“What is the Impact of Foreign Trade on Race
Based Discrimination in the Workplace?”
Michael Shields
May 2013
Abstract
This research tests the impact of foreign trade on race based discrimination in
compensation and employment in the workplace. Predicated on Gary Becker’s 1957
theory that competition will eradicate taste-based employer discrimination in the long
run, as discriminatory firms paying effective wage premiums for preferred workers are
driven from the market, this paper tests whether foreign trade serves as an effective
approximation of competition. Because the opportunity cost of discrimination for
firms depends on the slack in the labor market, increased trade may decrease costs to
firms by creating labor surpluses in import competing industries. Thus the likely
impact of trade on discrimination is ambiguous. Utilizing data on forty-one distinct
manufacturing industries in the US, I find that for US manufacturing firms over the
period from 2002 through 2006, increased trade was in fact associated with a
reduction in median wage differentials between African Americans and whites.
I wish to thank Dr. Francesco Renna for his patience and insight in sharing ideas
with me over the course of this project. Also, many thanks to Dr. Steven Myers for
helping me to develop the technical skills needed to complete this project and
offering guidance along the way. Thanks to Dr. Kate Sheppard for introducing me to
the formal tools used in evaluating discrimination. Thanks to Sam Hinkle for
reading my work and offering ideas, and to Jeremy Hunter for offering
troubleshooting advice. Finally, thanks to Dr. Steve Harp, whose support has helped
me to navigate this project alongside many other academic demands, and whose
guidance has been invaluable to me over the course of my academic career.
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Contents
Introduction……………………………………………………………………………………………………..……….3
Literature Review…………………………………………………………………………………………..………….8
Data…………………………………………………………………………………………………………….………….13
Theoretical Model……………………………………………………………………………………………...…….15
Empirical Model……………………………………………………………………………………………………...16
Estimation Results……………………………………………………………………………………….………….18
Conclusion and Recommendations for Further Research………………………………….………20
Bibliography……………………………………………………………………………………………………………21
Appendices
Appendix A: Data……………………………………………………………………………….…………22
Appendix B: Estimation Results…………………………………………………………………….23
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Introduction
Economists disagree about the likely impact of trade on discrimination in
wages and hiring against workers. Two theories from divergent subfields of
economics can offer insights into the impact of trade on discrimination. The first is
Becker’s (1957) seminal work. According to Becker, competition will tend to reduce
workplace discrimination. To explain how, Becker evokes the notion of a “taste for
discrimination” which leads some employers (as well as some consumers and
employees) to behave “as if [they] were willing to pay something either directly or
in the form of a reduced income, to be associated with some persons instead of
others”(p.14). Becker calls this assumed cost the “Discrimination Coefficient.
Instead of paying a wage, “W,” and hiring workers at the market rate without regard
to race, discriminating employers incur a disutility “d” from associating with
minorities, so that they perceive the cost of hiring minority workers to be not just
“W,” but (W+d), and are willing to pay that amount to a white worker in order not to
transact with African Americans against whom they harbor discriminatory
preferences. In the case that they do hire a black worker, the wage they pay him or
her will be lower than that of a comparable white worker, by a magnitude of d.
Because firms with lower Discrimination Coefficients incur lower costs, Becker
predicts that discrimination will decrease as more discriminatory firms are either
driven from the market or forced to change their discriminatory hiring practices in
order to remain competitive.
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In assessing the likely impact of trade on discrimination, some economists
have used trade as an approximation of competition. Thus with increased entry by
foreign firms into their industry, firms are predicted to decrease discriminatory
hiring and compensation practices. Yet Becker’s assessment may be extrapolated to
account for a divergent outcome; to the extent that domestic firms are displaced by
foreign competition, trade may in fact reduce the opportunity cost of discrimination
for remaining firms, by swelling the labor supply in that industry with displaced
workers and driving down the market wage. An employer faced with import
competition and thus induced to cut labor costs by lowering wages may still find an
abundant supply of preferred workers at a lower wage. Thus, with increased trade,
minority workers may enjoy reduced discrimination, or may face still greater
discrimination than before, depending on the specific nature of the industry in
which they work and the skill set of the worker.
The Hechscher-Ohlin-Samuelson comparative advantage trade theory sheds
light on how trade will impact discriminatory practices in specific industries. The HO-S theory predicts that with increased trade firms will increasingly specialize in the
production of goods and services in which their region has a comparative
advantage. As they specialize, they will substitute away from the production factors
utilized in the types of production which are diminishing, and toward those factors
needed in production which is on the rise. This means that, for example, demand for
low-skilled workers in countries specializing in skills intensive production will
decrease, while demand for high-skilled workers will grow. While income
differentials resulting from changes in demand for one’s skill set are legitimate,
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market-based differentials, not discrimination, trade induced decreases in demand
for one’s skill set also enable firms to discriminate more by decreasing the cost they
incur to do so. Recall that in keeping with Becker’s theory, it is not competition per
se which constrains firms in their ability to discriminate; it is opportunity cost.
What the H-O-S theory indicates about industry specific costs is that firms
engaged in import competing production, while facing increased incentives to cut
costs, may also draw from larger labor supply pools at a lower equilibrium wage.
Thus, their ability to discriminate may in fact expand. Those firms engaged in
exporting on the other hand, will draw from a diminishing labor supply pool as more
workers possessing the skill sets they need are hired in their expanding industry,
prompting equilibrium wages to rise. This study assumes that US firms tend to
specialize in skills intensive production, and that with increased trade, demand for
high-skill workers will increase, while demand for low-skill workers will decrease.
The implications for minority workers are clearly contingent on whether
their skill sets match up with those in growing demand. Not only can such workers
reap higher compensation based on skill itself but the fact that they are in tight labor
markets constrains even prejudiced employers’ ability to discriminate against them.
The opposite is true for workers whose skill sets are in decreasing demand in their
region (low-skill workers, in the US case). For those workers, not only will their
skill type reap diminished compensation, but slack in the labor market for their
skills will mean that, barring legal repercussions, employers can discriminate
against them with impunity. Important to note is that this study also assumes labor
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market stratification, at least in the short run, as workers face time and cost
constraints on their ability to transform their skill sets to enable them to compete in
markets for job types in higher demand. Because African American workers
comprise a disproportionate share of the low-skill workforce in the US, increased
trade may exacerbate both the wage gap between themselves and their nonblack
peers, and the residual wage gap, a proxy for discrimination, which they face. To the
extent that “pre-market discrimination” in access to quality schooling exists, African
American workers may face distinct challenges to overcoming their segmentation
into low-skill sectors.
This analysis assumes that African American workers comprise a
disproportionately large share of low-skill workers. To the extent that blacks are
clustered in low-skill jobs, there are market-based reasons predicated on human
capital differentials. While these differentials have nothing to do with
discrimination, how these individuals got to the labor market with skill sets
inadequate to secure lucrative jobs to begin with may have a great deal to do with
so-called pre-market discrimination. This matter, while important to keep in mind,
is not the central focus of this study.
In this study, I will test whether the residual wage gap between the races
increases or decreases as a result of trade. In short, does increased trade result in
diminished discrimination against blacks in the workforce, or does trade exacerbate
such discrimination?
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While the literature represents divergent approaches to assessing the likely
impact of trade on women workers, the idea of a trade induced reduction in
discrimination begs the obvious question of how racial minorities will be impacted.
While Black and Brainerd can point to a trend of rising female relative wages, Altonji
and Blank (1999) point out that a similar trend in evidence for African Americans in
the 1960’s has come to a halt since then, and African American wages have
stagnated below those of whites for decades. Based on the Becker Discrimination
Model, I will test whether African American workers in trade impacted industries
experienced lower rates of employment as a result of increased import penetration
into the markets in which they worked.
Literature Review
Black and Brainerd (2004) devise a formal test to determine whether
increased imports have driven the reduction in the gender wage gap. Their work is
predicated on the Becker theoretical model, which argues that competition
eliminates discrimination over time, since firms engaging in discrimination pay an
effective premium to indulge their presumed “taste” for discrimination. According
to Becker’s theory, increased competition should trim profit margins and constrain
firms’ ability to pay this premium.1 They hypothesize that the wage differential in a
It bears note that, while firms must pay an effective premium in order to indulge discriminatory
tastes, this does not necessarily imply that the wages they pay, even to “preferred” workers are at or
above market rates. While a competitive firm pays its workers a salary equivalent to the marginal
revenue product it realizes from the last worker, a monopsonistic employer, possessing market
power both as a seller in the goods market and as a buyer in the labor market, limits production to
artificially inflate prices and hires fewer than an equilibrium number of workers. In turn it pays an
“exploitive” wage and captures a share of the surplus that would, under competitive conditions,
accrue to workers (and similarly captures consumer surplus in the goods market). Thus, the “wage
premium” may simply mean that the firm is less exploitive of preferred workers than of minority
1
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given industry will decrease as foreign firms enter the consumer market for that
firm’s goods. To test this, they use personal income and demographic information
from the CPS March demographic supplement and the 1980 and 1990 Censuses,
combined with figures for 188 manufacturing industries from NBER Trade (1998)
and Manufacturing (1996) Databases. They develop a difference in differences
model in which firms are first classified into competitive and concentrated
industries, then the gender wage gap for each is compared on the basis of whether
firms experienced a trade shock.2 This methodology is employed in order to filter
out the wage impact of non-discrimination related factors such as increased
education for women, assumed to be the same across all classifications of firms.
Postulating that concentrated firms are insulated from domestic competition, they
predict that foreign entry will have a greater impact on wage differentials for
concentrated firms. This is supported by the findings. For “concentrated”
industries, Black and Brainerd found that a ten percent increase in import share led
to a decline in the residual gender wage gap of about 6.6percent. These results are
consistent with the Becker theory that competition will reduce discrimination over
time.
Kongar (2006) expresses concerns that intensified job competition among
workers as a result of increased trade may actually enhance firms’ ability to
discriminate. Utilizing a similar methodology to Black and Brainerd, she too finds a
workers, not that preferred workers realize a premium in absolute terms. Based on Becker’s
prediction that competition eliminates discrimination, it emerges that any firm engaged in
discrimination must be shielded from competition, and thus free to engage in exploitive behavior of
this nature.
2 Black and Brainerd define a “concentrated” industry as one with a four firm market share of at least
40%.
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reduction in the wage gap in trade impacted industries. Yet, cautious to rule out
discrimination on this basis, she notes another important dimension of the trade
impact on work outcomes; that of relative employment both overall and in high and
low skill jobs. Citing evidence of extensive job losses for low-skill workers, as the HO-S model predicts, Kongar notes that in US manufacturing industries, increased
import competition has had a disparate impact on women workers. That is, while a
human capital based H-O-S model would predict job losses for low-skill workers,
Kongar finds that among low-skill workers, women have suffered the greatest job
losses. She claims that women’s overall wages rose in these industries due to these
job losses among the low-skilled, which disproportionately affected women, leaving
the average female wage to rise due to the higher skill set of those women who
remained on the job. Kongar utilizes a Becker theoretical model, and a difference in
differences empirical model similar to that employed by Black and Brainerd, but
incorporating a variable for technological investment. The key difference between
her work and that of Black and Brainerd is that she regresses not just female
earnings, but also share of employment. Kongar finds that, for import competing
manufacturing firms, increased trade is in fact associated with a rise in relative
female earnings, but this is offset by nearly as great a loss in female share of overall
employment. Based on these differential findings, Kongar regards the trade impact
on discrimination to be inconclusive.
Utilizing Columbian firm data, Ederington et. al (2009) investigate key
assumptions of the Becker model, and incorporate H-O-S theory to make predictions
about future trends. Because Becker’s prediction of what drives decreases in
10
discrimination is predicated on opportunity cost, slack in labor markets is an
important component. Based on the H-O-S model, demand for workers is higher in
industries in which their countries specialize. Thus, workers in export industries
should be in relatively high demand, and firms in these markets might be more
constrained (face higher costs) in their ability to discriminate. Ederington et. al test
to find whether women comprise a disproportionate share of the workforce in
export markets, and find that in fact they do. This is important in that, based on the
H-O-S model, it indicates that increased trade should decrease the residual wage gap
between genders, since women are heavily represented in export competing
industries which should see more demand with trade, thus increasing the
opportunity cost of discrimination. Next, they test the Becker hypothesis that
discriminating firms will be driven from the market as profit margins narrow, and
profit maximizing firms obtain lower cost labor inputs by hiring a larger share of
female workers. While they find evidence that firm exit did occur as a result of trade
liberalization, they key question is whether those firms which exited comprised a
disproportionate number of male workers, indicating that they were paying a wage
premium to indulge their “taste for discrimination.” The findings do not support
this hypothesis. In light of these results, Ederington et. al. pose an alternative
mechanism whereby the Becker model may work. Instead of simply maintaining
labor ratios that favored more costly male workers, firms might decide at the
margin to forego their discriminatory preferences and hire a greater share of
women workers. While this idea provides a plausible explanation for the study’s
failure to establish a relationship between firm exit and male employment
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concentration, empirical testing has not been done, and thus this possible
explanation remains speculative in nature. The data come from a plant-level dataset
produced by the Colombian Manufacturing census by DANE (National Statistical
Institute) for the years 1977 through 1991, which comprised a sample of 6,035
plants in 1984, of which 3,760 remained in 1991. Increased trade competition is
measured as industry specific tariff reductions.
Berik et. al (2004) utilize an empirical model based on Black and Brainerd’s
to test the trade impact on discrimination in Taiwan and South Korea. Taiwanese
figures come from the DGBAS and International Economic Databank, while Korean
data comes from the South Korean Census, Labor Ministry, and International
Economic Databank. Their results indicate a reduction in female relative earnings.
Both Taiwan and South Korea witnessed employment losses in low skill sectors as a
result of import competition from lower wage countries. These troubling findings
indicate that, in some cases, trade may actually increase workplace discrimination.
Berik et. al call upon the H-O-S comparative advantage model to show why. Taiwan
and South Korea, as net importers of manufactured goods, saw job losses in this
sector with increased trade. With slack in the labor markets, the opportunity cost
firms faced to discriminate actually fell, and with it fell women’s relative earnings.
Menon and Rogers (2008) also argue that discrimination may be positively
linked to increased foreign competition. In the case of India, they argue that women
comprise a significant share of low skill workers who become increasingly
vulnerable to discrimination with increased trade, since India specializes in high
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skill exports amongst most of its trading partners, and import competition for low
skill goods creates slack in the labor markets in which most women work. The most
important contribution Menon and Rogers make to the literature is that they utilize
a decomposition to isolate the residual wage gap from the aggregate wage gap.
Because discrimination is traditionally proxied as the residual, that portion which is
unexplained by gender specific differentials in skills, experience, or other human
capital based determinants, they use an Oaxaca decomposition. They use data from
the National Sample Survey Organization and construct their own concentration
ratios.3 With increased trade, Menon and Rogers find that the residual share of the
wage gap grew from 56.5percent in 1983 of the wage gap to 77.7percent by 2004.
This unexplained wage gap rose 2.8percent per year, indicating that, for firms in
India, increased exposure to foreign trade appears to have increased discrimination.
Data
Data is drawn from four sources. Race, income, and employment data are
from the March CPS, utilizing years 2002 and 2006 as a comparison. These years
are chosen to coincide with trade data figures through 2005 and have the advantage
of being isolated from the recession that took place at the end of the decade. These
figures update the data utilized in the Black and Brainerd and Kongar studies, which
end in 1994. The shorter time-span is more conducive to the difference-indifferences methodology in that it limits the likelihood of endogeneity. Income data
3
Menon and Rogers’ concentration index is distinct from the Hirfindahl application utilized by Black
and Brainerd in that it is a continuous rate, rather than a dummy variable “Concentrated,” predicated
on whether the four firm share of an industry comprises at least 40%.
13
is annual income, deflated by the Consumer Price Index base year 1999. Mean and
median wages by race are taken for each industry in both 2002 and 2006.
Employment is approximated by multiplying weeks employed by usual hours
worked.
The trade variable is compiled by summing the value of production by
industry from the Manufacturing Industry Productivity Database with the value of
imports by industry from the NBER Trade Database, then dividing the foreign value
figure by this aggregate figure to get a relative share. Figures are taken for 2002 and
2005, with the proportional difference used for the variable.
Concentration data is from the Census of Manufacturers. Figures are taken at
the four-digit NAICS code level for the beginning period 2002, then a dummy
variable is created based on the Hirfindahl four firm 40 percent market share
threshold. Because competition is expected to decrease discrimination, the
Concentration variable is predicted to have a positive coefficient, indicating that
concentrated firms have greater wage differentials than non-concentrated firms.
ConcTrade is an interaction term indicating the impact of increased trade on
an industry, given that that industry was concentrated as of 2002. Because nonconcentrated industries are assumed to face competition already, the impact of
increased trade on them is anticipated to be negligible. Likewise, these firms are
predicted to be less discriminatory. For concentrated industries on the other hand,
increased trade may reduce profit margins and provide an incentive for firms to give
up costly discrimination practices or be forced from the market by
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nondiscriminating competitors. Thus, ConcenTrade is the primary variable of
interest.
Theoretical Model
Based on the ambiguous nature of the trade impact on gender discrimination
in the workplace, and the differential trends between women workers, who are
closing the wage gap they face, and African Americans, who are not, I will test the
impact of foreign trade on racial discrimination in compensation and employment.
The theoretical model is predicated on Becker’s 1957 discrimination theory. In
principle, competition, which is here approximated by trade, should decrease
discrimination against workers as discriminating firms are driven out of their
product markets or induced to change their discriminatory behavior in order to
save on costs. The hypothesis maintains that in the case of trade, discrimination
may not always be reduced because slackness in labor markets may shelter firms
from market forces which should otherwise induce them to minimize factor costs in
order to remain competitive. To serve as a guide for which industries are likely to
see reduced discrimination, and which may see more, the H-O-S trade theory is
incorporated. Based on that theory, I posit that employees who have skills in high
demand in their region face less discrimination than those who have skill sets in
decreasing demand. Note that this is distinct from market based skills selection per
se. While it is true that workers whose skills are in high demand will realize higher
wages, it is also likely that minority workers in those fields will face fewer instances
15
of discrimination, since firms face higher costs to discriminate when labor markets
are tight.
Empirical Model
The model will be a difference of differences methodology similar to that
used in the Black and Brainerd and Kongar studies. This methodology is useful in
that, by making the assumption that factors such as education and workplace
attachment are consistent across concentrated and non-concentrated industries, it
isolates the portion of the wage gap, or employment gap respectively, attributable to
discrimination. This method for isolating the residual is useful in that, by invokig
the assumption that such factors are the same for both groups it effectively filters
out those market based differentials which are unobservable.4 While this makes the
model a desirable method, it bears note that this methodology is most commonly
used in controlled tests, and it invokes an assumption of trade exogenaity which, if
untrue, will limit the effectiveness of the procedure. An attempt is made at limiting
trade endogenaity by focusing on a narrow range of time.
This is particularly useful for filtering taste based differentials in commitment to
ones career, since measuring utility is notoriously problematic.
4
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Wage Regression:
t(ln(wage)iw – ln(wage)ib) =  + ttradei + conceni + (concen*ttradei)
Where t ln(wage) is the change in logged wage of persons by industry, according to
their race, from 2002 to 2006. Note that subscript “i” denotes industry, not
individual. To create this figure, nominal wages as reported in the dataset were
deflated using the Consumer Price Index to base year 1999. Individuals were sorted
by year, then race, and finally NAICS code industry. From these group totals I took a
mean, to be regressed in Model 1, and a median, to be regressed in Model 2. trade
is the proportional increase or decrease in foreign share of the industry in which
they worked. Concen is a dummy variable indicating whether the industry was
concentrated as of the beginning period, 2002, based on the Hirfindahl 4 firm
40percent market share criterion. (concen*ttrade)I is an interaction term
measuring the impact of trade change contingent on whether the firm was
concentrated. Note that subscript “i” denotes industry, not individual.
Employment Regression:
t(ln(employ)iw – ln(employ)ib) =  + ttradei + conceni + (concen*ttrade)i
Where all right side variables are as above and the dependant variable
t(ln(employ)iw – ln(employ)ib) is the difference in change of employment share
from 2002 to 2006.
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Results
In the first model, “Change in Mean Wage Gap,” I regress the change in logged
mean wages on Trade, Concentrated, and ConcenTrade. This model fails to find
statistical significance for any variables, set aside ConcenTrade, the primary input of
interest. With a very low R-Squared, this model proves not very useful in predicting
employer behavior in terms of discrimination. This may be due to outliers in mean
earnings, particularly for industries having few employees.
Model 2, “Change in Median Wage Gap” regresses median earnings by
industry on foreign trade share, industry concentration, and the interaction term for
these. By taking the median, I attempt to filter outliers which may bias results. In
this model, both industry concentration and increased trade in concentrated
industries prove highly significant, at the one percent level. Both signs are
appropriate and consistent with the expectations discussed in the model.
Concentrated industries are associated with a 38 percent larger wage gap than nonconcentrated industries. Furthermore, the impact of trade on discriminatory wage
practices emerges as clearly contingent on whether the industry was concentrated
in 2002. While the general trade impact is insignificant, the impact of trade on
concentrated firms in particular is significant. Concentrated firms exposed to
foreign entry decreased their race wage differential by 215 percent as more than did
firms not impacted by trade or not concentrated. That is, the wage gap fell by a
magnitude of roughly double for such firms.
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Model 3, “Change in Employment Hours Differential” indicates that increased
trade causes a reduction in the employment differential between whites and African
Americans. This model suggests that proportionally more African Americans are
hired as trade increases. Incidentally, because neither the estimator for
concentration, nor the interaction between concentration and trade is significant,
the results do not provide conclusive evidence on the impact of trade on the relative
employment of African Americans in firms which have been insulated from
competition, the focus of the study.
Conclusion and Recommendations for Further Research
This study advances our knowledge of discrimination by drawing links
between gender based discrimination and discrimination based on race. Based on
my findings, increased trade in consumer goods markets may in fact incentivize
firms which have been insulated from competition to reduce discriminatory
practices going forward. This fact may hold promise for racial minorities working in
those industries.
This study is constrained by a lack of available data on industry
concentration ratios for firms outside of the manufacturing sector. Also, the use of a
difference in differences test invokes assumptions of exogenous trade shock which
may prove a poor fit in a dynamic global economy. While this methodology has the
advantage of employing a filter to cancel unmeasurable group characteristics which
could impact incomes for reasons other than discrimination, such as employee
attachment to the labor force, it does so only on the assumption that such
19
preferences do not differ on the basis of trade between members of the same
demographic. For this reason, future research utilizing a decomposition style model
could prove useful in corroborating these findings.
20
Bibliography
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Becker, Gary. The Economics of Discrimination. The University of Chicago Press,
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Berik, G., Rodgers, Y. v. d. M. and Zveglich, J. E. (2004), International Trade and
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Ederington, Josh, Jenny Minier, and Kenneth Troske. "Where the girls are: trade and
labor market segregation in Colombia." (2009).
Kongar, Ebru. "Importing equality or exporting jobs? Competition and gender wage
and employment differentials in US manufacturing." Competition and Gender Wage
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Menon, Nidhiya, and Yana van der Meulen Rodgers. "International trade and the
gender wage gap: New evidence from India’s manufacturing sector." World
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Schott, Peter K. “U.S. Manufacturing Exports and Imports by SIC or NAICS Category
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http://faculty.som.yale.edu/peterschott/files/research/data/sic_naics_trade_20100
504.pdf
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Appendix A
Data
Table I
22
Appendix B
Estimation Results
Table II
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