Product Market Structure and Labor Market Discrimination

3. Product Market Structure and Gender Discrimination in the United Kingdom

Chapter 3 Product Market Structure and Gender Discrimination in the United Kingdom Clive Belfield and John S. Heywood Introduction In his classic study of nearly a half century ago, Gary Becker (1957) identified that nonwhite males held a lower proportion of manufacturing jobs in the southern United States in those sectors that were monopolistic than in those that were more nearly competitive. His study began a long line of empirical studies focusing on the association between monopolistic product market structure and racial and gender differences in the labor market. Despite the passing decades, this literature has been largely a North American literature and has not included contributions from other industrial democracies even though Becker’s basic theory applies to any country. The purpose of this chapter is to examine the role of product market structure in the determination of gender wage differentials in the United Kingdom. The rationale for such a study is particularly strong. First, there is continuing evidence of a persistent gender earnings differential in the United Kingdom, along with increases in wage dispersion and increases in female participation rates (Machin, 1996; Prasad, 2002). Second, there is substantial variation in product market structure across industries in the United Kingdom. Finally, and perhaps most importantly, the publicly available data in the United Kingdom are in many ways superior to that in the United States. The use of linked employee–employer data allows the wages of individual workers to be tied to the product market structure associated with their specific employer. Thus, unlike typical U.S. studies that simply match a worker to his or her broad three-digit industry and its market structure, the errors-in-variables problem can be minimized through a more direct link between worker treatment and market structure. 39 To limit our attention we focus in this chapter on estimating the influence of product market structure on gender discrimination as the variety of racial minorities in the United Kingdom is great and specific racial minorities comprise only a small share of the total labor force. In the next section we review the basic theory, predicting a role for product market structure in determining discrimination, and review studies that have estimated the link between structure and earnings discrimination . In the third section we introduce our data source and method. The initial results are in the fourth section and they confirm the role of market structure in determining the gender wage gap as measured by individual worker wages. In the fifth section we present two additional inquiries at the aggregated establishment level. First, we explore the share of women workers as a determinant of earnings and whether market structure influences the strength of this determinant. Second, we follow recent work in the United States to test whether gender employment patterns influence firm performance in the way predicted by Becker’s theory of discrimination. The sixth section concludes. The Link between Discrimination and Structure Following Becker (1957), economists have long identified personal prejudice as the source of labor market discrimination. This prejudice might be held by the customers (Borjas and Bronars, 1989) or by the coworker (Buffum and Whaples, 1995) or by the employer. While each of these possibilities may result in equally productive workers receiving different labor market treatment because of their demographic group, it is prejudice by the employer that has received the greatest attention. Becker argues that discrimination is costly to the employer who faces a trade-off between satisfying prejudices and earnings profits. The extent of observed discrimination reflects the intensity of prejudice on the one hand and the cost of discrimination on the other hand. Firms operating in more competitive product markets have smaller rents and are less able to afford discrimination . Put somewhat differently, the cost of discrimination is higher in the competitive product market as reductions in profits threaten the viability of the firm. Thus, this popular view of discrimination differs from the view that discrimination is an information problem, that is, statistical discrimination, and from the view that discrimination is a profitable tool in which firms engage as a matter of explicit strategy as suggested by some renderings of the dual labor market hypothesis. As Heywood (1998) argues, it is only the possibility of employer prejudice that generates strong predictions about the role of product 40 Clive Belfield and John S. Heywood market structure. If the prejudice rests with customers or coworkers, the firm has a cost-based...