Competitive market reduces discrimination

Ari A. Perdana, Centre for Strategic and International Studies, Jakarta

One issue in the labor market transformation is how much women gain from development. One indicator is the female Labor Force Participation Rate (LFPR). Indonesia's female LFPR, especially in the modern sector and in skilled jobs has increased markedly over the past 30 years. In the early 1970s, only 30 percent of the female working age population was in the labor market. The number increased to around 50 percent in the 1990s. The labor force participation is higher especially for educated urban females in their mid-30s.

However, the female LFPR is considerably lower than the male's. The male LFPR has been steadily high, about 80 percent to 90 percent over time. What determines the lower female labor force participation rate?

The difference could arise from several factors. First, the productivity-related factors such as education, experience or skills. In a competitive labor market, firms would hire employees with the highest productivity.

The second factor is related to the supply and demand structure in the labor market. Supply is determined by the individual's decision to work at a given time and at a certain wage rate. Demand is determined by the size of the labor market, regional characteristics, or specific job requirements.

Another aspect is discrimination. There are two types of labor market discrimination. Wage discrimination refers to different wages received by two groups of similar workers in the same occupation; and occupational discrimination refers to when minorities like women are excluded in a certain way or another from certain desirable occupations. This usually results in women crowded into less desirable occupations, hence depressing the average wage rate.

Discrimination may be caused by employers' prejudice against working women. Or employers refer to the popular perception that female workers are generally less productive than males. Third, employers discriminate because of employees' prejudice. For example, employees may refuse to work in the same position with, or under supervision of, female workers.

Occupational discrimination has existed because it has been possible for society at large to create barriers for women to access certain occupations, even to have access to work at all. To this day, the labeling of certain jobs as "men's work" or "women's work" has yet to be eliminated. Many women, hence, involuntarily refrain from working. But women may also accept such institutionalized segregation as natural.

How would one evaluate the presence of such discrimination in the labor market? Based on a method proposed by Jones and Makepeace (1996), the CSIS in 2000 studied explanations for the difference in the female and male LFPR.

The study observed two factors, the relative difference in the average quality of human capital (education, experience, skills) between female and male workers and other, unexplained factors.

The study showed that in the mid 1980s, the difference in this quality of human capital only explained some 23 percent of the difference between urban female and male workers in Indonesia.

This means 76 percent of the difference was the result of the unexplained factors, suggesting a strong presence of discrimination. Such factors remained high in the late 1990s, though it declined to 63 percent. In the rural areas, the contribution of unexplained factors was higher -- 83 percent of the LFPR gap in the mid-1980s, but it too declined somewhat, to 79 percent in the late 1990s.

What measures would at least reduce discrimination? Since the heart of the problem lies in the patriarchal society, the optimal solution would be a "deconstruction" of such a societal attitude.

Economists can at least offer two strategies. The first is economic growth. This would create new job opportunities and employers could recruit people of higher quality. Growth would also provide greater capacity to deliver public services and increase social infrastructure. This would reduce the time for women to do household activities, and enable more time and access to education and other activities to increase their level of human capital.

The second is a competitive market structure. This would increase the costs to employers who might otherwise discriminate against female workers, since any firm wishing to compete would have to hire the most productive workers regardless of the gender.

In a non-competitive market, the incentives to be efficient are much less. Thus, firms may have the luxury to discriminate against females and others from minority groups.