Estimate percentage of wage gap due to racial discrimination
Macroeconomics
1. Revisit the definition of affirmative action: “Affirmative Action maybe defined as proactive steps to erase differences between minorities and non-minorities in the labor market”. Suggest a modified version of the Becker model that includes a policy intervention requiring businesses to proactively hire Black workers. Describe the changes in the model parameter(s) and resulting changes if any in the hiring decisions of the three types of firms.
2. For the following questions, please apply the Oaxaca decomposition model. The following is the wage equation in the labor market.
(Assume that all coefficients are significant at 1% significance level)
(1) Use evidence from the regression estimates to discuss whether this labor market is characterized by racial discrimination (Assume that “white” wages are benchmarks).
(2) Estimate the percentage of wage gap due to racial discrimination after controlling for years of schooling and years of work experience.
(3) What would be the coefficient on “Black” if there was no discrimination?
(4) Assume that all workers have 20 years of schooling and 5 years of work experience. Assuming that white and black workers are perfect substitutes, then what is the threshold value of the discrimination coefficient “d” at which prejudiced businesses will start hiring only white workers?
