Assume education is the only factor that affects productivity which means that t

Question

Assume education is the only factor that affects productivity which means that the only difference in wages between difference people should be due to differences in education unless there is discrimination. Suppose also that an additional year of schooling always increases wages by 7 percent, regardless of the worker's race or ethnicity. Suppose that in 1970, the observed wage differential between the average white and the average Hispanic was 36 percent while the average white worker had 12 years of schooling compared to 9 years for the average Hispanic worker. How much of the observed wage gap can be attributed to discrimination? Suppose that by 1980, the average white worker had 13 years of education, while the average Hispanic had 11 years. A year of schooling still increased earnings by 7 percent, regardless of the worker's ethnic background, and the wage differential between the average white worker and the average Hispanic fell to 24 percent. Was there a decrease in wage discrimination during the decade?

Explanation / Answer

a. Since the difference between number of years of education between white and hispanic is 3 years (12years - 9 years). So, the wage differencial due to education shoud be 7*3 = 21 percent, But the observed wage gap = 36%.

HENCE, Wage Gap attributed to discrimination = 36 - 21 = 15%

b. Since in the difference between number of years of education between white and hispanic is 2 years (13years - 11 years). So, the wage differencial due to education shoud be 7*2 = 14 percent, But the observed wage gap = 24%.

HENCE, Wage Gap attributed to discrimination = 24 - 14 = 10%

So, Yes there is a decrease in wage discrimination during the decade as it decreased from 15% to 10%.

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