An Establishment-Level Test of the Statistical Discrimination Hypothesis

Abstract

This article explores the basic assumption of statistical discrimination theory, which holds that women and minorities earn lower wages because they, on average, have lower productivity. Employer exploitation of women and minorities and social closure by advantaged employees are advanced as alternative explanations for the lower wages of women and minorities. The authors first demonstrate that there are substantial gender and racial wage penalties net of human capital for a sample of employees. The primary analysis focuses on the sample of private-for-profit establishments in which these individuals are employed. Establishment productivity as well as aggregate salaries and wages and profits are regressed on the sex and race composition of the establishment with other factors that may influence establishment productivity. Findings show that neither the sex nor race compositions of the workplace are associated with productivity. The authors interpret the results to be most consistent with a social closure account of gender and racial earnings inequality.