender-based model, an additional trade-off emerges: that between the quantity and the quality of children.

Lagerlöf ( 2003 ) models gender inequality as a social norm: on average, men have higher human capital than women. Confronted with this fact, parents play a coordination game in which it is optimal for them to reproduce the inequality in the next generation. The reason is that parents expect the future husbands of their daughters to be, on average, relatively more educated than the future wives of their sons. Because, in the model, parents care for the total income of their children’s future households, they respond by investing relatively less in daughters’ human capital. Here, gender inequality does not arise from some intrinsic difference between men and women. It is instead the result of a coordination failure: “[i]f everyone else behaves in a discriminatory manner, it is optimal for the atomistic player to do the same” (Lagerlöf 2003 , p. 404).

With lower human capital, women earn lower wages than men and are therefore solely responsible for the time cost of childrearing. But if, exogenously, the social norm becomes more gender egalitarian over time, the gender gap in parental educational investment decreases. As better educated girls grow up and become mothers, their opportunity costs of childrearing are higher. Parents trade-off the quantity of children by their quality; fertility falls and human capital accumulates. However, rising wages have an offsetting positive income effect on fertility because parents pay a (fixed) “goods cost” per child. The goods cost is proportionally more important in poor societies than in richer ones. As a result, in poor economies, growth takes off slowly because the positive income effect offsets a large chunk of the negative substitution effect. As economies grow richer, the positive income effect vanishes (as a share of total income), and fertility declines faster. That is, growth accelerates over time even if gender equality increases only linearly.

The natural next step is to model how the social norm on gender roles evolves endogenously during the course of development. Hiller ( 2014 ) develops such a model by combining two main ingredients: a gender gap in the endowments of brawn (as in Galor & Weil 1996 ) generates a social norm, which each parental couple takes as given (as in Lagerlöf 2003 ). The social norm evolves endogenously, but slowly; it tracks the gender ratio of labor supply in the market, but with a small elasticity. When the male-female ratio in labor supply decreases, stereotypes adjust and the norm becomes less discriminatory against women.

The model generates a U-shaped relationship between economic development and female labor force participation. Footnote 13 In the preindustrial stage, there is no education and all labor activities are unskilled, i.e., produced with brawn. Because men have a comparative advantage in brawn, they supply more labor to the market than women, who specialize in home production. This gender gap in labor supply creates a social norm that favors boys over girls. Over time, exogenous skill-biased technological progress raises the relative returns to brains, inducing parents to invest in their children’s education. At the beginning, however, because of the social norm, only boys become educated. The economy accumulates human capital and grows, generating a positive income effect that, in isolation, would eventually drive up parental investments in girls’ education. Footnote 14 But endogenous social norms move in the opposite direction. When only boys receive education, the gender gap in returns to market work increases, and women withdraw to home production. As female relative labor supply in the market drops, the social norm becomes more discriminatory against women. As a result, parents want to invest relatively less in their daughters’ education.

In the end, initial conditions determine which of the forces dominates, thereby shaping long-term outcomes. If, initially, the social norm is very discriminatory, its effect is stronger than the income effect; the economy becomes trapped in an equilibrium with high gender inequality and low per capita income. If, on the other hand, social norms are relatively egalitarian to begin with, then the income effect dominates, and the economy converges to an equilibrium with gender equality and high income per capita.

In the models reviewed so far, human capital or brain endowments can be understood as combining both education and health. Bloom et al. ( 2015 ) explicitly distinguish these two dimensions. Health affects labor market earnings because sick people are out of work more often (participation effect) and are less productive per hour of work (productivity effect). Female health is assumed to be worse than male health, implying that women’s effective wages are lower than men’s. As a result, women are solely responsible for childrearing. Footnote 15

The model produces two growth regimes: a Malthusian trap with high fertility and no educational investments; and a regime of sustained growth, declining fertility, and rising educational investments. Once wages reach a certain threshold, the economy goes through a fertility transition and education expansion, taking off from the Malthusian regime to the sustained growth regime.

Female health promotes growth in both regimes, and it affects the timing of the takeoff. The healthier women are, the earlier the economy takes off. The reason is that a healthier woman earns a higher effective wage and, consequently, faces higher opportunity costs of raising children. When female health improves, the rising opportunity costs of children reduce the wage threshold at which educational investments become attractive; the fertility transition and mass education periods occur earlier.

In contrast, improved male health slows down economic growth and delays the fertility transition. When men become healthier, there is only a income effect on the demand for children, without the negative substitution effect (because male childrearing time is already zero). The policy conclusion would be to redistribute health from men to women. However, the policy would impose a static utility cost on the household. Because women’s time allocation to market work is constrained by childrearing responsibilities (whereas men work full-time), the marginal effect of health on household income is larger for men than for women. From the household’s point of view, reducing the gender gap in health produces a trade-off between short-term income maximization and long-term economic development.

In an extension of the model, the authors endogeneize health investments, while keeping the assumption that women pay the full time cost of childrearing. Because women participate less in the labor market (due to childrearing duties), it is optimal for households to invest more in male health. A health gender gap emerges from rational household behavior that takes into account how time-constraints differ by gender; assuming taste-based discrimination against girls or gender-specific preferences is not necessary.

In the models reviewed so far, parents invest in their children’s human capital for purely altruistic reasons. This is captured in the models by assuming that parents derive utility directly from the quantity and quality of children. This is the classical representation of children as durable consumption goods (e.g., Becker 1960 ). In reality, of course, parents may also have egoistic motivations for investing in child quantity and quality. A typical example is that, when parents get old and retire, they receive support from their children. The quantity and quality of children will affect the size of old-age transfers and parents internalize this in their fertility and childcare behavior. According to this view, children are best understood as investment goods.

Zhang et al. ( 1999 ) build an endogenous growth model that incorporates the old-age support mechanism in parental decisions. Another innovative element of their model is that parents can choose the gender of their children. The implicit assumption is that sex selection technologies are freely available to all parents.

At birth, there is a gender gap in human capital endowment, favoring boys over girls. Footnote 16 In adulthood, a child’s human capital depends on the initial endowment and on the parents’ human capital. In addition, the probability that a child survives to adulthood is exogenous and can differ by gender.

Parents receive old-age support from children that survive until adulthood. The more human capital children have, the more old-age support they provide to their parents. Beyond this egoistic motive, parents also enjoy the quantity and the quality of children (altruistic motive). Son preference is modeled by boys having a higher relative weight in the altruistic-component of the parental utility function. In other words, in their enjoyment of children as consumer goods, parents enjoy “consuming” a son more than “consuming” a girl. Parents who prefer sons want more boys than girls. A larger preference for sons, a higher relative survival probability of boys, and a higher human capital endowment of boys positively affect the sex ratio at birth, because, in the parents’ perspective, all these forces increase the marginal utility of boys relative to girls.

Zhang et al. ( 1999 ) show that, if human capital transmission from parents to children is efficient enough, the economy grows endogenously. When boys have a higher human capital endowment than girls, and the survival probability of sons is not smaller than the survival probability of daughters, then only sons provide old-age support. Anticipating this, parents invest more in the human capital of their sons than on the human capital of their daughters. As a result, the gender gap in human capital at birth widens endogenously.

When only boys provide old-age support, an exogenous increase in son preference harms long-run economic growth. The reason is that, when son preference increases, parents enjoy each son relatively more and demand less old-age support from him. Other things equal, parents want to “consume” more sons now and less old-age support later. Because parents want more sons, the sex ratio at birth increases; but because each son provides less old-age support, human capital investments per son decrease (such that the gender gap in human capital narrows). At the aggregate level, the pace of human capital accumulation slows down and, in the long run, economic growth is lower. Thus, an exogenous increase in son preference increases the sex ratio at birth, and reduces human capital accumulation and long-run growth (although it narrows the gender gap in education).

In summary, in growth models with unitary households, gender inequality is closely linked to the division of labor between family members. If women earn relatively less in market activities, they specialize in childrearing and home production, while men specialize in market work. And precisely due to this division of labor, the returns to female educational investments are relatively low. These household behaviors translate into higher fertility and lower human capital and thus pose a barrier to long-run development.

4 Intra-household bargaining: husbands and wives

In this section, we review models populated with non-unitary households, where decisions are the result of bargaining between the spouses. There are two broad types of bargaining processes: non-cooperative, where spouses act independently or interact in a non-cooperative game that often leads to inefficient outcomes (e.g., Doepke & Tertilt 2019 , Heath & Tan 2020 ); and cooperative, where the spouses are assumed to achieve an efficient outcome (e.g., De la Croix & Vander Donckt 2010 ; Diebolt & Perrin 2013 ). As in the previous section, all of these non-unitary models take the household as given, thereby abstracting from marriage markets or other household formation institutions, which will be discussed separately in section 5 . When preferences differ by gender, bargaining between the spouses matters for economic growth. If women care more about child quality than men do and human capital accumulation is the main engine of growth, then empowering women leads to faster economic growth (Prettner & Strulik 2017 ). If, however, men and women have similar preferences but are imperfect substitutes in the production of household public goods, then empowering women has an ambiguous effect on economic growth (Doepke & Tertilt 2019 ).

A separate channel concerns the intergenerational transmission of human capital and woman’s role as the main caregiver of children. If the education of the mother matters more than the education of the father in the production of children’s human capital, then empowering women will be conducive to growth (Agénor 2017 ; Diebolt & Perrin 2013 ), with the returns to education playing a crucial role in the political economy of female empowerment (Doepke & Tertilt 2009 ).

However, different dimensions of gender inequality have different growth impacts along the development process (De la Croix & Vander Donckt 2010 ). Policies that improve gender equality across many dimensions can be particularly effective for economic growth by reaping complementarities and positive externalities (Agénor 2017 ).

The idea that women might have stronger preferences for child-related expenditures than men can be easily incorporated in a Beckerian model of fertility. The necessary assumption is that women place a higher weight on child quality (relative to child quantity) than men do. Prettner & Strulik ( 2017 ) build a unified growth theory model with collective households. Men and women have different preferences, but they achieve efficient cooperation based on (reduced-form) bargaining parameters. The authors study the effect of two types of preferences: (i) women are assumed to have a relative preference for child quality, while men have a relative preference for child quantity; and (ii) parents are assumed to have a relative preference for the education of sons over the education of daughters. In addition, it is assumed that the time cost of childcare borne by men cannot be above that borne by women (but it could be the same).

When women have a relative preference for child quality, increasing female empowerment speeds up the economy’s escape from a Malthusian trap of high fertility, low education, and low income per capita. When female empowerment increases (exogenously), a woman’s relative preference for child quality has a higher impact on household’s decisions. As a consequence, fertility falls, human capital accumulates, and the economy starts growing. The model also predicts that the more preferences for child quality differ between husband and wife, the more effective is female empowerment in raising long-run per capita income, because the sooner the economy escapes the Malthusian trap. This effect is not affected by whether parents have a preference for the education of boys relative to that of girls. If, however, men and women have similar preferences with respect to the quantity and quality of their children, then female empowerment does not affect the timing of the transition to the sustained growth regime.

Strulik ( 2019 ) goes one step further and endogeneizes why men seem to prefer having more children than women. The reason is a different preference for sexual activity: other things equal, men enjoy having sex more than women. Footnote 17 When cheap and effective contraception is not available, a higher male desire for sexual activity explains why men also prefer to have more children than women. In a traditional economy, where no contraception is available, fertility is high, while human capital and economic growth are low. When female bargaining power increases, couples reduce their sexual activity, fertility declines, and human capital accumulates faster. Faster human capital accumulation increases household income and, as a consequence, the demand for contraception goes up. As contraception use increases, fertility declines further. Eventually, the economy undergoes a fertility transition and moves to a modern regime with low fertility, widespread use of contraception, high human capital, and high economic growth. In the modern regime, because contraception is widely used, men’s desire for sex is decoupled from fertility. Both sex and children cost time and money. When the two are decoupled, men prefer to have more sex at the expense of the number of children. There is a reversal in the gender gap in desired fertility. When contraceptives are not available, men desire more children than women; once contraceptives are widely used, men desire fewer children than women. If women are more empowered, the transition from the traditional equilibrium to the modern equilibrium occurs faster.

Both Prettner & Strulik ( 2017 ) and Strulik ( 2019 ) rely on gender-specific preferences. In contrast, Doepke & Tertilt ( 2019 ) are able to explain gender-specific expenditure patterns without having to assume that men and women have different preferences. They set up a non-cooperative model of household decision making and ask whether more female control of household resources leads to higher child expenditures and, thus, to economic development. Footnote 18

In their model, household public goods are produced with two inputs: time and goods. Instead of a single home-produced good (as in most models), there is a continuum of household public goods whose production technologies differ. Some public goods are more time-intensive to produce, while others are more goods-intensive. Each specific public good can only be produced by one spouse—i.e., time and good inputs are not separable. Women face wage discrimination in the labor market, so their opportunity cost of time is lower than men’s. As a result, women specialize in the production of the most time-intensive household public goods (e.g., childrearing activities), while men specialize in the production of goods-intensive household public goods (e.g., housing infrastructure). Notice that, because the household is non-cooperative, there is not only a division of labor between husband and wife, but also a division of decision making, since ultimately each spouse decides how much to provide of his or her public goods.

When household resources are redistributed from men to women (i.e., from the high-wage spouse to the low-wage spouse), women provide more public goods, in relative terms. It is ambiguous, however, whether the total provision of public goods increases with the re-distributive transfer. In a classic model of gender-specific preferences, a wife increases child expenditures and her own private consumption at the expense of the husband’s private consumption. In Doepke & Tertilt ( 2019 ), however, the rise in child expenditures (and time-intensive public goods in general) comes at the expense of male consumption and male-provided public goods.

Parents contribute to the welfare of the next generation in two ways: via human capital investments (time-intensive, typically done by the mother) and bequests of physical capital (goods-intensive, typically done by the father). Transferring resources to women increases human capital, but reduces the stock of physical capital. The effect of such transfers on economic growth depends on whether the aggregate production function is relatively intensive in human capital or in physical capital. If aggregate production is relatively human capital intensive, then transfers to women boost economic growth; if it is relatively intensive in physical capital, then transfers to women may reduce economic growth.

There is an interesting paradox here. On the one hand, transfers to women will be growth-enhancing in economies where production is intensive in human capital. These would be more developed, knowledge intensive, service economies. On the other hand, the positive growth effect of transfers to women increases with the size of the gender wage gap, that is, decreases with female empowerment. But the more advanced, human capital intensive economies are also the ones with more female empowerment (i.e., lower gender wage gaps). In other words, in settings where human capital investments are relatively beneficial, the contribution of female empowerment to human capital accumulation is reduced. Overall, Doepke and Tertilt’s ( 2019 ) model predicts that female empowerment has at best a limited positive effect and at worst a negative effect on economic growth.

Heath & Tan ( 2020 ) argue that, in a non-cooperative household model, income transfers to women may increase female labor supply. Footnote 19 This result may appear counter-intuitive at first, because in collective household models unearned income unambiguously reduces labor supply through a negative income effect. In Heath and Tan’s model, husband and wife derive utility from leisure, consuming private goods, and consuming a household public good. The spouses decide separately on labor supply and monetary contributions to the household public good. Men and women are identical in preferences and behavior, but women have limited control over resources, with a share of their income being captured by the husband. Female control over resources (i.e., autonomy) depends positively on the wife’s relative contribution to household income. Thus, an income transfer to the wife, keeping husband unearned income constant, raises the fraction of her own income that she privately controls. This autonomy effect unambiguously increases women’s labor supply, because the wife can now reap an additional share of her wage bill. Whenever the autonomy effect dominates the (negative) income effect, female labor supply increases. The net effect will be heterogeneous over the wage distribution, but the authors show that aggregate female labor supply is always weakly larger after the income transfer.

Diebolt & Perrin ( 2013 ) assume cooperative bargaining between husband and wife, but do not rely on sex-specific preferences or differences in ability. Men and women are only distinguished by different uses of their time endowments, with females in charge of all childrearing activities. In line with this labor division, the authors further assume that only the mother’s human capital is inherited by the child at birth. On top of the inherited maternal endowment, individuals can accumulate human capital during adulthood, through schooling. The higher the initial human capital endowment, the more effective is the accumulation of human capital via schooling.

A woman’s bargaining power in marriage determines her share in total household consumption and is a function of the relative female human capital of the previous generation. An increase in the human capital of mothers relative to that of fathers has two effects. First, it raises the incentives for human capital accumulation of the next generation, because inherited maternal human capital makes schooling more effective. Second, it raises the bargaining power of the next generation of women and, because women’s consumption share increases, boosts the returns on women’s education. The second effect is not internalized in women’s time allocation decisions; it is an intergenerational externality. Thus, an exogenous increase in women’s bargaining power would promote economic growth by speeding up the accumulation of human capital across overlapping generations.

De la Croix & Vander Donckt ( 2010 ) contribute to the literature by clearly distinguishing between different gender gaps: a gap in the probability of survival, a wage gap, a social and institutional gap, and a gender education gap. The first three are exogenously given, while the fourth is determined within the model.

By assumption, men and women have identical preferences and ability, but women pay the full time cost of childrearing. As in a typical collective household model, bargaining power is partially determined by the spouses’ earnings potential (i.e., their levels of human capital and their wage rates). But there is also a component of bargaining power that is exogenous and captures social norms that discriminate against women—this is the social and institutional gender gap.

Husbands and wives bargain over fertility and human capital investments for their children. A standard Beckerian result emerges: parents invest relatively less in the education of girls, because girls will be more time-constrained than boys and, therefore, the female returns to education are lower in relative terms.

There are at least two regimes in the economy: a corner regime and an interior regime. The corner regime consists of maximum fertility, full gender specialization (no women in the labor market), and large gender gaps in education (no education for girls). Reducing the wage gap or the social and institutional gap does not help the economy escaping this regime. Women are not in labor force, so the wage gap is meaningless. The social and institutional gap will determine women’s share in household consumption, but does not affect fertility and growth. At this stage, the only effective instruments for escaping the corner regime are reducing the gender survival gap or reducing child mortality. Reducing the gender survival gap increases women’s lifespan, which increases their time budget and attracts them to the labor market. Reducing child mortality decreases the time costs of kids, therefore drawing women into the labor market. In both cases, fertility decreases.

In the interior regime, fertility is below the maximum, women’s labor supply is above zero, and both boys and girls receive education. In this regime, with endogenous bargaining power, reducing all gender gaps will boost economic growth. Footnote 20 Thus, depending on the growth regime, some gender gaps affect economic growth, while others do not. Accordingly, the policy-maker should tackle different dimensions of gender inequality at different stages of the development process.

Agénor ( 2017 ) presents a computable general equilibrium that includes many of the elements of gender inequality reviewed so far. An important contribution of the model is to explicitly add the government as an agent whose policies interact with family decisions and, therefore, will impact women’s time allocation. Workers produce a market good and a home good and are organized in collective households. Bargaining power depends on the spouses’ relative human capital levels. By assumption, there is gender discrimination in market wages against women. On top, mothers are exclusively responsible for home production and childrearing, which takes the form of time spent improving children’s health and education. But public investments in education and health also improve these outcomes during childhood. Likewise, public investment in public infrastructure contributes positively to home production. In particular, the ratio of public infrastructure capital stock to private capital stock is a substitute for women’s time in home production. The underlying idea is that improving sanitation, transportation, and other infrastructure reduces time spent in home production. Health status in adulthood depends on health status in childhood, which, in turn, relates positively to mother’s health, her time inputs into childrearing, and government spending. Children’s human capital depends on similar factors, except that mother’s human capital replaces her health as an input. Additionally, women are assumed to derive less utility from current consumption and more utility from children’s health relative to men. Wives are also assumed to live longer than their husbands, which further down-weights female’s emphasis on current consumption. The final gendered assumption is that mother’s time use is biased towards boys. This bias alone creates a gender gap in education and health. As adults, women’s relative lower health and human capital are translated into relative lower bargaining power in household decisions.

Agénor ( 2017 ) calibrates this rich setup for Benin, a low income country, and runs a series of policy experiments on different dimensions of gender inequality: a fall in childrearing costs, a fall in gender pay discrimination, a fall in son bias in mother’s time allocation, and an exogenous increase in female bargaining power. Footnote 21 Interestingly, despite all policies improving gender equality in separate dimensions, not all unambiguously stimulate economic growth. For example, falling childrearing costs raise savings and private investments, which are growth-enhancing, but increase fertility (as children become ‘cheaper’) and reduce maternal time investment per child, thus reducing growth. In contrast, a fall in gender pay discrimination always leads to higher growth, through higher household income that, in turn, boosts savings, tax revenues, and public spending. Higher public spending further contributes to improved health and education of the next generation. Lastly, Agénor ( 2017 ) simulates the effect of a combined policy that improves gender equality in all domains simultaneously. Due to complementarities and positive externalities across dimensions, the combined policy generates more economic growth than the sum of the individual policies. Footnote 22

In the models reviewed so far, men are passive observers of women’s empowerment. Doepke & Tertilt ( 2009 ) set up an interesting political economy model of women’s rights, where men make the decisive choice. Their model is motivated by the fact that, historically, the economic rights of women were expanded before their political rights. Because the granting of economic rights empowers women in the household, and this was done before women were allowed to participate in the political process, the relevant question is why did men willingly share their power with their wives?

Doepke & Tertilt ( 2009 ) answer this question by arguing that men face a fundamental trade-off. On the one hand, husbands would vote for their wives to have no rights whatsoever, because husbands prefer as much intra-household bargaining power as possible. But, on the other hand, fathers would vote for their daughters to have economic rights in their future households. In addition, fathers want their children to marry highly educated spouses, and grandfathers want their grandchildren to be highly educated. By assumption, men and women have different preferences, with women having a relative preference for child quality over quantity. Accordingly, men internalize that, when women become empowered, human capital investments increase, making their children and grandchildren better-off.

Skill-biased (exogenous) technological progress that raises the returns to education over time can shift male incentives along this trade-off. When the returns to education are low, men prefer to make all decisions on their own and deny all rights to women. But once the returns to education are sufficiently high, men voluntarily share their power with women by granting them economic rights. As a result, human capital investments increase and the economy grows faster.

In summary, gender inequality in labor market earnings often implies power asymmetries within the household, with men having more bargaining power than women. If preferences differ by gender and female preferences are more conducive to development, then empowering women is beneficial for growth. When preferences are the same and the bargaining process is non-cooperative, the implications are less clear-cut, and more context-specific. If, in addition, women’s empowerment is curtailed by law (e.g., restrictions on women’s economic rights), then it is important to understand the political economy of women’s rights, in which men are crucial actors.

5 Marriage markets and household formation

Two-sex models of economic growth have largely ignored how households are formed. The marriage market is not explicitly modeled: spouses are matched randomly, marriage is universal and monogamous, and families are nuclear. In reality, however, household formation patterns vary substantially across societies, with some of these differences extending far back in history. For example, Hajnal ( 1965 , 1982 ) described a distinct household formation pattern in preindustrial Northwestern Europe (often referred to as the “European Marriage Pattern”) characterized by: (i) late ages at first marriage for women, (ii) most marriages done under individual consent, and (iii) neolocality (i.e., upon marriage, the bride and the groom leave their parental households to form a new household). In contrast, marriage systems in China and India consisted of: (i) very early female ages at first marriage, (ii) arranged marriages, and (iii) patrilocality (i.e., the bride joins the parental household of the groom).

Economic historians argue that the “European Marriage Pattern” empowered women, encouraging their participation in market activities and reducing fertility levels. While some view this as one of the deep-rooted factors explaining Northwestern Europe’s earlier takeoff to sustained economic growth (e.g., Carmichael, de Pleijt, van Zanden and De Moor 2016 ; De Moor & Van Zanden 2010 ; Hartman 2004 ), others have downplayed the long-run significance of this marriage pattern (e.g., Dennison & Ogilvie 2014 ; Ruggles 2009 ). Despite this lively debate, the topic has been largely ignored by growth theorists. The few exceptions are Voigtländer and Voth ( 2013 ), Edlund and Lagerlöf ( 2006 ), and Tertilt ( 2005 , 2006 ).

After exploring different marriage institutions, we zoom in on contemporary monogamous and consensual marriage and review models where gender inequality affects economic growth through marriage markets that facilitate household formation (Du & Wei 2013 ; Grossbard & Pereira 2015 ; Grossbard-Shechtman 1984 ; Guvenen & Rendall 2015 ). In contrast with the previous two sections, where the household is the starting point of the analysis, the literature on marriage markets and household formation recognizes that marriage, labor supply, and investment decisions are interlinked. The analysis of these interlinkages is sometimes done with unitary households (upon marriage) (Du & Wei 2013 ; Guvenen & Rendall 2015 ), or with non-cooperative models of individual decision-making within households (Grossbard & Pereira 2015 ; Grossbard-Shechtman 1984 ).

Voigtländer and Voth ( 2013 ) argue that the emergence of the “European Marriage Pattern” is a direct consequence of the mid-fourteen century Black Death. They set up a two-sector agricultural economy consisting of physically demanding cereal farming, and less physically demanding pastoral production. The economy is populated by many male and female peasants and by a class of idle, rent-maximizing landlords. Female peasants are heterogeneous with respect to physical strength, but, on average, are assumed to have less brawn relative to male peasants and, thus, have a comparative advantage in the pastoral sector. Both sectors use land as a production input, although the pastoral sector is more land-intensive than cereal production. All land is owned by the landlords, who can rent it out for peasant cereal farming, or use it for large-scale livestock farming, for which they hire female workers. Crucially, women can only work and earn wages in the pastoral sector as long as they are unmarried. Footnote 23 Peasant women decide when to marry and, upon marriage, a peasant couple forms a new household, where husband and wife both work on cereal farming, and have children at a given time frequency. Thus, the only contraceptive method available is delaying marriage. Because women derive utility from consumption and children, they face a trade-off between earned income and marriage.

Initially, the economy rests in a Malthusian regime, where land-labor ratios are relatively low, making the land-intensive pastoral sector unattractive and depressing relative female wages. As a result, women marry early and fertility is high. The initial regime ends in 1348–1350, when the Black Death kills between one third and half of Europe’s population, exogenously generating land abundance and, therefore, raising the relative wages of female labor in pastoral production. Women postpone marriage to reap higher wages, and fertility decreases—moving the economy to a regime of late marriages and low fertility.

In addition to late marital ages and reduced fertility, another important feature of the “European Marriage Pattern” was individual consent for marriage. Edlund and Lagerlöf ( 2006 ) study how rules of consent for marriage influence long-run economic development. In their model, marriages can be formed according to two types of consent rules: individual consent or parental consent. Under individual consent, young people are free to marry whomever they wish, while, under parental consent, their parents are in charge of arranging the marriage. Depending on the prevailing rule, the recipient of the bride-price differs. Under individual consent, a woman receives the bride-price from her husband, whereas, under parental consent, her father receives the bride-price from the father of the groom. Footnote 24 In both situations, the father of the groom owns the labor income of his son and, therefore, pays the bride-price, either directly, under parental consent, or indirectly, under individual consent. Under individual consent, the father needs to transfer resources to his son to nudge him into marrying. Thus, individual consent implies a transfer of resources from the old to the young and from men to women, relative to the rule of parental consent. Redistributing resources from the old to the young boosts long-run economic growth. Because the young have a longer timespan to extract income from their children’s labor, they invest relatively more in the human capital of the next generation. In addition, under individual consent, the reallocation of resources from men to women can have additional positive effects on growth, by increasing women’s bargaining power (see section 4 ), although this channel is not explicitly modeled in Edlund and Lagerlöf ( 2006 ).

Tertilt ( 2005 ) explores the effects of polygyny on long-run development through its impact on savings and fertility. In her model, parental consent applies to women, while individual consent applies to men. There is a competitive marriage market where fathers sell their daughters and men buy their wives. As each man is allowed (and wants) to marry several wives, a positive bride-price emerges in equilibrium. Footnote 25 Upon marriage, the reproductive rights of the bride are transferred from her father to her husband, who makes all fertility decisions on his own and, in turn, owns the reproductive rights of his daughters. From a father’s perspective, daughters are investments goods; they can be sold in the marriage market, at any time. This feature generates additional demand for daughters, which increases overall fertility, and reduces the incentives to save, which decreases the stock of physical capital. Under monogamy, in contrast, the equilibrium bride-price is negative (i.e., a dowry). The reason is that maintaining unmarried daughters is costly for their fathers, so they are better-off paying a (small enough) dowry to their future husbands. In this setting, the economic returns to daughters are lower and, consequently, so is the demand for children. Fertility decreases and savings increase. Thus, moving from polygny to monogamy lowers population growth and raises the capital stock in the long run, which translates into higher output per capita in the steady state.

Instead of enforcing monogamy in a traditionally polygynous setting, an alternative policy is to transfer marriage consent from fathers to daughters. Tertilt ( 2006 ) shows that when individual consent is extended to daughters, such that fathers do not receive the bride-price anymore, the consequences are qualitatively similar to a ban on polygyny. If fathers stop receiving the bride-price, they save more physical capital. In the long run, per capita output is higher when consent is transferred to daughters.

Grossbard-Shechtman ( 1984 ) develops the first non-cooperative model where (monogamous) marriage, home production, and labor supply decisions are interdependent. Footnote 26 Spouses are modeled as separate agents deciding over production and consumption. Marriage becomes an implicit contract for ‘work-in-household’ (WiHo), defined as “an activity that benefits another household member [typically a spouse] who could potentially compensate the individual for these efforts” (Grossbard 2015 , p. 21). Footnote 27 In particular, each spouse decides how much labor to supply to market work and WiHo, and how much labor to demand from the other spouse for WiHo. Through this lens, spousal decisions over the intra-marriage distribution of consumption and WiHo are akin to well-known principal-agent problems faced between firms and workers. In the marriage market equilibrium, a spouse benefiting from WiHo (the principal) must compensate the spouse producing it (the agent) via intra-household transfers (of goods or leisure). Footnote 28 Grossbard-Shechtman ( 1984 ) and Grossbard ( 2015 ) show that, under these conditions, the ratio of men to women (i.e., the sex ratio) in the marriage market is inversely related to female labor supply to the market. The reason is that, as the pool of potential wives shrinks, prospective husbands have to increase compensation for female WiHo. From the potential wife’s point of view, as the equilibrium price for her WiHo increases, market work becomes less attractive. Conversely, when sex ratios are lower, female labor supply outside the home increases. Although the model does not explicit derive growth implications, the relative increase in female labor supply is expected to be beneficial for economic growth, as argued by many of the theories reviewed so far.

In an extension of this framework, Grossbard & Pereira ( 2015 ) analyze how sex ratios affect gendered savings over the marital life-cycle. Assuming that women supply a disproportionate amount of labor for WiHo (due, for example, to traditional gender norms), the authors show that men and women will have very distinct saving trajectories. A higher sex ratio increases savings by single men, who anticipate higher compensation transfers for their wives’ WiHo, whereas it decreases savings by single women, who anticipate receiving those transfers upon marriage. But the pattern flips after marriage: precautionary savings raise among married women, because the possibility of marriage dissolution entails a loss of income from WiHo. The opposite effect happens for married men: marriage dissolution would imply less expenditures in the future. The higher the sex ratio, the higher will be the equilibrium compensation paid by husbands for their wives’ WiHo. Therefore, the sex ratio will positively affect savings among single men and married women, but negatively affect savings among single women and married men. The net effect on the aggregate savings rate and on economic growth will depend on the relative size of these demographic groups.

In a related article, Du & Wei ( 2013 ) propose a model where higher sex ratios worsen marriage markets prospects for young men and their families, who react by increasing savings. Women in turn reduce savings. However, because sex ratios shift the composition of the population in favor of men (high saving type) relative to women (low saving type) and men save additionally to compensate for women’s dis-saving, aggregate savings increase unambiguously with sex ratios.

In Guvenen & Rendall ( 2015 ), female education is, in part, demanded as insurance against divorce risk. The reason is that divorce laws often protect spouses’ future labor market earnings (i.e., returns to human capital), but force them to share their physical assets. Because, in the model, women are more likely to gain custody of their children after divorce, they face higher costs from divorce relative to their husbands. Therefore, the higher the risk of divorce, the more women invest in human capital, as insurance against a future vulnerable economic position. Guvenen & Rendall ( 2015 ) shows that, over time, divorce risk has increased (for example, consensual divorce became replaced by unilateral divorce in most US states in the 1970s). In the aggregate, higher divorce risk boosted female education and female labor supply.

In summary, the rules regulating marriage and household formation carry relevant theoretical consequences for economic development. While the few studies on this topic have focused on age at marriage, consent rules and polygyny, and the interaction between sex ratios, marriage, and labor supply, other features of the marriage market remain largely unexplored (Borella, De Nardi and Yang 2018 ). Growth theorists would benefit from further incorporating theories of household formation in gendered macro models. Footnote 29

6 Conclusion

In this article, we surveyed micro-founded theories linking gender inequality to economic development. This literature offers many plausible mechanisms through which inequality between men and women affects the aggregate economy (see Table 1 ). Yet, we believe the body of theories could be expanded in several directions. We discuss them below and highlight lessons for policy.

The first direction for future research concerns control over fertility. In models where fertility is endogenous, households are always able to achieve their preferred number of children (see Strulik 2019 , for an exception). The implicit assumption is that there is a free and infallible method of fertility control available for all households—a view rejected by most demographers. The gap between desired fertility and achieved fertility can be endogeneized at three levels. First, at the societal level, the diffusion of particular contraceptive methods may be influenced by cultural and religious norms. Second, at the household level, fertility control may be object of non-cooperative bargaining between the spouses, in particular, for contraceptive methods that only women perfectly observe (Ashraf, Field and Lee 2014 ; Doepke & Kindermann 2019 ). More generally, the role of asymmetric information within the household is not yet explored (Walther 2017 ). Third, if parents have preferences over the gender composition of their offspring, fertility is better modeled as a sequential and uncertain process, where household size is likely endogenous to the sex of the last born child (Hazan & Zoabi 2015 ).

A second direction worth exploring concerns gender inequality in a historical perspective. In models with multiple equilibria, an economy’s path is often determined by its initial level of gender equality. Therefore, it would be useful to develop theories explaining why initial conditions varied across societies. In particular, there is a large literature on economic and demographic history documenting how systems of marriage and household formation differed substantially across preindustrial societies (e.g., De Moor & Van Zanden 2010 ; Hajnal 1965 , 1982 ; Hartman 2004 ; Ruggles 2009 ). In our view, more theoretical work is needed to explain both the origins and the consequences of these historical systems.

A third avenue for future research concerns the role of technological change. In several models, technological change is the exogenous force that ultimately erodes gender gaps in education or labor supply (e.g., Bloom et al. 2015 ; Doepke & Tertilt 2009 ; Galor & Weil 1996 ). For that to happen, technological progress is assumed to be skill-biased, thus raising the returns to education—or, in other words, favoring brain over brawn. As such, new technologies make male advantage in physical strength ever more irrelevant, while making female time spent on childrearing and housework ever more expensive. Moreover, recent technological progress increased the efficiency of domestic activities, thereby relaxing women’s time constraints (e.g., Cavalcanti & Tavares 2008 ; Greenwood, Seshadri and Yorukoglu 2005 ). These mechanisms are plausible, but other aspects of technological change need not be equally favorable for women. In many countries, for example, the booming science, technology, and engineering sectors tend to be particularly male-intensive. And Tejani & Milberg ( 2016 ) provide evidence for developing countries that as manufacturing industries become more capital intensive, their female employment share decreases.

Even if current technological progress is assumed to weaken gender gaps, historically, technology may have played exactly the opposite role. If technology today is more complementary to brain, in the past it could have been more complementary to brawn. An example is the plow that, relative to alternative technologies for field preparation (e.g., hoe, digging stick), requires upper body strength, on which men have a comparative advantage over women (Alesina, Giuliano and Nunn 2013 ; Boserup 1970 ). Another, even more striking example, is the invention of agriculture itself—the Neolithic Revolution. The transition from a hunter-gatherer lifestyle to sedentary agriculture involved a relative loss of status for women (Dyble et al. 2015 ; Hansen, Jensen and Skovsgaard 2015 ). One explanation is that property rights on land were captured by men, who had an advantage on physical strength and, consequently, on physical violence. Thus, in the long view of human history, technological change appears to have shifted from being male-biased towards being female-biased. Endogeneizing technological progress and its interaction with gender inequality is a promising avenue for future research.

Fourth, open economy issues are still almost entirely absent. An exception is Rees & Riezman ( 2012 ), who model the effect of globalization on economic growth. Whether global capital flows generate jobs primarily in female or male intensive sectors matters for long-run growth. If globalization creates job opportunities for women, their bargaining power increases and households trade off child quantity by child quality. Fertility falls, human capital accumulates, and long-run per capita output is high. If, on the other hand, globalization creates jobs for men, their intra-household power increases; fertility increases, human capital decreases, and steady-state income per capita is low. The literature would benefit from engaging with open economy demand-driven models of the feminist tradition, such as Blecker & Seguino ( 2002 ), Seguino ( 2010 ). Other fruitful avenues for future research on open economy macro concern gender analysis of global value chains (Barrientos 2019 ), gendered patterns of international migration (Cortes 2015 ; Cortes & Tessada 2011 ), and the diffusion of gender norms through globalization (Beine, Docquier and Schiff 2013 ; Klasen 2020 ; Tuccio & Wahba 2018 ).

A final point concerns the role of men in this literature. In most theoretical models, gender inequality is not the result of an active male project that seeks the domination of women. Instead, inequality emerges as a rational best response to some underlying gender gap in endowments or constraints. Then, as the underlying gap becomes less relevant—for example, due to skill-biased technological change—, men passively relinquish their power (see Doepke & Tertilt 2009 , for an exception). There is never a male backlash against the short-term power loss that necessarily comes with female empowerment. In reality, it is more likely that men actively oppose losing power and resources towards women (Folbre 2020 ; Kabeer 2016 ; Klasen 2020 ). This possibility has not yet been explored in formal models, even though it could threaten the typical virtuous cycle between gender equality and growth. If men are forward-looking, and the short-run losses outweigh the dynamic gains from higher growth, they might ensure that women never get empowered to begin with. Power asymmetries tend to be sticky, because “any group that is able to claim a disproportionate share of the gains from cooperation can develop social institutions to fortify their position” (Folbre 2020 , p. 199). For example, Eswaran & Malhotra ( 2011 ) set up a household decision model where men use domestic violence against their wives as a tool to enhance male bargaining power. Thus, future theories should recognize more often that men have a vested interest on the process of female empowerment.

More generally, policymakers should pay attention to the possibility of a male backlash as an unintended consequence of female empowerment policies (Erten & Keskin 2018 ; Eswaran & Malhotra 2011 ). Likewise, whereas most theories reviewed here link lower fertility to higher economic growth, the relationship is non-monotonic. Fertility levels below the replacement rate will eventually generate aggregate social costs in the form of smaller future workforces, rapidly ageing societies, and increased pressure on welfare systems, to name a few.

Many theories presented in this survey make another important practical point: public policies should recognize that gender gaps in separate dimensions complement and reinforce one another and, therefore, have to be dealt with simultaneously. A naïve policy targeting a single gap in isolation is unlikely to have substantial growth effects in the short run. Typically, inequalities in separate dimensions are not independent from each other (Agénor 2017 ; Bandiera & Does 2013 ; Duflo 2012 ; Kabeer 2016 ). For example, if credit-constrained women face weak property rights, are unable to access certain markets, and have mobility and time constraints, then the marginal return to capital may nevertheless be larger for men. Similarly, the return to male education may well be above the female return if demand for female labor is low or concentrated in sectors with low productivity. In sum, “the fact that women face multiple constraints means that relaxing just one may not improve outcomes” (Duflo 2012 , p. 1076).

Promising policy directions that would benefit from further macroeconomic research are the role of public investments in physical infrastructure and care provision (Agénor 2017 ; Braunstein, Bouhia and Seguino 2020 ), gender-based taxation (Guner, Kaygusuz and Ventura 2012 ; Meier & Rainer 2015 ), and linkages between gender equality and pro-environmental agendas (Matsumoto 2014 ).

See Echevarria & Moe ( 2000 ) for a similar complaint that “theories of economic growth and development have consistently neglected to include gender as a variable” (p. 77).

A non-exhaustive list includes Bandiera & Does ( 2013 ), Braunstein ( 2013 ), Cuberes & Teignier ( 2014 ), Duflo ( 2012 ), Kabeer ( 2016 ), Kabeer & Natali ( 2013 ), Klasen ( 2018 ), Seguino ( 2013 , 2020 ), Sinha et al. ( 2007 ), Stotsky ( 2006 ), World Bank ( 2001 , 2011 ).

For an in-depth history of “new home economics” see Grossbard-Shechtman ( 2001 ) and Grossbard ( 2010 , 2011 ).

For recent empirical reviews see Duflo ( 2012 ) and Doss ( 2013 ).

Although the unitary approach has being rejected on theoretical (e.g., Echevarria & Moe 2000 ; Folbre 1986 ; Knowles 2013 ; Sen 1989 ) and empirical grounds (e.g., Doss 2013 ; Duflo 2003 ; Lundberg et al. 1997 ), these early models are foundational to the subsequent literature. As it turns out, some of the key mechanisms survive in non-unitary theories of the household.

For nice conceptual perspectives on conflict and cooperation in households see Sen ( 1989 ), Grossbard ( 2011 ), and Folbre ( 2020 ).

The relationship depicted in Fig. 1 is robust to using other composite measures of gender equality (e.g., UNDP’s Gender Inequality Index or OECD’s Social Institutions and Gender Index (SIGI) (see Branisa, Klasen and Ziegler 2013 )), and other years besides 2000. In Fig. 2 , the linear prediction explains 56 percent of the cross-country variation in per capita income.

See Seguino ( 2013 , 2020 ) for a review of this literature.

The model allows for sorting on ability (“some people are better teachers”) or sorting on occupation-specific preferences (“others derive more utility from working as a teacher”) (Hsieh et al. 2019 , p. 1441). Here, we restrict our presentation to the case where sorting occurs primarily on ability. The authors find little empirical support for sorting on preferences.

Because the home sector is treated as any other occupation, the model can capture, in a reduced-form fashion, social norms on women’s labor force participation. For example, a social norm on traditional gender roles can be represented as a utility premium obtained by all women working on the home sector.

Note, however, that discrimination against women raises productivity in the non-agricultural sector. The reason is that the few women who end up working outside agriculture are positively selected on talent. Lee ( 2020 ) shows that this countervailing effect is modest and dominated by the loss of productivity in agriculture.

This is not the classic Beckerian quantity-quality trade-off because parents cannot invest in the quality of their children. Instead, the mechanism is built by assumption in the household’s utility function. When women’s wages increase relative to male wages, the substitution effect dominates the income effect.

The hypothesis that female labor force participation and economic development have a U-shaped relationship—known as the feminization-U hypothesis—goes back to Boserup ( 1970 ). See also Goldin ( 1995 ). Recently, Gaddis & Klasen ( 2014 ) find only limited empirical support for the feminization-U.

The model does not consider fertility decisions. Parents derive utility from their children’s human capital (social status utility). When household income increases, parents want to “consume” more social status by investing in their children’s education—this is the positive income effect.

Bloom et al. ( 2015 ) build their main model with unitary households, but show that the key conclusions are robust to a collective representation of the household.

This assumption does not necessarily mean that boys are more talented than girls. It can be also interpreted as a reduced-form way of capturing labor market discrimination against women.

Many empirical studies are in line with this assumption, which is rooted in evolutionary psychology. See Strulik ( 2019 ) for references. There are several other evolutionary arguments for men wanting more children (including with different women). See, among others, Mulder & Rauch ( 2009 ), Penn & Smith ( 2007 ), von Rueden & Jaeggi ( 2016 ). However, for a different view, see Fine ( 2017 ).

They do not model fertility decisions. So there is no quantity-quality trade-off.

In their empirical application, Heath & Tan ( 2020 ) study the Hindu Succession Act, which, through improved female inheritance rights, increased the lifetime unearned income of Indian women. Other policies consistent with the model are, for example, unconditional cash transfers to women.

De la Croix & Vander Donckt ( 2010 ) show this with numerical simulations, because the interior regime becomes analytically intractable.

We focus on gender-related policies in our presentation, but the article simulates additional public policies.

Agénor and Agénor ( 2014 ) develop a similar model, but with unitary households, and Agénor and Canuto ( 2015 ) have a similar model of collective households for Brazil, where adult women can also invest time in human capital formation. Since public infrastructure substitutes for women’s time in home production, more (or better) infrastructure can free up time for female human capital accumulation and, thus, endogenously increase wives’ bargaining power.

Voigtländer and Voth ( 2013 ) justify this assumption arguing that, in England, employment contracts for farm servants working in animal husbandry were conditional on celibacy. However, see Edwards & Ogilvie ( 2018 ) for a critique of this assumption.

The bride-price under individual consent need not be paid explicitly as a lump-sum transfer. It could, instead, be paid to the bride implicitly in the form of higher lifetime consumption.

In Tertilt ( 2005 ), all men are similar (except in age). Widespread polygyny is possible because older men marry younger women and population growth is high. This setup reflects stylized facts for Sub-Saharan Africa. It differs from models that assume male heterogeneity in endowments, where polygyny emerges because a rich male elite owns several wives, while poor men remain single (e.g., Gould, Moav and Simhon 2008 ; Lagerlöf 2005 , 2010 ).

See Grossbard ( 2015 ) for more details and extensions of this model and Grossbard ( 2018 ) for a non-technical overview of the related literature. For an earlier application, see Grossbard ( 1976 ).

The concept of WiHo is closely related but not equivalent to the ‘black-box’ term home production used by much of the literature. It also relates to feminist perspectives on care and social reproduction labor (c.f. Folbre 1994 ).

In the general setup, the model need not lead to a corner solution where only one spouse specializes in WiHo.

For promising approaches, see, among others, Cubeddu and Ríos-Rull ( 2003 ), Goussé, Jacquemet and Robin ( 2017 ), Greenwood, Guner, Kocharkov and Santos ( 2016 ), Guler, Guvenen and Violante ( 2012 ), Walther ( 2017 ), Wong ( 2016 ).

Agénor, P.-R. (2017). A computable overlapping generations model for gender and growth policy analysis. Macroeconomic Dynamics , 21 (1), 11–54.

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Acknowledgements

We thank the Editor, Shoshana Grossbard, and three anonymous reviewers for helpful comments. We gratefully acknowledge funding from the Growth and Economic Opportunities for Women (GrOW) initiative, a multi-funder partnership between the UK’s Department for International Development, the Hewlett Foundation and the International Development Research Centre. All views expressed here and remaining errors are our own. Manuel dedicates this article to Stephan Klasen, in loving memory.

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Santos Silva, M., Klasen, S. Gender inequality as a barrier to economic growth: a review of the theoretical literature. Rev Econ Household 19 , 581–614 (2021). https://doi.org/10.1007/s11150-020-09535-6

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Price Discrimination and Consumer Welfare - A-Level Economics Essay Walkthrough

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In this video we walk through an answer to a question about whether price discrimination helps or harms consumer welfare. We hope this is useful in showing how to build clear chains of reasoning and well-supported evaluation.

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Essay on Price Discrimination | Products | Economics

Here is an essay on ‘Price Discrimination’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Price Discrimination’ especially written for school and college students.

Essay on Price Discrimination

Essay Contents:

Essay on the Desirability of Price Discrimination

Essay # 1. Meaning of Price Discrimination:

Generally a manufacturer charges one price for one product from all the customers but sometimes it happens that different prices are charged for the same product (or service) from different customers. This policy is commonly known as price differential or price discrimination policy.

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Mrs. John Robinson has defined price discrimination as follows. “The act of selling the same article, produced under a single control at different prices to different buyers is known as price discrimination”. According Prof. J.S. Bain, “Price discrimination refers strictly to the practice by a seller of simultaneously charging different prices to different buyers for the same goods.”

According to Spencer and Siegleman, “Differential pricing may be defined as the practice by a seller or charging different prices to the same or to different buyers for the same goods without corresponding difference in cost.”

Thus, price discrimination may be of various types such as individual price discrimination, geographical price discrimination use discrimination etc.

Essay # 2. Motives behind Price Discrimination:

From the seller’s standpoint, the differential price that result from the application of various discount structures and from product- line pricing may serve several purpose, it is, therefore (desirable to look first at the company’s structure of price discriminations in terms of its motives, which may be grouped follows:

1. Market Expansion:

Differential pricing that is designed encourage new users or new customers is a common goal product- line pricing, but it also extends over various phases of discount structure, depending upon the circumstances of a purchase by a new user.

2. Market Segmentation:

A major objective of price discrimination is to achieve profitable market segmentation when legal and competitive considerations permit discrimination. It permits the appropriation of the consumer’s surplus so that it accrues to the producer rather than to the consumer.

3. Implementation or Marketing Strategy:

The patterns of price differentials should implement the company’s overall marketing strategy. These price differentials should efficiently geared with other elements in the marketing programme to reach of the sectors the market selected by strategy. In doing so the job of a particular structure of discounts may be quite specific.

4. Reduction of Production Costs:

Differential prices can sometimes help solve problems of production. Seasonal or other forms of time-period discounts may be allowed partly for the purpose of regularising Output changing the timing of sale. For example, since electricity cannot be stored, classification of electric rates is designed to encourage off season users and penalizing users that contributed to peak.

5. Competitive Adaptation:

Differential prices are a major device for selective adjustment to the competitive environment. Discounts are often designed to match what competitors charge under comparable, conditions of purchase, in terms of net price to each customer class. When products are homogeneous, competitive parity is a compelling consideration.

Essay # 3. Conditions of Price Discrimination:

Price discrimination needs some conditions in the market.

They are as follows:

1. Existence or Monopoly:

Discrimination is possible only if monopoly exists and there is no competitor in the market or when the producers enter into agreement among themselves to sell the products at agreed prices.

2. Division or the Markets into Sub-Markets:

The market is distinctly divisible into various parts among which the product cannot be exchanged; examples are a home and a foreign market separated by governmental restrictions or by a tariff wall and the market for hair-cuts or a surgeon’s fees- in the former case domestic buyers cannot import the product at the low price and in the latter services are rendered to individuals personally.

3. Expenditure in Sub-Dividing the Market should not be More than the Expected Profit Increase from Price Discrimination:

Sometimes a monopolist has to incur some expenditure on keeping the sub-markets separate so that he can fix different prices in different sub-markets and the consumers are restrained from transferring the product from one sub-market to the other.

4. Consumer’s Ignorance:

When the consumers of one market are ignorant of the prices prevailing in the other markets, price discrimination can be successful.

5. Difference in Consumer’s Purchasing Power:

Variance in the purchasing power of the customers also helps in price discrimination. Non-price factors in such a situation pay to the producers.

6. Purchaser’s Irrational Feeling:

Some purchasers judge the quality of goods only by the high or low prices. There the policy of price discrimination can successfully be launched.

7. Geographical Distance and Tariff Walls:

Between two distant markets where the transportation charges make differences in the cost of the product, price discrimination can be practised easily.

8. Nature or Goods and Service:

Goods and services which are not transferable among buyers e.g., charging more from rich and less from poor by a doctor can be easily subjected to price discrimination.

9. Sale on Orders:

When the goods are produced on the specific instructions of the customers, price discrimination is possible. One customer does not know what is being charged from the other.

10. Product Differentiation:

Sometimes a monopolist’s market consists of rich and poor consumers. He takes advantage of the whims of the rich and offers the same production in a deluxe packing. Thereby he is able to charge a higher price from the richer section of consumers.

11. Govt. Sanction:

Sometimes government also permits the public utility services like the railway to charge different prices from different consumers, and different prices for the use of electricity by Individual and domestic purposes.

Essay # 4. Degrees of Price Discrimination:

Price discrimination is done only when elasticity of demand for the product is different for different buyers, the amounts demanded of the product differs at the same price i.e., the demand prices differ. Discrimination is designed to gain revenue by varying the price in term of the demand prices of the customers. On the basis of the limit to which a monopolist can go on charging different prices for his product from his customers, various degrees of discrimination were discussed by Professor A.C. Pigou.

(1) First Degree Discrimination:

In discrimination of the first degree the monopolist is supposed to know the maximum amount of money each consumer will pay for any quality. He then sets his prices accordingly and extracts from each consumer the entire amount of the consumer’s surplus. Such a monopolist, in Mrs. Robinson’s phrase, is a ‘perfect’ discriminator.

This is ‘perfect’ price discrimination because it is an extreme limiting case of the same. In practice, few monopolists can and actually do that. An example of limited discrimination of the type is to be found in the practice of doctors of varying the charges on their customers according to their income status.

A breeder of horses dealing individually with various buyers in different parts of the country, with a highly imperfect market and absence of knowledge on the part of each buyer of the prices being charged from other buyers, may be able to carry on perfect discrimination to a limited extent. Obviously, perfect discrimination is useful only in theory as a concept.

(2) Second Degree Discrimination:

It occurs where a monopolist sets different prices for different customers but does not fully exploit their potential demand prices; the monopolist captures only parts of his customer’s consumer’s surpluses. The schedules of rates typically charged by public utilities like railways can be regarded as form of second-degree discrimination.

(3) Third Degree Discrimination:

It means that the monopolist divides his customers into two or more classes or groups on the basis of the elasticity of their demand for the product, and charging a different price to each class of buyers. Each group is a separate market.

In discrimination, of the third degree, the monopolist makes some attempt to benefit from the differences in the elasticity of demand for the product on the part the different groups of buyers. This is the only type ordinarily possible and therefore we address ourselves to this type of discrimination in detail and study the price and output determination of such a monopolist.

Essay # 5. Desirability of Price Discrimination:

Price discrimination is generally hatred as an unpopular idea because justice is supposed to go with the concept of equality and similar treatment among all customers. Therefore, it is considered as anti-social, undesirable and unprofitable act.

But, now-a-days, it has become essential for the seller to create market for the goods taking into consideration the various factors such as economics, social, geographical location, availability of goods, available alternatives etc. Price discrimination is not anti-social, infact, it means charging reasonable prices from all sections of the buyers according to their capacity, status, elasticity of demand, etc.

Such differentiation helps the manufacturer in not only increasing the sale but serving the maximum members of the society.

In the following circumstances, price discrimination is very well justified:

(1) When Community’s Welfare is the Main Aim:

There are many public services which would not be available to the poor if there was no price discrimination. For example, electricity, water, doctor, education may be cited here.

(2) Operation of Public Utility Services: Such public utilities as railways, electric supply companies and water supply companies must be allowed to have price discrimination. This is because the price of the service has to be kept low.

For example, electric supply rates have to be low for industrial concerns and agricultural operations if we want to encourage industrialisation and agricultural development. This necessitates charging higher price from consumers who can pay, otherwise, costs will not be covered.

Price Discrimination: Definitions, Types, Conditions and Degrees
Conditions under which Price Discrimination is Possible
Price Discrimination: Kind, Effects and Evils | Monopoly
Degrees of Price Discrimination | Monopoly

Discrimination Economics

Checked : Karen F. , Aakanksha M.

Latest Update 21 Jan, 2024

12 min read

Table of content

What is the economy of discrimination?

Sources of discrimination, types of discrimination, direct discrimination, indirect discrimination, victimization, how discrimination is handled.

We know that discrimination is something that happens to many people in life. You may have heard about social discrimination, where certain people of social standing are not allowed to mingle with others from a different social background. For instance, being a female head of household or belonging to the racial minority group may increase one's chances of being pushed to the lower side of the income distribution, and worse, being poor. Women and members of the minority racial groups in the real world receive different wages from white males workers even where they have a similar qualification. They can be charged different prices when buying certain goods, and perhaps denied employment opportunities based on who they are. In this chapter, we shall be looking at the meaning of discrimination, its types and sources, as well as how it is addressed.

Economic discrimination can be defined as discrimination based on economic factors, which include access to job opportunities, wages, prices, and availability of goods and services. It also touches the amount of capital funding given for minorities to run their business. This can touch areas like discrimination against workers, consumers, and businesses owned by a member of the minority groups. Note that this discrimination is different from price discrimination, which is the practice of monopolies charging buyers different prices based on consumers' willingness to buy.

Discrimination is seen when people who have a similar economic characteristic, and perhaps knowledge about certain areas, are exposed to different economic outcomes based on their race, sex, or other factors. For instance, black workers with similar or even better skills as white workers may receive lower wages and become victims of discrimination. We have seen a lot of women denied job opportunities where they qualify simply because of their sex. Discrimination could be so widespread in an economy that a country fails to allocate resources efficiently, in which case the economy will be operating inside its production possibilities curve.

There has been a lot of literature on this topic from various scholars, who tried to resolve its threats. Earlier works from Gary S. Becker, a Nobel Peace Prize winner in economies in 1992 and an economist from the University of Chicago, have been major cited. His thought about discrimination is that it occurs because of what people prefer and their attitudes towards others and certain things. And it's very easy to agree with Gary on this matter. He says that if there are enough people to prejudice against a certain racial group, or women, or other people based on selected characteristics, the market will respond based on these preferences. Note that markets are places where firms seek to make profits from the goods they produce, and they do so by offering consumers what they want. Therefore, they will go to any extent to achieve their goals no matter what other people may be feeling or going through.

According to Becker's theory, these preferences determine wedges between the outcomes seen by different groups. Discrimination can harm people and the entire economy. For example, if a good salesperson is discriminated, they may lack the willingness to sell to one group, or encourage consumers not to buy from one group. They can also make one labor provider from one race, sex, or ethnic group less willing to work or give in their maximum effort than others from another group.

Becker's model can be examined even better by looking at the discrimination against the black labor force. In this, the first assumption is that there is not discriminatory preference in the labor market or attitudes that may otherwise be negative against the black. Hence, the supply curve or white and black workers are identical. If we continue further and say that all the workers have the same marginal product, they have equal production abilities. The demand for both workers would be at the same point. If things change and there is discrimination or attitudes towards black workers, causing firms to believe black workers are less productive than similarly skilled white workers, there will be a curve change. The employers will have lower demand for black workers than they would for white ones. Another effect would be that black workers are paid lower wages than they would have received if there were no discrimination.

As we have seen above, discrimination is not a new thing in the modern world as it has been around for a long. As Gary states, it comes from people's attitudes towards others or individual characteristics in society. When employers have racial prejudice, it produces discrimination against other people, as seen in the black above case, leading to lower wages and a lack of proper motivation. Discrimination can come from many other sources within the economy, all based on how people relate. Think about the economic theory, Kantian theory, and the Deontology theory. They all have one thing in common: advocating for good relationships between different groups of an economy. When people start using different factors to judge others, other than their abilities, social prejudice will exist, leading to economic discrimination.

Hence, one good source of discrimination comes from fellow workers. Consider, for instance, a situation where white workers refuse to work with black workers and ask for a wage premium. If they must, the firm may be forced to react by demanding less of black employees. In reaction, black consumers may refuse to use this firm's products, which also lowers the revenue of the said firm. Humans are social beings, and the way we interact with each other determines how well we exist within a certain economic atmosphere. Besides, we have already determined that markets exist because of the relationships between consumers and producers in the previous course. Discrimination kills the spirit of working together, which leads to people losing focus on what they do best. When black workers are discriminated against, they lack the incentives to work efficiently, causing many of them to lose focus.

Customers may also be a good source of discrimination. Some customers may demand not to deal with black employees, a case that will force the firm to respond by employing fewer of them. If the firm does not agree to their demands, they risk losing these white customers. On the other hand, prejudice on consumers' part may mean the firm is not getting as many revenues as they would if all people were treated equally. A company that is looking to make maximum profit needs to look beyond the boundaries of racial prejudice; it is one thing that affects markets and should not be encouraged,

Factors like race and sex affect hiring and wages to a large extend. But they are not the only characteristics that employers consider. A number of studies have shown that short, overweight, and other people who lack proper physical attraction are discriminated against. This begins right from the society level, no wonder people living with disabilities and other sexual orientations have been voicing their concerns against discrimination. Employers, workers, or customers may have discriminatory preferences, which leads to discrimination. The effects of these preferences have been felt across all markets and economies and should be shared widely.

There are four main types of discrimination, direct, indirect, harassment, and victimization.

Direct discrimination is the most popular form, and perhaps one that you already know. And there are three major ways in which direct discrimination may occur. The first one is where one is treated less favorably because of a characteristic they possess. This is the ordinary form, which can be lawful, where it's 'objectively justifiable.'

The second way direct discrimination can occur is where some are treated less than others because of a protected characteristic possessed by someone they are in a relationship with. A good example is where white consumers refuse to deal with a certain firm because they have black employees. This is called direct discrimination by association.

The third way in which direct discrimination occurs is when one is treated less favorably due to a protected characteristic they are perceived to have, regardless of whether the thought is correct or wrong – direct discrimination by perception. It is also another common form that affects a large number of people.

There are certain deliberate actions or exclusion that define direct discrimination. However, it does not always have to be assumed intentional. Nevertheless, claims can still succeed even if there was no intention in this discrimination.

As the name suggests, this is a less obvious form of discrimination. It is normally done without intention, like an accident. In general, such discrimination will exist when a rule or plan of some sort put into place to apply to all people and which has no discriminatory feature, puts those with certain protected features to a disadvantage.

Consider the law that involves a 'provision, criterion, or practice' (PCP). Four major things come out clear in the laws. One that the 'PCP' is applied equally to a group of people, only if they share certain protected features. Two that have (or will) an effect of placing those with shared protected characteristics to a disadvantage point, as compared to others who may not have the same characteristics. Three, that it places the person at a point where they are disadvantaged. And four, when the employer cannot objectively justify the policy.

The Equality Act issues have been presented many times, but it does not explain PCP very well. According to Acas, this term does not always involve employers' policies, procedures, requirements, rules, and other factors. For a claim to exists, all the four elements above must apply. However, the employee or claimant faces the burden to prove that element 2 and three affects them.

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Harassment is a common term that is used by many people in their daily life. It can be defined as 'unwanted contact' relating to a protected characteristic of another person. Harassment must demonstrate the purpose or effect of violating a person's dignity and character, or creating an intimidating, hostile, degrading, humiliating or offensive environment for the person affected. Some of the examples of harassment include bullying, nicknames, gossip, intrusive or inappropriate questions, and comments. Also, they can harass someone by excluding them from a meeting or event.

With this type of discrimination, how the victim perceives the action is more vital than how the actor sees it. If an action has a negative impact on a worker's dignity who witnesses, they can claim harassment. And this can happen even if they don't share the characteristic with the person who was harassed.

Consider a situation where one employee faces a 'detriment' due to something they have done, or what they are perceived to have done. In this case, the person can make and allegation discrimination , support a complaint of such nature, and offer evidence that someone has been discriminated against or raised concerns on equality. They can also do anything else they think is right to ensure the discriminated person does not face harsh judgment from society and those around them. These things are usually done in good faith on behalf of the victim.

Before you think about how discrimination is resolved, it is good to understand that discrimination can be lawful. If the employer can objectively justify a policy, then it becomes a lawful direct or indirect discrimination. They must show that the person treated less favorably received a fair judgment, and it was appropriate/necessary.

Even though discrimination is rampant, certain market pressures can lessen it. For instance, where one group of employees has discriminatory preferences, and others don't, those who do not discriminate can take advantage of the discriminated group's labor force. Moreover, because workers from these groups are paid fewer wages, they will benefit from the extra revenues. In fairly competitive markets, companies that continue to discriminate may run out of business. Besides these market pressures, governments intervene in labor markets by providing equal rights and treatment policies and guidelines.

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Price Discrimination Economics Essay

Price discrimination occurs when goods or services of identical nature retail at different prices from the same provider (Philips, 1983, p. 5). It can also be referred to as price differentiation. Price discrimination is characteristic of oligopolistic and monopolistic markets and it mainly makes use of market power.

Success of price discrimination depends on the separation of the markets, in this case, men and women and also young and senior citizens. There is likely to be minimal reselling between the two groups that are targeted by the grocery and the pub. Secondly, market demand must exhibit different elasticities.

For instance, the demand of beer among men and women and the demand of groceries among young and senior citizens must show different elasticities. Price discrimination has been used by retailers to attract a particular group of people that is likely to boost sales.

Its success is varied though there numerous cases of very high success. Theoretically, price discrimination is likely to succeed in a perfectly competitive market where there are perfect substitutes, perfect information and as well as minimal or no transactional costs (Keat & Young, 2006, p 307).

Price discrimination can be categorized into three levels; first degree price discrimination, second degree price discrimination and third degree price discrimination (Mankiw, 2008, p. 328). In first degree price discrimination, the seller or service provider has to identify the position of each customer on the demand curve and then use the information to impose a specific price.

In second degree price discrimination, blocks of goods and services attract different prices. The case above displays third degree price discrimination. Here, seller group customers to different markets and charge these respective markets different prices. Many demographic factors such as gender, age, and income are used in the segmentation. In the pub, the owners have grouped the market to men and women.

The grocery owner has grouped the market to young people and senior citizens. In some cases, third degree price discrimination exhibited in the cases above can be dependent on the location of the business. The business people that use price discrimination like the above case have more often than not differentiated the consumer base.

In the above case, the discrimination is effected to women and senior citizens’ advantage. The business owners recognize that men and young people will have varying willingness to pay for the goods than women and senior citizens.

Men and young people exhibit a more flexible price elasticity of demand compared to the groups that have the advantage because of budget constraints. The sellers in the above case realize that women and senior citizens can’t easily buy the goods without a lower price

It’s important to note that price discrimination does not always guarantee success. The sellers and service providers need quality market intelligence before embarking on such initiatives. While it can lead to surpluses, it can also easily make some groups of customers feel discriminated (Mankiw, 2008, p. 335). Fro that reason therefore, retailers must always ensure that the three most basic conditions are met.

The consumers that are targeted must exhibit considerable variance in their demand for the goods or services on offer. The firm or seller/provider of the goods and services must possess market power. Finally, the sellers or firm must be able to check or prevent arbitrage. When the above conditions are observed, it’s easier for any business or firm to successfully carry out price discrimination.

Keat, G.P. & Young, K.Y. (2006). Managerial economics: economic tools for today’s decision makers . New York: Pearson Prentice Hall.

Mankiw, N.G. (2008). Principles of economics . New York: Cengage Learning.

Philips, L.(1983). The economics of price discrimination . Cambridge: Cambridge University Press.

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Race and Racism in Economics
The economic debate has progressed since Stigler's 1965 piece. Gary Becker, a 1992 Nobel laureate, demonstrated in his 1971 Economics of Discrimination that discrimination from several factors, including race, reduces the real income of both its target and the perpetrator. More recently, Harvard economist Raj Chetty and coauthors found that it is much harder for Black children in low-income ...
19.3 The Economics of Discrimination
Pioneering work on the economics of discrimination was done by Gary S. Becker, an economist at the University of Chicago, who won the Nobel Prize in economics in 1992. He suggested that discrimination occurs because of people's preferences or attitudes. ... Professor James Heckman, in an op-ed essay in The Wall Street Journal, ...
Economic discrimination
Economic discrimination is discrimination based on economic factors. These factors can include job availability, wages, the prices and/or availability of goods and services, and the amount of capital investment funding available to minorities for business. This can include discrimination against workers, consumers, and minority-owned businesses.
How Discrimination Harms the Economy and Business
Discrimination is extremely hurtful to individuals from targeted minorities. But, as we demonstrate, the effects of excluding talented individuals from economic opportunities tend to go further: when a society discriminates against a specific group, its entire economy can suffer. The case we analyzed involves discrimination against Jews in Nazi ...
Race Discrimination: An Economic Perspective
K42 Illegal Behavior and the Enforcement of Law. Race Discrimination: An Economic Perspective by Kevin Lang and Ariella Kahn-Lang Spitzer. Published in volume 34, issue 2, pages 68-89 of Journal of Economic Perspectives, Spring 2020, Abstract: We review the empirical literature in economics on discrimination in the labor market and criminal ...
Measuring racism and discrimination in economic data
The study of race and the consequences of race in market interactions have long been hampered by the relative lack of longitudinal data collected on relevant markers of discrimination, racism, and ...
Race Discrimination: An Economic Perspective
Journal of Economic Perspectives—Volume 34, Number 2—Spring 2020—Pages 68-89 I n this article, we discuss the theory and evidence on discrimination in two key domains—the labor market and the criminal justice system—from an economic perspective. We define discrimination as treating someone differ-
Systematic Inequality and Economic Opportunity
The Equal Employment Opportunity Commission's per capita spending is based on FY 2018 appropriations, divided by the total U.S. population estimates from the KFF. The EEOC's annual budget (see ...
The Economics of Discrimination
Discriminatory "tastes". Economists have two main theories concerning the causes of discrimination. The first theory is that individuals have "tastes" or preferences for discrimination. [5] This taste-driven discrimination theory suggests that factors such as social and physical distance and relative socioeconomic status contribute to ...
Economics of Discrimination: A Brief Review of Literature
The survey of literature summarizes the key contributions on theoretical literature of economic discrimination. Three theories of discrimination are found in the economic literature: (1) neo-classical, which includes non-stochastic and stochastic versions; (2) institutional; and (3) Marxian. The neo-classical theory of discrimination is almost entirely a demand-side theory.
Poverty, minority economic discrimination, and domestic terrorism
I also find minority economic discrimination to be a strong and substantive predictor of domestic terrorism vis-à-vis the general level of economic development. I conclude with a discussion of the implications of the findings for scholarship on terrorism and for counter-terrorism policy. ... Oxford Economic Papers 61(1): 1-27. Crossref. ISI ...
How racial and regional inequality affect economic opportunity
Therefore, any economic shifts that disadvantage the South and Midwest could disproportionally affect African-Americans. Differences within regions—across cities, suburbs and rural areas—also ...
Economic Discrimination
Introduction. Income inequality is one of many major issues that has been known to contribute to economic discrimination. Economic discrimination can be defined in one of two ways. Societal economic discrimination is the "long-lasting inequality in economic well-being among individuals based on their color, gender, or ethnic ties" (Cain 2).
The Economics of Discrimination
IN HIS Economics of Discrimination,2 Professor Gary Becker develops a useful model for analyzing the economic effects of discrimination. Treating Negro and white sectors as if they were separate countries in an international trade model, he analyzes discrimination under the assumption that the white sector owns a higher ratio of capital to labor than does the Negro sector.
Racism Impoverishes the Whole Economy
By Lisa D. Cook. Nov. 18, 2020. Discrimination hurts just about everyone, not only its direct victims. New research shows that while the immediate targets of racism are unquestionably hurt the ...
Gender inequality as a barrier to economic growth: a review of the
The vast majority of theories reviewed argue that gender inequality is a barrier to economic development, particularly over the long run. The focus on long-run supply-side models reflects a recent effort by growth theorists to incorporate two stylized facts of economic development in the last two centuries: (i) a strong positive association between gender equality and income per capita (Fig. 1 ...
Economic Discrimination Essay
Economic Discrimination Essay. The topic that is perhaps the most central in feminist economic thought is discrimination. Studies of the household division of labor, the wage in the labor market, and human capital development for women all have to deal with discrimination. So far we have discussed feminist economics and discrimination in ...
Price Discrimination and Consumer Welfare
In this video we walk through an answer to a question about whether price discrimination helps or harms consumer welfare. We hope this is useful in showing how to build clear chains of reasoning and well-supported evaluation.
Discrimination Essay
Discrimination Essay: According to the Oxford dictionary, discrimination is the practice of treating an individual or a particular group in society unfairly than others based on age, race, sex, religion, finance, etc. Throughout history, we have seen discrimination tainting every society and nation. This essay examines and analyses the causes and effects of discrimination in various […]
Essay on Price Discrimination
Essay # 4. Degrees of Price Discrimination: Price discrimination is done only when elasticity of demand for the product is different for different buyers, the amounts demanded of the product differs at the same price i.e., the demand prices differ. Discrimination is designed to gain revenue by varying the price in term of the demand prices of ...
Argumentative Essay about Discrimination
Discrimination is a persistent issue that plagues societies across the globe, denying individuals their fundamental rights and perpetuating inequality. It takes various forms, such as racial, gender, religious, and socioeconomic discrimination, and has severe consequences for individuals and communities. This essay aims to present a compelling ...
Discrimination Economics
Economic discrimination can be defined as discrimination based on economic factors, which include access to job opportunities, wages, prices, and availability of goods and services. It also touches the amount of capital funding given for minorities to run their business. ... All Model papers offered by Essay.biz should be properly referenced ...
Price Discrimination Economics
Price Discrimination Economics Essay. Price discrimination occurs when goods or services of identical nature retail at different prices from the same provider (Philips, 1983, p. 5). It can also be referred to as price differentiation. Price discrimination is characteristic of oligopolistic and monopolistic markets and it mainly makes use of ...