International Monetary Fund - "The COVID-19 Gender Gap"

https://www.imf.org/en/Blogs/Articles/2020/07/21/blog-the-covid-19-gender-gap

Consider a perfectly competitive labor market in which there are equal numbers of male and female workers. The wages of men and women are unknown. Now consider two companies in the market: Company A has discriminatory preferences against women (d = 0.5), but Company B does not have discriminatory preferences against women (d = 0). Which of these statements is true?

1. Company A will earn a lower profit than Company B.
2. If women earn lower wages, Company B will only hire women.
3. If more women enter the labor market, women's relative wages will decrease.
4. In a competitive market, Company A will be driven out of business.

The Becker Model Describes "preference-based" or "taste-based discrimination": employers may not like workers from some group and incur a psychological cost of hiring them. In this model, firms maximize utility, not profits Think of utility as the firm's overall welfare: want higher profits, and prefer not to interact with members of a particular group The model could equally apply to discrimination on the basis of gender, race, national origin, sexual orientation, religion and many other factors (to the extent that these factors are observable to employers).

For simplicity, assume that there is only one input to production: employee-hours (E). Production Function: q = f(E) Marginal product of labor (MP_E): change in output resulting from a hiring an additional worker, holding constant the quantities of all other inputs.

Value of the marginal product of labor: the dollar increase in revenue generated by an additional worker. VMP_E = p MP_E

Profit Maximization Profit = pf(E) - wE [Profit = revenue - labor costs] FOC: p MP_E - w = 0 [Profit is maximized where FOC = 0]

p MP_E = w

VMP_E = w [Hire employees until value of marginal product is equal to wage]

-Start with the assumption that men and women are equally productive, and labor is the only factor of production.

q = f(E_M + E_W)

Assumptions

Suppose employers dislike hiring women. In the Becker model, such employers act as if there is an extra cost associated with hiring a woman. That is, employers act as if women's wages are not W_F but rather W_F*(1 + d)

- Note: women still only receive market wage W_F

- refer to W_F*(1 + d) as the "effective wage" faced by the employer

d represents the psychological cost of hiring a woman and is referred to as the "discrimination coefficient". Note that d may vary across firms. Assume d 0.

Women are "cheaper" than men (i.e. market wage W_F < W_M )

Firms are identical, except for their discrimination coefficient d

Firms are only discriminatory against women

d=0, firms that do not discriminate.