Statistical DiscriminationDavid L. DickinsonAppalachian State University

April 2006: GATE.

“Statistical Discrimination in Labor Markets: An Experimental Analysis.” David L. Dickinson and Ronald L. Oaxaca

working paper, 2005.

Motivation of paper is to look at second-moment distributional discrimination. Productivity distributions have same mean, but

variance or other ‘risk’ characteristic may differ. Distributional variable Support of distribution Probability of less-than-average payoffs

Note: these measures of ‘risk’ should not matter to risk-neutral decision-makers

Motivation Statistical discrimination is accepted/legal in

insurance and credit markets, but it is illegal/controversial in labor markets or with racial profiling.

Existence of any type of statistical discrimination will bias attempts to measure prejudiced-based discrimination.

This research, in general, examines decision-making under uncertainty.

Experimental Design Double-sided oral auction design similar to Smith (1965)

DOA has strong convergence to equilibrium, in general Productivity draw is independent of physical worker subject

We use labor market context, a trade-off for clarity. Treatments

TABLE 1 Experimental Treatment Design

Treatment

Description Productivity (probability)

Productivity Mean

Productivity Variance

Productivity distribution

support

Likelihood of

Productivity<mean productivity

1 3 (1.00)

3 0 0 0

2 1,2,3,4,5 (.1,.1,.6,.1,.1)

3 1 1-5 .20

3 1,2,3,4,5 (.2,.2,.2,.2,.2)

3 2 1-5 .40

4 2,4 (.5,.5)

3 1 2-4 .50

Results Employers pay lower wages in all uncertainty treatments

(primarily the males) (Table 2) Note from Table 1 that treatments do not control for single

variable changes Table 3 shows more controlled regression analysis. Loss

Prob matters most (for males) Females actually pay higher wages the larger is the distribution

support (?) Female aversion to competitive negotiations does not seem to

explain this (though there is evidence that single-gender contracts occur more frequently than mixed-gender contract.

Summary Evidence is found that distributional risk affects

experimental wage contracts Effect is largely due to male employer sub-sample.

Most significant, in terms of magnitude, variable is less-than-expected profits…consistent with loss-aversion

For full sample, evidence of discrimination based on distributional risk is significant Ignoring second-moment statistical discrimination will

bias estimates of prejudice-based and other statistically-based discrimination