The Effect of Wage Discrimination on Privileged Groups

Wage discrimination reduces the wages of groups subject to discrimination. Its effect on the wages of groups not subject to discrimination is less obvious. A powerful effect on one group in a work relationship could likely affect the other members of the relationship. This study explores the effect of wage discrimination on the wages of managers and coworkers not targeted for discrimination. Existing theories of discrimination predict disparate effects on the wages of the managers and coworkers of workers targeted for discrimination.

This study develops models in which managers' tastes cause discrimination. The models predict that as managers' taste for discrimination rises, the wage gap rises, and managers' pay falls. Discrimination hurts profits, but managers are willing to pay for it, making up for the losses in order to be allowed to hire fewer workers from groups they dislike.

I test this theory against other theories using data about sex and race discrimination. Using 2000 Census data to measure the wage discrimination against female non-managerial workers by Oaxaca decomposition, I find that for every one percent discriminatory decrease in the wages of female non-managerial workers, the wages of managers fall by 0.531%. This is consistent with the model of manager discrimination. I also find that a one percent discriminatory decrease in female wages leads to a 0.227% decrease in the wages of their male coworkers in the same geographic area. This is not consistent with the basic model, although it could be explained by extensions to the model. In the context of the race wage gap, I find the opposite effect for managers: when the unexplained wage gap increases by 1%, manager wages rise by 0.196% (significant at the 99% confidence level).

These results, taken together, suggest that while a model of manager taste discrimination may explain some of wage discrimination based on sex, race wage discrimination needs another explanation, perhaps statistical discrimination. The findings on race wage discrimination are inconsistent with a model that rogue managers produce the wage gap by gratifying their own tastes in opposition to corporate interests.