Problem of discrimination has been a favourite topic of engagement in various disciplines as variety of discriminatory practices have been in vogue across space and time. Socially derogatory treatment of humans based on inherited and endowed characteristics has been a vice which the world has lived with for too long. Yet, such practices are remarkably persistent and sometimes social mechanisms are created and often justified to perpetuate them.
Discrimination in wage on the basis of gender has been studied by Niederle and Vesterlund (2007), Addison et al. (2014), Arrow (1973), Rees and Shultz (1970), Andersen et al. (2013) and Flory et al. (2015). The studies by Flory et al. (2015), Andersen et al. (2013) and Niederle and Vesterlund (2007) suggest that gender imbalance in labour market arises as men appear to be more competitively inclined than women. Such a scenario might be the result of social prejudice and family environment. The empirical study by Addison et al. (2014) considers the role of gender in promotion and promotion-related earnings over the course of a career. Their findings show that the strong returns to education in later career arising from the growth in promotion-related earnings solely accrue to males, thereby resulting in gender discrimination.
Gender discrimination is considered as a close follow up of racial discrimination in economics. Kenneth Arrow, one of the most brilliant economists and a stellar contributor to research in this area, presents all possible arguments that can be put forth regarding discrimination in labour market, starting with a famous work of Becker (1957). Their main conclusion has been that the forces of competition would not allow discrimination to continue in competitive markets. In other words, while there is no denying that there are extra-economic reasons to practise discrimination, competitive markets tend to eliminate such an attitude. The logic of the argument is not too difficult to follow.
Firms practising discrimination would be inefficient, that is, they would have higher cost of running the business. This may happen if more efficient female workers are paid less affecting their productivity or hired in fewer numbers relative to the male workforce. This will increase average cost of production because they have to work with less efficient workers on average and they cannot survive competition. Put differently, capitalists would not like to invest in these firms since the rates of profit would be lower than others in a similar business. As competition gets more intense, firms or owners of business would be more disciplined and be forced to refrain from practising discrimination. Those who are familiar with the fundamentals of competitive equilibrium and welfare theorems know that competition provides the most ideal market condition and hence helps the economic system to reach Pareto Optimal allocation where you cannot better one’s welfare without hurting another. Thus, if one intends to coin discrimination as a negative element in social welfare, competitive capitalism can also claim to take away the evil of discrimination attributed only to rational economic behaviour.
One can easily infer that even if a single firm is bent on discriminating, it can still survive competition from non-discriminating firms provided it is more efficient than the others. Firms have different levels of productivities with better firms earning more from same level of investment simply because they enjoy a firm-specific advantage. Capital would not desert such firms, as they can still give them higher returns. Thus, more productive firms can get away by discriminating. Kenneth Arrow focused on the idea of statistical discrimination whereby firms would look at past data to form their current behaviour. If there is already some discrimination which reflects female workers are hired in smaller numbers or are offered lower wages, new entrants to the industry might accept it as a signal of profit maximising behaviour and perpetuate such actions. They would try to imitate more productive firms. Thus, if greater efficiency and discrimination coexist, it rationalises discrimination.