Wage Discrimination and the Residual Approach Paper Example

For a long time, the residual approach has been used as the traditional means of measuring wage differentials. Using the method, the existing gap in wages between males and females is broken down into two categories. Under the first category, the differences in qualifications are highlighted and then explained. The second category highlights differences in the model's structure. These highlighted differences are those which lack an explanation and in most instances, are indicative of discrimination in the market. Using the residual approach, it is assumed that males and females are imperfect substitutes and therefore their productivity may only be impacted by factors such as their underlying characteristics and the population of workers in employment from each group.

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Differences in wages between men and women should be explained using economic factors. An effective method of explaining the differences is one which can explain a large percentage of the differential. The residual approach is no longer perceived as an effective method of measuring wage differences as the assumptions made in regards to the use of the method have proven to be invalid. The major assumption made in regards to the use of the method is that workers who display the same characteristics are equally productive. The assumption does not factor in the issue of sex, race or even a worker's ethnic group. The implication of the assumption is that in the event that there is no discrimination, all workers would be paid equally. The residual approach does not effectively explain wage discrimination due to its flawed account of productivity differences. It only explains the differences which occur as a result of worker characteristics but does not account for those which occur as a result of the differences in the numbers of employed workers.

One effective way of measuring wage discrimination between male and female workers is by analyzing the productivity ratios of male and female employees and then comparing the ratios to the wage ratio. Even though the method does not completely identify instances of discrimination, it greatly helps in establishing whether the wages paid to a specific gender are reflective of their productivity. Labor market discrimination against women can only be said to exist in a situation where the women receive wages that are not equal to their relative productivity. In the current labor markets, wage discriminations are rare. However, other forms of discrimination may still be in existence. For instance, the crowding model discusses how women may prefer some professions compared to others. Such an instance creates a situation where some professions may have a large supply of workers than the available job opportunities or demand. The situation results to a low marginal product of labor and therefore low wages for women.

Conclusion

Under the crowding model, the wages are equated to the marginal product which eliminates the issue of wage discrimination. Low marginal products only occur because females tend to prefer some occupations over others. There are tasks that some females do not feel comfortable undertaking and therefore the males take up such opportunities. Theories of discrimination illustrate that women take less risks compared to men. Women have also been shown to be less confident than men and prefer careers or occupations where there is less competition. All these factors create an illusion of systematic labor market discriminations when in reality, such discriminations are non-existent.