Competitive market reduces discrimination

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.