I Wish to Thank Dr. Francesco Renna for His Patience and Insight in Sharing Ideas With

“What is the Impact of Foreign Trade on Race Based Discrimination in the Workplace?”
Michael Shields
May 2013

Abstract

This research tests the impact of foreign trade on race based discrimination in compensation and employment in the workplace. Predicated on Gary Becker’s 1957 theory that competition will eradicate taste-based employer discrimination in the long run, as discriminatory firms paying effective wage premiums for preferred workers are driven from the market, this paper tests whether foreign trade serves as an effective approximation of competition. Because the opportunity cost of discrimination for firms depends on the slack in the labor market, increased trade may decrease costs to firms by creating labor surpluses in import competing industries. Thus the likely impact of trade on discrimination is ambiguous. Utilizing data on forty-one distinct manufacturing industries in the US, I find that for US manufacturing firms over the period from 2002 through 2006, increased trade was in fact associated with a reduction in median wage differentials between African Americans and whites.

I wish to thank Dr. Francesco Renna for his patience and insight in sharing ideas with me over the course of this project. Also, many thanks to Dr. Steven Myers for helping me to develop the technical skills needed to complete this project and offering guidance along the way. Thanks to Dr. Kate Sheppard for introducing me to the formal tools used in evaluating discrimination. Thanks to Sam Hinkle for reading my work and offering ideas, and to Jeremy Hunter for offering troubleshooting advice. Finally, thanks to Dr. Steve Harp, whose support has helped me to navigate this project alongside many other academic demands, and whose guidance has been invaluable to me over the course of my academic career.

Contents

Introduction……………………………………………………………………………………………………..……….3

Literature Review…………………………………………………………………………………………..………….8

Data…………………………………………………………………………………………………………….………….13

Theoretical Model……………………………………………………………………………………………...…….15

Empirical Model……………………………………………………………………………………………………...16

Estimation Results……………………………………………………………………………………….………….18

Conclusion and Recommendations for Further Research………………………………….………20

Bibliography……………………………………………………………………………………………………………21

Appendices

Appendix A: Data……………………………………………………………………………….…………22

Appendix B: Estimation Results…………………………………………………………………….23

Introduction

Economists disagree about the likely impact of trade on discrimination in wages and hiring against workers. Two theories from divergent subfields of economics can offer insights into the impact of trade on discrimination. The first is Becker’s (1957) seminal work. According to Becker, competition will tend to reduce workplace discrimination. To explain how, Becker evokes the notion of a “taste for discrimination” which leads some employers (as well as some consumers and employees) to behave “as if [they] were willing to pay something either directly or in the form of a reduced income, to be associated with some persons instead of others”(p.14). Becker calls this assumed cost the “Discrimination Coefficient. Instead of paying a wage, “W,” and hiring workers at the market rate without regard to race, discriminating employers incur a disutility “d” from associating with minorities, so that they perceive the cost of hiring minority workers to be not just “W,” but (W+d), and are willing to pay that amount to a white worker in order not to transact with African Americans against whom they harbor discriminatory preferences. In the case that they do hire a black worker, the wage they pay him or her will be lower than that of a comparable white worker, by a magnitude of d. Because firms with lower Discrimination Coefficients incur lower costs, Becker predicts that discrimination will decrease as more discriminatory firms are either driven from the market or forced to change their discriminatory hiring practices in order to remain competitive.

In assessing the likely impact of trade on discrimination, some economists have used trade as an approximation of competition. Thus with increased entry by foreign firms into their industry, firms are predicted to decrease discriminatory hiring and compensation practices. Yet Becker’s assessment may be extrapolated to account for a divergent outcome; to the extent that domestic firms are displaced by foreign competition, trade may in fact reduce the opportunity cost of discrimination for remaining firms, by swelling the labor supply in that industry with displaced workers and driving down the market wage. An employer faced with import competition and thus induced to cut labor costs by lowering wages may still find an abundant supply of preferred workers at a lower wage. Thus, with increased trade, minority workers may enjoy reduced discrimination, or may face still greater discrimination than before, depending on the specific nature of the industry in which they work and the skill set of the worker.

The Hechscher-Ohlin-Samuelson comparative advantage trade theory sheds light on how trade will impact discriminatory practices in specific industries. The H-O-S theory predicts that with increased trade firms will increasingly specialize in the production of goods and services in which their region has a comparative advantage. As they specialize, they will substitute away from the production factors utilized in the types of production which are diminishing, and toward those factors needed in production which is on the rise. This means that, for example, demand for low-skilled workers in countries specializing in skills intensive production will decrease, while demand for high-skilled workers will grow. While income differentials resulting from changes in demand for one’s skill set are legitimate, market-based differentials, not discrimination, trade induced decreases in demand for one’s skill set also enable firms to discriminate more by decreasing the cost they incur to do so. Recall that in keeping with Becker’s theory, it is not competition per se which constrains firms in their ability to discriminate; it is opportunity cost.

What the H-O-S theory indicates about industry specific costs is that firms engaged in import competing production, while facing increased incentives to cut costs, may also draw from larger labor supply pools at a lower equilibrium wage. Thus, their ability to discriminate may in fact expand. Those firms engaged in exporting on the other hand, will draw from a diminishing labor supply pool as more workers possessing the skill sets they need are hired in their expanding industry, prompting equilibrium wages to rise. This study assumes that US firms tend to specialize in skills intensive production, and that with increased trade, demand for high-skill workers will increase, while demand for low-skill workers will decrease.

The implications for minority workers are clearly contingent on whether their skill sets match up with those in growing demand. Not only can such workers reap higher compensation based on skill itself but the fact that they are in tight labor markets constrains even prejudiced employers’ ability to discriminate against them. The opposite is true for workers whose skill sets are in decreasing demand in their region (low-skill workers, in the US case). For those workers, not only will their skill type reap diminished compensation, but slack in the labor market for their skills will mean that, barring legal repercussions, employers can discriminate against them with impunity. Important to note is that this study also assumes labor market stratification, at least in the short run, as workers face time and cost constraints on their ability to transform their skill sets to enable them to compete in markets for job types in higher demand. Because African American workers comprise a disproportionate share of the low-skill workforce in the US, increased trade may exacerbate both the wage gap between themselves and their nonblack peers, and the residual wage gap, a proxy for discrimination, which they face. To the extent that “pre-market discrimination” in access to quality schooling exists, African American workers may face distinct challenges to overcoming their segmentation into low-skill sectors.

This analysis assumes that African American workers comprise a disproportionately large share of low-skill workers. To the extent that blacks are clustered in low-skill jobs, there are market-based reasons predicated on human capital differentials. While these differentials have nothing to do with discrimination, how these individuals got to the labor market with skill sets inadequate to secure lucrative jobs to begin with may have a great deal to do with so-called pre-market discrimination. This matter, while important to keep in mind, is not the central focus of this study.

In this study, I will test whether the residual wage gap between the races increases or decreases as a result of trade. In short, does increased trade result in diminished discrimination against blacks in the workforce, or does trade exacerbate such discrimination?

While the literature represents divergent approaches to assessing the likely impact of trade on women workers, the idea of a trade induced reduction in discrimination begs the obvious question of how racial minorities will be impacted. While Black and Brainerd can point to a trend of rising female relative wages, Altonji and Blank (1999) point out that a similar trend in evidence for African Americans in the 1960’s has come to a halt since then, and African American wages have stagnated below those of whites for decades. Based on the Becker Discrimination Model, I will test whether African American workers in trade impacted industries experienced lower rates of employment as a result of increased import penetration into the markets in which they worked.

Literature Review

Black and Brainerd (2004) devise a formal test to determine whether increased imports have driven the reduction in the gender wage gap. Their work is predicated on the Becker theoretical model, which argues that competition eliminates discrimination over time, since firms engaging in discrimination pay an effective premium to indulge their presumed “taste” for discrimination. According to Becker’s theory, increased competition should trim profit margins and constrain firms’ ability to pay this premium.[1] They hypothesize that the wage differential in a given industry will decrease as foreign firms enter the consumer market for that firm’s goods. To test this, they use personal income and demographic information from the CPS March demographic supplement and the 1980 and 1990 Censuses, combined with figures for 188 manufacturing industries from NBER Trade (1998) and Manufacturing (1996) Databases. They develop a difference in differences model in which firms are first classified into competitive and concentrated industries, then the gender wage gap for each is compared on the basis of whether firms experienced a trade shock.[2] This methodology is employed in order to filter out the wage impact of non-discrimination related factors such as increased education for women, assumed to be the same across all classifications of firms. Postulating that concentrated firms are insulated from domestic competition, they predict that foreign entry will have a greater impact on wage differentials for concentrated firms. This is supported by the findings. For “concentrated” industries, Black and Brainerd found that a ten percent increase in import share led to a decline in the residual gender wage gap of about 6.6percent. These results are consistent with the Becker theory that competition will reduce discrimination over time.

Kongar (2006) expresses concerns that intensified job competition among workers as a result of increased trade may actually enhance firms’ ability to discriminate.Utilizing a similar methodology to Black and Brainerd, she too finds a reduction in the wage gap in trade impacted industries. Yet, cautious to rule out discrimination on this basis, she notes another important dimension of the trade impact on work outcomes; that of relative employment both overall and in high and low skill jobs. Citing evidence of extensive job losses for low-skill workers, as the H-O-S model predicts, Kongar notes that in US manufacturing industries, increased import competition has had a disparate impacton women workers. That is, while a human capital based H-O-S model would predict job losses for low-skill workers, Kongar finds that among low-skill workers, women have suffered the greatest job losses. She claims that women’s overall wages rose in these industries due to these job losses among the low-skilled, which disproportionately affected women, leaving the average female wage to rise due to the higher skill set of those women who remained on the job. Kongar utilizes a Becker theoretical model, and a difference in differences empirical model similar to that employed by Black and Brainerd, but incorporating a variable for technological investment. The key difference between her work and that of Black and Brainerd is that she regresses not just female earnings, but also share of employment. Kongar finds that, for import competing manufacturing firms, increased trade is in fact associated with a rise in relative female earnings, but this is offset by nearly as great a loss in female share of overall employment. Based on these differential findings, Kongar regards the trade impact on discrimination to be inconclusive.

Utilizing Columbian firm data, Ederington et. al (2009) investigate key assumptions of the Becker model, and incorporate H-O-S theory to make predictions about future trends. Because Becker’s prediction of what drives decreases in discrimination is predicated on opportunity cost, slack in labor markets is an important component. Based on the H-O-S model, demand for workers is higher in industries in which their countries specialize. Thus, workers in export industries should be in relatively high demand, and firms in these markets might be more constrained (face higher costs) in their ability to discriminate. Ederington et. al test to find whether women comprise a disproportionate share of the workforce in export markets, and find that in fact they do. This is important in that, based on the H-O-S model, it indicates that increased trade should decrease the residual wage gap between genders, since women are heavily represented in export competing industries which should see more demand with trade, thus increasing the opportunity cost of discrimination. Next, they test the Becker hypothesis that discriminating firms will be driven from the market as profit margins narrow, and profit maximizing firms obtain lower cost labor inputs by hiring a larger share of female workers. While they find evidence that firm exit did occur as a result of trade liberalization, they key question is whether those firms which exited comprised a disproportionate number of male workers, indicating that they were paying a wage premium to indulge their “taste for discrimination.” The findings do not support this hypothesis. In light of these results, Ederington et. al. pose an alternative mechanism whereby the Becker model may work. Instead of simply maintaining labor ratios that favored more costly male workers, firms might decide at the margin to forego their discriminatory preferences and hire a greater share of women workers. While this idea provides a plausible explanation for the study’s failure to establish a relationship between firm exit and male employment concentration, empirical testing has not been done, and thus this possible explanation remains speculative in nature. The data come from a plant-level dataset produced by the Colombian Manufacturing census by DANE (National Statistical Institute) for the years 1977 through 1991, which comprised a sample of 6,035 plants in 1984, of which 3,760 remained in 1991. Increased trade competition is measured as industry specific tariff reductions.

Berik et. al (2004) utilize an empirical model based on Black and Brainerd’s to test the trade impact on discrimination in Taiwan and South Korea. Taiwanese figures come from the DGBAS and International Economic Databank, while Korean data comes from the South Korean Census, Labor Ministry, and International Economic Databank. Their results indicate a reduction in female relative earnings. Both Taiwan and South Korea witnessed employment losses in low skill sectors as a result of import competition from lower wage countries. These troubling findings indicate that, in some cases, trade may actually increase workplace discrimination. Berik et. al call upon the H-O-S comparative advantage model to show why. Taiwan and South Korea, as net importers of manufactured goods, saw job losses in this sector with increased trade. With slack in the labor markets, the opportunity cost firms faced to discriminate actually fell, and with it fell women’s relative earnings.

Menon and Rogers (2008) also argue that discrimination may be positively linked to increased foreign competition. In the case of India, they argue that women comprise a significant share of low skill workers who become increasingly vulnerable to discrimination with increased trade, since India specializes in high skill exports amongst most of its trading partners, and import competition for low skill goods creates slack in the labor markets in which most women work. The most important contribution Menon and Rogers make to the literature is that they utilize a decomposition to isolate the residual wage gap from the aggregate wage gap. Because discrimination is traditionally proxied as the residual, that portion which is unexplained by gender specific differentials in skills, experience, or other human capital based determinants, they usean Oaxaca decomposition. They use data from the National Sample Survey Organization and construct their own concentration ratios.[3] With increased trade, Menon and Rogers find that the residual share of the wage gap grew from 56.5percent in 1983 of the wage gap to 77.7percent by 2004. This unexplained wage gap rose 2.8percent per year, indicating that, for firms in India, increased exposure to foreign trade appears to have increased discrimination.