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Chapter 1 The Influence of Market Structure on Labor Market Discrimination John S. Heywood and James H. Peoples The motivation for this book comes from many years of involvement in an often acrimonious debate over the influence of increased product market competition on labor market outcomes. This debate is often phrased as whether product competition reduces labor market discrimination. The formal suggestion that it does reduce discrimination nears its fiftieth birthday as Nobel Prize winner Gary Becker (1957) first proposed what is often referred to as the “neoclassical” theory of discrimination. The essence of that proposal is that prejudice is costly. The desire to replace a more efficient worker with a less efficient worker because of preferences over gender, race, ethnicity, or religion reduces the profit that would otherwise be earned. Thus, asks Becker, which firms are in a position to “afford ” these costs? As competition forces the economic rate of return to zero and only those firms with positive economic profit can afford discrimination , the firms in a position to act on their prejudice are those in monopolistic product markets enjoying monopolistic rates of return. This relatively straightforward logic is subject to a rather long series of important caveats. Owners with prejudice may gain utility from discrimination and may be willing to pay for it in any market structure not just those associated with positive economic profit. Indeed, they may experience economic losses but value the utility they receive sufficiently to compensate for those losses. Yet, the more common story is one in which the managers who run the firm have prejudice, and owners, separated from operations of the firm, care only about profits. In this case, Becker’s prediction depends on sufficiently severe agency problems that managers ’ discriminatory behavior cannot be controlled by owners or eliminated through the corporate takeover mechanism. In addition, the exact 1 impact of the prejudice on wages and employment depends dramatically on the underlying labor supply and demand elasticities at the product market, or industrial, level. Perhaps most importantly, the source of prejudice may be outside the direct authority of the firm. Customers or workers may be prejudiced and willing to pay more for a product sold by a particular type of person or be willing to work for less to have those same people as coworkers. In this case, there is no particular reason to anticipate that competition will fully eliminate the resulting discrimination, discrimination that can be in the profit interest of the firm. A full list of these and other caveats are found in Heywood (1998) but the point is that sophisticated observers have never assumed that increased competition will, in all cases and in all times, eliminate discrimination. This view has often been lost in the sometimes loud cries of both supporters and opponents of Becker’s original proposition. For instance Epstein (1992, 9) writes in strong support claiming: “Competitive markets with free entry offer better and more certain protection against invidious discrimination than any anti-discrimination law.” In opposition, Coleman (2002) dismisses the Becker proposition as a largely unsubstantiated belief in “the magic of the market-place.” In contrast to these rather hardened positions, the authors of this volume come to the subject with the desire to provide the detailed empirical work that delineates both the scope and limitations of the proposition that product market competition reduces workplace discrimination. As will be emphasized, testing for the role of competition in reducing discrimination remains an area of vital interest. One of the most recent areas of testing focuses on international trade as an element of product market competition. Globalization has often been blamed for generating greater inequality within the U.S. labor force. Yet, Black and Brainerd (2004) emphasize that the true story is more complex and that while inequality across skill groups has increased due to foreign trade pressure, that same trade pressure has reduced the ability of U.S. firms to engage in gender discrimination. In nearly parallel findings from outside the United States, Hazarika and Otero (2004) show that foreign trade has dramatically increased product market competition in Mexico and that as a consequence of this increase, gender discrimination has been reduced in that country. Thus, despite nearly fifty years of being a “textbook ” theory, the proposition that product market competition reduces discrimination remains under active debate. Yet, while many of the chapters in this volume address this fundamental proposition head-on, we have tried to expand on the relationships examined previously in the literature. We...

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