Statistical Discrimination

One of the most interesting variants of discrimination occurs because of the interplay between incomplete information and perverse incentives. This is known as statistical discrimination, in which individuals are treated on the basis of the average behavior
of members of the group to which they belong rather than on their personal’ characteristics.

One common example arises when an employer screens employees on the basis of their college. The employer may have observed that people who graduate from better schools are on average more productive; in addition. grade point averages are often difficult to compare because of differences in grading standards. Employers therefore often hire people on the basis of their college rather than of their grades. A more careful screening process would show that there are many highly qualified workers from the less well-known schools. We see here a common form of statistical discrimination based on average
quality of schooling.

Other examples: Employers sometimes assume that all young black workers have low productivity, and therefore they do not hire well-qualified black youths. Landlords assume that all students are rowdy. and so they ate reluctant to rent to quiet students. New York taxicab drivers are fearful about being robbed by black men and generally will not pick up black passengers north of 96th Street. Police engage in “racial profiling”
in highway searches because they believe that on average most criminals meet a particular profile. Some of these activities are illegal. while some are just Petersen. but they are all examples of statistical discrimination. Statistical discrimination leads to economic inefficiencies because it reinforces stereotypes and reduces the incentives of individual members of a group to develop skills and experience. Consider someone who goes to a little-known school. She , knows that she will be largely judged by the quality
of her schooling credential’s.

The grade point average. the difficulty of the courses taken. her actual knowledge. and her on-the-job experience may be ignored, TIle result is that. when subject to statistical
discrimination, individuals have greatly reduced incentives to invest in activities that will improve their skills and make them better workers. , Statistical discrimination is particularly pernicious when it involves race. gender •.or ethnic groups.’ If employers treat all black youths as “unproductive” because of average experience with hiring black
youths. then gifted individuals will not only be treated as the average worker but will have little incentive to upgrade their skills, Statistical discrimination is seen in many areas of society. Life insurance and automobile insurance generally average the risks of” people who are careful with those who live dangerously; this tends to reduce the incentive to behave cautiously and leads to a decrease in the average amount of caution in the population: Women were traditionally excluded from quantitatively oriented professions’
like engineering; as a result. women were more likely to choose humanities and social sciences for their majors and their careers. thereby’ reinforcing the stereotype that women were uninterested in engineering.

Statistical discrimination not only stereotypes individuals on the basis of group characteristics; it also reduces the incentives of individuals to make investments in education and training and thereby tends to reinforce the original stereotype.

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