ABSTRACT
The residual wage gap between men and women has been documented in an extensive body of research. Some view the residual wage gap as evidence of sex discrimination inwages, arguing that if a gap remains after controlling for variables measuringworkers’ productivity, it must reflect discrimination. This interpretation of the evidence comes directly from Becker’s (1971) classic model of employer discrimination, in which discrimination is reflected in a gap between wages and marginal products. Others, citing the same model, focus on Becker’s conclusion that under sufficiently competitive conditions discriminatory employers will fail to thrive, and will eventually be competed out of existence; since the sex-wage differential has persisted, it must reflect unobserved productivity differences rather than discrimination (Fuchs, 1988; O’Neill, 1994). In this chapter, we report new evidence on both of these issues: whether sex discrimination exists, and whether competitive market forces act to reduce or eliminate discrimination. Specifically, we use plant-and firm-level data to examine short-run profitability and longer-run growth and ownership changes, in relation to the sex composition of a plant’s or firm’s workforce, and we explore how these relationships vary with the strength of product market competition. In our view, this evidence is far more informative than what we can learn
from analyzing wage regressions. Given that the individual-level data sets used to estimate unexplained or residual wage gaps between men and women contain only proxies for workers’ productivity, it is difficult to refute the argument that the residual wage gap reflects unobserved productivity differences. Furthermore, because we do not know how quickly nondiscriminatory sources of the residual sex-wage gap might be changing, evidence on changes in the sex-wage gap over time may not be particularly informative regarding the role of competition in eliminating or reducing discrimination. We begin with a simple test for sex discrimination. If there is no discrimina-
tion against women, then there should be no cross-sectional relationship between profitability and the sex composition of the workforce. Any sex difference in wagesmust reflect only observed or unobserved productivity differentials between men and women, and firms or plants that employ more women should earn no
higher profits. Evidence that plants or firms that employ relatively more women earn higher profits, in contrast, would be consistent with sex discrimination. We determine which of these hypotheses holds empirically by estimating the crosssectional relationship between plant or firm profitability and the sex composition of the workforce. Next, we explore the more direct static implication of Becker’s model that
discrimination is likely to exist only where there is product market power, and conversely that product market competition hinders discrimination. We test whether-as the Becker model predicts-there is a positive short-run relationship between profitability and the sex composition of the workforce only among plants with product market power, because only among such plants are there positive economic profits that may be exploited to indulge the discriminatory tastes of some employers. This evidence is arguably more decisive than that obtained from wage regres-
sions with individual-level controls, because firm or plant profitability, unlike wages, is a direct measure of performance, obviating the need to find proxies for workers’ productivity. In addition, the results incorporating market power are informative about the role of competitive market forces, which Becker’s model highlights. However, higher profits at a point in time in plants or firms employing more
women (possibly only where there is product market power) does not contradict the dynamic implication of Becker’s model that market forces may eliminate discrimination over the longer run. Market forces may undermine discrimination in different ways, depending on the nature of product market competition, barriers to entry, transferability of assets, and the form of employers’ discriminatory tastes. We use longitudinal data on the plants in our data set to test the dynamic implications of Becker’s model, asking whether nondiscriminatory plants-those which, according to the cross-sectional evidence, employ more women and earn higher profits-grow faster or are less likely to undergo a change of ownership, compared with discriminatory plants. The combined static and dynamic evidence provides us with a better understanding of sex discrimination in labor markets, and the role of competitive market forces in reducing or eliminating this discrimination, than can be obtained from conventional wage equation approaches to discrimination, or even from more convincing cross-sectional tests for discrimination (such as audit studies), which cannot say anything about the dynamic implications of Becker’s model.1
