Please answer all parts for upvote Consider a labor market with white and black
ID: 1159205 • Letter: P
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Please answer all parts for upvote
Consider a labor market with white and black workers. Let W indicate whites and B blacks, where white and black wages are determined as follows Ww 60.5E 0.2X and WB-4 + 0.4E 0.1X, where W is the wage, E is years of education past the high-school level, and X is years of work experience. Let whites on average have 4 years of education past the high-school level (E = 4) and 10 years of experience (X-10) and let blacks have 2 years of education past the high-school level (E 2) and 10 years of experience (X-10) a) Find the average wage of whites and blacks. What is the ratio of the black to white average wage! b) What wage would blacks earn if they had the same pre-market characteristics as whites on average? What would be the ratio of the black to white average wage? c) What is the effect of racial discrimination on wages? Region of residence affects wages because wages are lower in the south. Also, a larger portion of blacks live in the south than whites. Suppose the following wage equations are produced when controlling for region of residence Ww 7.350.5E +0.2X- 6.7SOUTH WB-7.35 + 0.4E + 0.1X- 6.7SOUTH where SOUTH equals 1 if residence is in the south and zero otherwise. Suppose 50 percent of blacks ve in the south but only 20 percent of whites live in the south. Thus, "SOUTH" is 0.5 for blacks and 0.2 for whites. What effect does this have on discrimination? d) Find the average wage of whites and blacks when controlling for region of residence What is the ratio of the black to white average wage?Explanation / Answer
Solution: As per the given information:
a) Ww = 6 + 0.5*4 + 0.2*10 = 10
Wb = 4 + 0.4*2 + 0.1*10 = 5.8
Required ratio = Wb/Ww = 5.8/10 = 0.58
b) Keeping pre-market characterstics of whites for both groups: Ww = 10
Wb = 4 + 0.4*4 + 0.1*10 = 6.6
Now, required ratio = 6.6/10 = 0.66
c) We can see from part b) that even when the market characterstics for the two groups is same, the wage ratio is not equal to one, i.e, wages are not same for both groups. This discrepancy in wages is caused due to racial discrimination. Thus, racial discrimination results in lower wages for the unfavoured group, than the favoured one, in spite of the same set of skills or such characterstics, thereby hampering the efficiency in the market outcome, by such injustice/ inequality of wages.
d) Now, Ww = 7.35 + 0.5*4 + 0.2*10 - 6.7*0.2 = 10.01
Wb = 7.35 + 0.4*2 + 0.1*10 - 6.7*0.5 = 5.8
required wage ratio = Wb/Ww = 5.8/10.01 = 0.579
e) In case of same pre-market characterstics of E = 4, X = 10, SOUTH = 0.2; Ww = 10.01
Wb = 7.35 + 0.4*4 + 0.1*10 - 6.7*0.2 = 8.61
Wage ratio = Wb/Ww= 8.61/10.01 = 0.86. This highe ratio (ratio closer to 1), on keeping market characterstics same implies the racial discrimination has decreased.
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