Master in Economic Development and Growth
Ethnic and Gender Discrimination in labor markets:
TheBolivian case
Diana Balderrama Durán
Abstract:The aim of this paper is to identify wage gaps attributable to discrimination in labor markets as consequence of discrimination in endowments such as education. For this purpose, the paper analyzes supply and demand-side of labor market, in order to establish a base line for the econometric analysis.
Some indexes and descriptive data were provided in order to give more support to the econometric findings. The results show that there is evidence of discrimination by gender, ethnicity and region; as well discrimination seems to be explained by education opportunities that may determine further productivity.
One striking result is given by the way to measure the variable ethnicity, depending on the methodology used to define ethnicity, results have large differentials.
Key words: Discrimination, labor market, human capital, gender, ethnicity
EKHR92
Master thesis (15 credits ECTS)
June 2012
Supervisor: Prof. Anders Nilsson
Examiner:
Website
Table of Contents
Acknowledgements
Firstly thank the Erasmus Mundus Programme for such amazing opportunity that not only provided me the possibility of being part of this prestigious Master, but the possibility of knowing great friends. I also would like to express my gratitude to Lund University, its faculty and the administrative staff. However, my special gratitude to my Thesis’ Supervisor, Prof. Anders Nilsson, who has been supportive and gave me nice feedbacks and comments to improve this works.
Thanks to GiovannAlarcón, who gave me some hints to do this paper, thanks to my friends and finally, my greatest gratitude to my beloved family, who is always there for me to make me happy.
- INTRODUCTION
Numerous studies analyzed the gender and race pay differential and the phenomena of wage gaps by separate, however few of them and none for the Bolivian case, analyzes both situation in parallel by splitting samples; thus investigations that studied the relevance of ethnic discrimination do not take into account gender selectiveness in either in educational decisions and, furthermore, in labor markets.
According to human capital theory, higher levels of education may conduce to higher productivity and thus, higher wages. However, from the evidence found form Bolivia, is possible to wonder if labor markets pay equally to all participants, one first approach given by descriptive statistics shows pay differentials in labor markets, nevertheless, disparities can also be rooted in educational markets, as will be shown in the document.
Thus, to set the problem properly is necessary to make a brief analysis of discrimination in education, not only as the first screening filter to labor market opportunities but as a result of wage gaps and their incidence on wealth accumulation.
Is well known that Bolivia is a multi-cultural country with differences in social classes, which are a consequence of the colonial process which took place into a newborn State based in elites that controlled the power. Statistical approach shows that ethnicity is more or less identified with poverty and social exclusion, evident in participative processes like education. For the purpose of this document, from now on the label “ethnic” will refer to those groups that can be considered descendants of the original inhabitants of Bolivia before the European invasion, which currently show cultural characteristics that, distinguish them from the rest of national society (Stavenhagen, 1995); then, “non-ethnic” are those who are descendants of European colonizers without miscegenation with original inhabitants.
Despite three Structural Reforms and one change of Political Constitution[1], Bolivia is still a middle-income country with economy based on extractive industries, with large patterns of discrimination by ethnicity and gender that help prevailing poverty and exclusion.
Considering that individual’s income comes from labor activities, to explain wage gaps and its determinants, seems to be relevant in order to improve labor markets. The study focuses primarily in ethnicity disparities and found some results for gender issues; in spite the fact that both problematic –ethnicity and gender– are interesting, limitations of the number of observation coming from the data set, do not permit to elevate robust conclusions about gender, however, is quite strong to analyze ethnicity.
The aim of this paper is to analyze the differentials between the average hourly wages between male and women workers, with “ethnic” and “non-ethnic” features, in Bolivian labor market. For this purpose,using the methodology proposed by Oaxaca & Blinder[2] (1973) will show a comparative analysis of wages controlling by age, sex, and years of schooling; region and type of occupation, among other variables. Thus, wage gaps are decomposed in observable characteristics and non-explained disparities, which are called discrimination.
As secondary objective, in order to findwage discrimination between “ethnic” and “non-ethnic”, will be necessary to identify what is ethnicity in Bolivia and the different paradigms that face the measurement of the feature.
The paper is organized as follows: one first section reviews briefly Bolivian economic background. The following section sets the theoretical framework compound by literature referencing to wage discrimination and some empirical evidence found for Bolivian case.
A third section shows a detailed analysis of educational system and labor market, supported by descriptive statistics that smoothly lead to the empirical section where some indexes were constructed to introduce the econometric model.
Methodological section followed by the data, let us reach the econometric model based on Oaxaca & Blinder model to explain wage gaps. Finally, some conclusions are presented to provide a kind of summarizing of the paper.
- ECONOMIC BACKGROUND
During the 80’s Bolivia started a Structural Program Reform which objective was to stabilize the economy after the historical hyperinflation, and thus promote economic growth. Structural Reforms allowed achieving sustainable but still insufficient economic growth during the 90’s. (See Chart 1)
Chart 1. Bolivia: GDP, GDP pc and Unemployment growth rates, 1989 – 2010p* PPP Adjusted
Note: GDP and GDP pc growth rate are measured in the left axis
Unemployment is measured in the right axis.
Source: Own building with data retrieved from Bolivian National Statistical Institute
Despite many efforts, Second Generation Reforms[3] and socio-economic policies with different political views, living standards did not improve as expected, especially for the poorest segments of the population. However, recent important attainments in terms of economic indicators due external conditions, gives some hope to recover social indicators that still remain weak in comparison with Latin America’s average.
Nevertheless, economic recovery promoted the diminishing of unemployment, as showninChart1. During periods ofslowdownin economic activity –early 80’s and around 2000– rates of unemployment tend to increase while GDP growth rates were declining. In contrast, in periods where the GDP exhibited growth of the product, unemployment decreased –see the 90’s in the Chart–. Although theory suggests that we can expect unemployment to fall when the economy is growing; however it can be seen in the Chart an increasing tendency in economic growth and unemployment in the last period, in opposition with theory. This unusual behavior could be associated with social conflicts and lower levels of investment (domestic and foreign) that may cause damages in job creation processes. (Jemio& Muriel, 2008)
Regarding that, according to the World Bank (2000), urban family’s income comes from labor activities –85% in average–, this situation makes us wonder if poverty is actually linked with labor access conditions. In fact, labor market features have a determinant role in terms of wage differentials (e.g. rural vs. urban, formal vs. informal, etc.); nevertheless, other features are defined by labor supply, such as willingness, qualification or educational attainment.
Several studies analyze determinant characteristics that determine the probability of being poor by work conditions, explaining differences between individuals such as the jobs where wages are obtained, labor categories and selection of workplaces are closely related to human capital accumulation, indeed, evidence suggest that human capital is one of the most important determinants of income achievements and as a consequence, the reason to differentials in basic needs access.
Table 1. Bolivia: Poverty indicators by geographic situation, 2005-2010e(percentage)
(e) Estimation, (p) preliminary, n.d. no-data.
Source: Own constructions with data retrieved from Bolivian Economic and Social Policy Analysis Unit (UDAPE).
By 2005, 60% of country’s population was under the poverty line and the incidence of moderate poverty barely reduced 11percentage points until 2010. In Table 1, poverty indicators are shown; is important to notice that rural area has a deeper incidence of moderate and extreme poverty in comparison with the urban area. This is consistent with ethnic distribution, which has more density in rural areas and in the West-side of the country. (See Table 2)
Table 2. Bolivia: Distribution of the population by region and ethnicity(percentage)
Source: Own constructions with data retrieved from Bolivian National Statistical Institute.
Rural poverty is largely explained by the low levels of productivity in agriculture, in addition, the low prices of their products in marketplaces. Small-scale production, unskilled or semi-skilled labor, natural resources and infrastructure scarcity, as well as high costs of capital, lack of well-defined property rights for land use among others, constraint the enhancement of productivity which finally determines the opportunities to overcome poverty. (Jemio&Choque, 2003)
In urban areas, poverty is closely related to entrepreneurial and self-employment conditions, which are more vulnerable to shocks in demand for unskilled and semi-unskilled labor, the incidence of wage disparities is relatively more important for poorest ones, due the composition of consumption and save; poor householdsspendhigher sharesof their incomein consumption andsave less, in relative terms, whilethe richest familiesspend lower shares to consumption and save bigger shares proportionately. (Kliksberg, 1993)
From the brief analysis above is important to highlight the nature of poverty and productivity, as well as the relevance of labor markets, which in sum, will determine the access to education and thus, much of the future individual’s constraints in labor market achievements; topics that will be presented in the paper later.
- THEORETICAL FRAMEWORK
3.1.Wage Differentials and Discrimination
One way to analyze wage differentials theories by gender and/or ethnicity is to divide discrimination in two mainstream theories: supply-side and demand-side[4], both complementary. In fact, the close relationship between both roots makes important feed-backs that help to maintain differentials even when open markets tend to minimize the gaps. (Blauet.al., 1998)
On the supply-side explanations comes from the individual features and decisions that each worker takes. Thus differentials in wages are a result of different qualifications, expectations and behaviors due its gender or ethnicity. Mincer (1974) and Becker (1985) analyze gender discrimination highlighting the relevance of individual’s choice whether to invest in human capital or not.
Returns to education are to workers as output to enterprises; individuals choose to invest in human capital to increase their future productivity and thus their returns –wages–. The mechanism appears to be clear, higher levels of education increase potential productivity of workers, which compensates direct and indirect costs of education.
The assumption behind this theory is that workers always maximize their returns. Human Capital theory explains individuals’ behaviors in terms of efficiency, thus distribution of workers according to their endowments and expected returns, are observed as a strategy to maximize wellbeing. (Mincer &Polachek, 1974)
Goldin(2006) reveal that men and women have different expectations, showing that women are less ambitious and, in consequence, their real productivity is non-observable. Giving the asymmetric information in labor market, men are averse to hire women when women’s productivity is not observable and verifiable by all.It is also attributable to women the higher rates of absenteeism, being an imperfect substitute to male work (Blauet. al. op. cit.). Wage gaps are a result of different endowments, initial rates of investment and continuous productivity that can include learning by doing/apprenticeship and experience.
The individual’s decisionsregarding theirlevels of educationor other trainingdeterminesto a largeextent,theirjob characteristics when facing the labor market. These features, however, are often a result of environmental and/or exogenous conditions. Socio-economic environment where individuals develop their abilities can encourage or limit the act of choosing a given level of investment in education. Galor&Zeira (1993) shows, in a two period model, the implications of the accumulation of human capital in an economy with bequests, where the extent endowments will determine the whether choose to accumulate human capital or consume and get into labor market.
Therefore, disparities in human capital accumulation can be determined by family conditions and socio-economic characteristics of the community such as expectations of labor force participation, access to educations, institutions, cultural constraints, or self-selection[5]. (Altonji& Blank, 1999)
Nevertheless, dissimilarities in educational quality –in schools and universities– also creates disincentives to demand education, high quality of education may expect higher returns and advantages in labor markets. In one hand, if employers are aware of the disparities of educational quality, it will be considered while hiring workers; thus discrimination at the demand-side, which was a consequence of discrimination on the supply-side, is not only a result of accumulation of human capital but also the quality of investment in education and training.
On the other hand the absence of complete information about individual characteristics or chosen actions leads to not efficient decisions, typical effects of self-selection models. Models of self-selection illustrate the effects of asymmetric information in a wide range of economic environments; self-selection often maximizes the benefits of the firm. Guasch& Weiss (1980) consider tests that directly discover an individual’s true characteristics or actions. This kind of testingcan reduce the cost of adverse selection and moral hazard, besides could lead to the full-information competitive equilibrium.
Explanations on the demand-side are based basically on the labor markets; Aigner& Cain (1977) call them post-market discrimination. Characteristics of labor markets and workplaces preserve discrimination allowing dissimilarities in returns according to appreciate features in the market, such as gender, ethnicity, productivity, etc.
Since discrimination between two target groups, can be produced by several mechanisms, is important to understand the dynamics of each one. Firstly, one group can be allocated in occupations with lower wages or less productivity. Then, discrimination is reflected in the process of hiring, promoting and dismissals; this kind of discrimination is called “allocative discrimination”. Secondly, some group can be discriminated by receiving lower wages due the type of occupation in the same business; this is called “within the wage discrimination”. Thirdly, “valuative discrimination” that is caused by labor market bias, consists in some occupations that are traditionally performed by certain type of individuals.(Petersen Morgan, 1995)
Considering that the typology presented by Petersen & Morgan could be biased by factors such as education, health or self-selection, as Heckman (1979) pointed out; this typology will be useful to analyze results of discrimination after labor market entering (e.g. valuative discrimination is closely related with segregation, term that is introduced further).
Descriptions for disparities in wages based on gender and/or ethnicity from the demand-side are mainly focused on discrimination in labor markets and the structure of it. It is possible to find some markets that provide opportunities only for one type of worker, or gender. Thus, the main theories of discrimination from the demand-side can be resumed as follows.
Taste for discrimination:Discrimination occurs not by a personal bias, but because is assumed that there are significant differences in average –e.g. productivity– between two groups of people. This means that since hiring is an imperfect information process, the criteria used to assess the suitability of the candidates is based on stereotypes’ skills of both groups, giving advantage to one observed group. (Becker, 1971)
Monopolistic model of discrimination: Is defined by non-ethic practices that determine the employability of certain group of people. Thus, employers can collude themselves to hire only women or ethnics. (Madden, 1975)
Overcrowding:This model analyzes the pay gap between men and woman (also applicable to ethnicity or other feature), from segregation information. Segregation is the social process that leads to separations by features between particular activities barely interacted. (Bergmann, 1974) However, the use of this segregation for gender purposes was introduced by Gross (1968). Another extension of the concept was introduced by Hakim (1996), he postulates that segregation canbe horizontal–when men andwomen work in differenttypesof occupations– or verticalwhenmen dominatesectors most important andbestpaid.
Statistical Discrimination: Occurs when disparities between two groups are made on the basis of real or imagined statistical distinctions (Oaxaca & Dickinson, 2005). Arrow (1973) and Phelps (1972) emphasize that the unequal treatment of equally productive workers can occur when employers have imperfect information about the characteristics of the applicants.
Institutional Models: Explain patterns of discrimination of population groups linked to segregation in employment caused by labor market rigidities, which arise from institutional arrangements in some companies or barriers to competition introduced by market powers such as monopoly.
3.2.Empirical Evidence
A significant number of studies assessed the issue of ethnic and gender discrimination combined and separately. However none of them uses the methodology proposed in this paper based on Oaxaca & Blinder (1973) with the particularity of splitting the sample to avoid female selection bias.