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labour productivity

Asked by rajt83 | Jul 12, 2008 | AS Level > Economics > Coursework
rajt83 asks:

how does racial discrimination affect labour productivity?

etutor answers:

How does racial discrimination affect labour productivity?

This is quite a difficult question. I assume you are familiar with marginal revenue productivity theory.

Assume we are dealing here with a discriminating monopsonist employer. This is a necessary assumption - otherwise black workers who are paid less than white workers will simply find employment in other firms. We assume also that there is no difference in the productivity of black and white workers, and that there are an equal number of each available at any given wage rate. We also need to assume there are no laws preventing the firm from discriminating in terms of either wages or employment.

Standard marginal productivity diagrams would provide a downward sloping MRP curve (the demand for labour) and upward sloping MC (cost to the firm of employing one extra worker) and AC (wage paid) curves. Equilibrium employment in the absence of discrimination would be where MRP intersects MC, with the wage for both black and white workers being identical, and found at that level of employment on the AC curve.

If, however, the firm discriminates against black workers, this is equivalent to operating on a lower MRP curve in the black worker market. The effect is to reduce their wages and the number employed. Now the effect of this on the wages and employment of white workers needs to be considered. In the first case, assume the employer practises discrimination purely in the negative sense - i.e. it discriminates against black workers but employs white workers on profit-maximising principles - i.e. up to the point where their MC equals their MRP. But the fact that fewer black workers are now being employed means that for any given number of white workers there will be fewer workers employed in total, and therefore the MRP of white workers will have increased. The rightward shift of the white workers' MRP curve has the effect of raising their employment and their wage rate.

Firms may, however, also practise economic discrimination IN FAVOUR of particular groups. If this discrimination in practised in favour of white workers, this shifts their MRP curve still further to the right, the effect of which is further to increase the wage rate and employment level of white workers.

If the government now insists on equal pay for equal work, then employers that discriminate will respond by further cutting back on black workers. The only way round this is legislation that requires firms to treat black and white workers equally when applying for jobs. An unscrupulous firm will, however, claim that the black workers are less well qualified, making such legislation hard to enforce.

The discrimination discussed above is in fact irrational if the firm's aim is to maximise profits, since to produce a given amount of output it is paying more in wages to employ white workers than black workers. In a competitive market such firms might be forced to cease the practice of discrimination simply to survive the competition from non-discriminating rivals. If, however, the firm has market power (as I assumed at the start) then it will probably be making sufficient profit to enable it to continue discriminating.

I hope this is helpful.

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