Statistical discrimination (economics)
Encyclopedia
Statistical discrimination is an economic
theory of racial or gender inequality
based on stereotypes. According to this theory, inequality may exist and persist between demographic groups even when economic agents (consumers, workers, employers, etc.) are rational and non-prejudiced. This type of preferential treatment is labeled "statistical" because stereotypes may be based on the discriminated group's average
behavior.
The theory was pioneered by Kenneth Arrow
and Edmund Phelps
The theory is based on lack of information. For instance, labor market discrimination may exist because employers don't know with certainty workers' ability, therefore they may resort to base employment decisions on the workers' visible features, such as group identity.
Another way statistical discrimination might be applied is due to differing amount of knowledge about different groups. For instance, a large amount of data may be available for group A in comparison to group B. But say these two groups have the same distribution and average ability. If two groups, A and B, have average test scores well above the average for the entire population, but group A's estimate is considered more reliable, then if two people, one from A and one from B interview for a job, using statistical discrimination, A is hired, because it is perceived that his group score is a good estimate, but group B's group score more likely to be "luck". Conversely, if the two groups are below average, B is hired, because group A's negative score is believed to be a better estimate.
Statistical discrimination is often used and tolerated, for example, when older people are charged more for life insurance, or when a college diploma is required for a job (because it is believed that college graduates perform, on average, better). Some well-documented instances of statistical discrimination for involuntary group membership also do exist and are tolerated. For example, many countries allow auto insurance companies to charge men and women with identical driving records different rates (or factor in gender when deciding whether to deny coverage). The same society may not tolerate statistical discrimination when it is applied to protected groups. For example, it has been suggested that home mortgage lending discrimination against African Americans, which is illegal in the United States
, may be partly caused by statistical discrimination.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
theory of racial or gender inequality
Inequality
In mathematics, an inequality is a statement how the relative size or order of two objects, or about whether they are the same or not .*The notation a b means that a is greater than b....
based on stereotypes. According to this theory, inequality may exist and persist between demographic groups even when economic agents (consumers, workers, employers, etc.) are rational and non-prejudiced. This type of preferential treatment is labeled "statistical" because stereotypes may be based on the discriminated group's average
Average
In mathematics, an average, or central tendency of a data set is a measure of the "middle" value of the data set. Average is one form of central tendency. Not all central tendencies should be considered definitions of average....
behavior.
The theory was pioneered by Kenneth Arrow
Kenneth Arrow
Kenneth Joseph Arrow is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51....
and Edmund Phelps
Edmund Phelps
Edmund Strother Phelps, Jr. is an American economist and the winner of the 2006 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Early in his career he became renowned for his research at Yale's Cowles Foundation in the first half of the 1960s on the sources of economic growth...
The theory is based on lack of information. For instance, labor market discrimination may exist because employers don't know with certainty workers' ability, therefore they may resort to base employment decisions on the workers' visible features, such as group identity.
Another way statistical discrimination might be applied is due to differing amount of knowledge about different groups. For instance, a large amount of data may be available for group A in comparison to group B. But say these two groups have the same distribution and average ability. If two groups, A and B, have average test scores well above the average for the entire population, but group A's estimate is considered more reliable, then if two people, one from A and one from B interview for a job, using statistical discrimination, A is hired, because it is perceived that his group score is a good estimate, but group B's group score more likely to be "luck". Conversely, if the two groups are below average, B is hired, because group A's negative score is believed to be a better estimate.
Statistical discrimination is often used and tolerated, for example, when older people are charged more for life insurance, or when a college diploma is required for a job (because it is believed that college graduates perform, on average, better). Some well-documented instances of statistical discrimination for involuntary group membership also do exist and are tolerated. For example, many countries allow auto insurance companies to charge men and women with identical driving records different rates (or factor in gender when deciding whether to deny coverage). The same society may not tolerate statistical discrimination when it is applied to protected groups. For example, it has been suggested that home mortgage lending discrimination against African Americans, which is illegal in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, may be partly caused by statistical discrimination.
Other references and suggestion for further readings
- Coate, Steven and Glenn Loury, 1993, Will affirmative-action policies eliminate negative stereotypes?,The American Economic Review, 1220--1240.
- Fang, Hanming and Andrea Moro, 2010, "Theories of Statistical Discrimination and Affirmative Action: A Survey," NBER Working Papers 15860, National Bureau of Economic Research, Inc.
- Glenn LouryGlenn LouryGlenn Cartman Loury is an American academic and author. He is the Merton P. Stoltz Professor of the Social Sciences and Professor of Economics at Brown University.- Early years :...
, The Anatomy of Racial Inequality, Princeton University Press. Informally illustrates the theory in the context of United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
' racial differences.