Two economists agree that labor market discrimination against certain workers un

Question

Two economists agree that labor market discrimination against certain workers unfairly leads to lower wages for the disfavored group. Economist X argues that government intervention is most likely necessary to eliminate this unfair treatment, whereas Economist York argues that the best solution to the unfair treatment is to let the market work to eliminate it on its own.

Economist Y is most likely to be correct when labor and product markets are highly competitive and the lower wages of the disfavored group result from:

A. Differences in human capital
B. Statistical discrimination
C. Discrimination by employers.

Explanation / Answer

Economist Y is most likely to be correct when labor and product markets are highly competitive and the lower wages of the disfavored group results from discrimination by employers.

This is because due to discrimination some employers hire only favored group, this tends to lower wages of disfavored group.

Many employers who do not discriminate will then be able to hire workers from disfavored group at lower wages.

This hiring of workers at lower wages tends to lower the cost of production of such employers who then are able to reduce their prices and be able to corner large market share.

On the other hand, discriminating employers, on account of discrimination, have been hiring high wage workers and thus would find it difficult to reduce their cost or prices and thus will lose market share.

As they lose market share, they either tend to go out of business or mend their ways.

In both the cases, demand for workers from disfavored group increases and demand for workers from favored group decreases. This results in elimination of wage diferences between two groups.

Hence, the correct answer is option (C).

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