Labor-Market Discrimination: An Interpretation of Income Differences in the Rural

South
Author(s): Finis Welch
Source: Journal of Political Economy , Jun., 1967, Vol. 75, No. 3 (Jun., 1967), pp. 225-
240
Published by: The University of Chicago Press

Stable URL: http://www.jstor.com/stable/1828681

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend
access to Journal of Political Economy

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
TH E )OURANAL OF
POLITICAL
ECO N OMY
Volume 75 JUNE 1967 Number 3

Labor-Market Discrimination: An Interpretation of Income

Differences in the Rural South Finis Welch 225

The Strong-Factor-Intensity Hypothesis: A Multise

Test John R. Moroney 241

On the Theory of Tax Incidence Peter M. Mieszkowski 250

Money and Cycles in Post-Confederation Canada

Keith A. J. Hay 263

A Reinterpretation of 'the Pure Theory of Exhaustion

Richard L. Gordon 274

Imperfections in the Capital Market George J. Stigler 287

The Demand for Money-the Dynamic Properties of the Multiplier

A. AX Walters 293

A Test of Monetary Policy Action Thomas Hatrilesky 299

Miscellany Sir Roy Harrod 305

Book Reviews (see inside front cover) 309

Books Received 314

THE UNIVERSITY OF CHICAGO PRESS

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 June 1967 Volume 75, No. 3

THE JOURNAL OF

POLITICAL ECONOMY
EDITED BY ROBERT A. MUNDELL
IN CO-OPERATION WITH THE OTHER MEMBERS OF THE DEPARTMENT OF ECONOMICS
OF THE UNIVERSITY Of CHICAGO

BOOK REVIEWS:

E. L. Wheelwright, Industrialaion in Malaysia T. H. SR wxoC 309

Gustave Glotz, Ancient Greece at Work An Econmc Histoy of Greece f

Period to the Roman Conqwest . . . . . . F. M. HE tmim 310
Werner Z. Hirsch, Elbert W. Segelhorst, and Morton Marcus, Spilov of Public Costs and
Benefs . ,.. . ,. . .. . ..... A. G. HOuvLANN 310

George Hildebrand, Growth atd Structure in the

FRAcESCo FiTE 311

Douglass North, Growth and Weifare in the American Past: A New E

RALPH ANDREANo 312

The Journal of ?olltlcal Ecosomy Is publIed bimonthly in Februar. rl. June, Augus and December by
The Univerity of Press, 57SO Ellis Avenue icag llinoa 6W7. S cdption rates for U.A. and po I ya
$10. 9.00; years, $27.50. Canada a PanAmercan Patal Union: 1 year, $10.30; 2 years, $20.00;
All other countries: 1Iyer,100;2years, $21.00; 3 r# yers 30.50. Si co, $2.50. S e $0 per yer0 Su
start with the Xtlsue publised after oder is rolved. Make remittance plyable toThe University of Chio Ei United
States curr rit eqivlt.
Claims, for missing aumber should be made within the month following the regular mont
erect to supply mixing numbers free only when lose have been sustained in transit and when
Business correspowleno. should be addressed to The University of Chag Pres, Chicago, Illinois 607.
Communcatons for the adltorsand m should e addressed to the Editorof Tnt Jo iMoCAL BMW
oy, 1126 East 5th Stret, Chicago Illinois 6WV7. Mnets ll be ssesedforpo t y co nav l form
but, if accepted, an original t rtte cop, on no ble paper, double spcd, gwit genrmas (3-Imc top), will he
required, and footnotes should double spaced ad placed consecutively at the end.
The articles bn thi journal ae minded in the SociaW &4iewsd H uiesWldes, New York, New York. Book
are Indexed in Beak Review lmex, Detroit, Michigan.
A vftid forp to quote fom this Journal should be addressed to The University of Chicago Pres
Microfilms of Journal are now available to regular subscribers only and may be obtained at the end of the volume
yea. Orders and inquires shd be addrsed to Universi , 313 North First Street, Ann Arbor, Michigan.
Noe to subecrihers I you change your address, please notify u and your local postmaster lmediately, giving W your
old and your new address. Alke'o fa kfor #A. ehaxge.

Scond-clas potage paid at Chicago, linols.

[Copyright 1967 by the Univrt of Ccago)

PRIXTZD IN 'U.S.A.

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 THE JOURNAL OF

POLITICAL ECONOMY
Volume 75 JUNE 1967 Number 3

LABOR-MARKET DISCRIMINATION: AN INTERPRETATION OF

INCOME DIFFERENCES IN THE RURAL SOUTH

FINIS WELCH*
Southern Methodist University

T IE first-order economic effects In addition, they may have less educa-

of discrimination are easily ob-
served-Negroes simply receive
less income than whites. For example, in
the rural South, average Negro income is
less than one-half average white income.
Broadly speaking, all of this difference
can be viewed as resulting from dis-
crimination, but not current discrimina-
tion alone, since the cumulative effects
of fewer opportunities are obviously
important. Part of the difference in in-
come is a consequence of the fact that
Negroes own less property and have less
education. Of course these differences in
earning potential may have discrimina-
tory origins. For example, Negroes may
Dwn less property because they have had
tower income and consequently less
iaving-and they may have been dis-
-riminated against in acquiring property.
* I am particularly indebted to H. Gregg Lewis son is assumed to be a composite factor
nd T. W. Schultz, who discussed in detail most of
'he issues considered here. In addition, Schultz made
numerous comments to aid in clarifying the presen-
ation. Thanks are also due to Zvi Griliches for
Ldvice concerning the empirical procedures and to
YIichael Connolly and Richard Parks for their com-
nents on an earlier draft.
tion because of inferior quality of school-
ing and because of having anticipated
discrimination against their education.
In principle, all of these effects should be
considered before the extent of current
discrimination can be determined.
My approach to determine the eco-
nomic effects of discrimination entails
using a model of market discrimination
which is based upon factor externalities;
this type of discrimination, as I shall
show, is generated by a class of inefficien-
cies which occurs when laborers are
required to associate with members of
other groups (races). Specifically, I shall
concentrate upon differences in quality
and quantity of schooling when educa-
tion is assumed to be a distinct factor of
production complementary to physical
(unskilled) labor and capital. Each per-
of production, consisting of one unit of
physical labor and a "bundle" of educa-
tion. My plan is first to consider the
theoretical issues and then proceed to
an empirical analysis of white-non-white

225

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 226 FINIS WELCH

income differentials in ten southern distinguishable, the first being personal-

states1 for rural farm males who were ized services which, by definition, are
twenty-five years old or over in 1959. associated with their producer, whereas
The burden of the empirical analysis is the second refers to impersonal or
to identify the parts of per capita income standardized products. Presumably, im-
differentials which are attributable to (1) personal products do not have unique
differences in the ownership of physical characteristics which permit producers
property, (2) differences in years of to be identified. Now, if consumers re-
school completed, (3) inferior quality of ceive disutility from associating with
schooling, and (4) market discrimination members of a group which provides
against physical labor and education. personalized services, they will discount
The most important result is that the the value of these services. If, on the
market evidently discriminates much other hand, the product is impersonal,
more heavily against a Negro's education any discount must be attributed to
than against his unskilled labor. Thus, disutility occurring at the time the
relative to whites with similar schooling, product is purchased, for thereafter the
Negro income declines as school comple- producer of that product is irrelevant.
tion increases. In addition, inferior-quali- In this case, an individual who receives
ty schooling is an important source of little or no disutility from purchasing
differential income. these products would have a compara-
Before formulating the model, I shall tive advantage as an intermediary.2 The
consider some of the often asserted ori- role of the intermediary would simply be
gins of market discrimination. According that of absorbing the difference between
to the definition used here, discrimina- the subjective discount rate of consum-
tion is assumed to exist whenever physi- ers (or potential intermediaries) and his
cally equivalent factors receive different own discount rate. Thus, to the extent
wages. Since we are more concerned with that transaction disutility is an im-
discrimination as it affects earnings, I portant consideration, we would expect
will consider only two types: discrimina- to observe persons who derive relatively
tion against producers and against em- little disutility from this association to
ployees. Discrimination against con- serve as intermediaries. Furthermore, if
sumers may affect the psychic evaluation there is a relatively large supply of
of income as well as the manner in which potential intermediaries who possess no
income is distributed among its alterna- disutility for association with persons
tives. But this type of discrimination is of different race, price discrimination
considered here only as it affects incen- against impersonal products will not
tives to acquire education. occur.
Discrimination against a producer To test for product discrimination it
may lower the price of his product and/ is necessary to compare prices, but, for
or raise the price of his purchased inputs. reasons that later become obvious, such
Producer discrimination therefore refers comparisons should be restricted to
to product and factor discrimination. impersonal products. Factor externalities
For products, two important classes are may distort the comparison of personal-
ized services.
I The states are: Alabama, Arkansas, Georgia,
Louisiana, Mississippi, North Carolina, South 2 I am indebted to H. G. Lewis for pointing to the
Carolina, Tennessee, Texas, and Virginia. possibility of intermediation.

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 LABOR-MARKET DISCRIMINATION 227
Factor discrimination is the mirror
image of product discrimination, and the
analysis is equivalent. If there is dis-
crimination in factor markets, those
discriminated against pay higher prices
for productive inputs; assuming profit
maximization, we would expect these
factors to have greater marginal products
than if a lower price were charged. Again,
if this sort of discrimination exists, an
incentive for intermediation will also
exist. To test for discrimination against
impersonal factors, either prices or mar-
ginal productivities, must be observed.
In the following analysis, it will be as-
sumed that no discrimination exists
against products or factors other than
labor. To the extent that these forms of
discrimination are important, my empir-
ical results will be biased.3
The most important distinction be-
tween employees and producers is that
employees always provide personalized
services, whereas producers may provide
impersonal products. In the market-
place, a producer's race may not be
discernible from his product; but, in the
firm, an employee's race is obviously
identified. In his pioneering book, The
Economics of Discrimination, Gary Beck-
er (1957) distinguishes two types of
market discrimination: (1) discrimina-
tion by employers and (2) discrimination
by employees. If employers discriminate,
they do so by discounting the value of
services provided by Negroes. White
employees presumably discriminate by
discounting the value of wages they earn
if these wages are earned in the presence
of Negro employees. These effects are
3 Here, I think that the burden of proof lies with
the protagonists. For example, does the price of corn
depend upon the race of its producer? If so, is the
dependence causal? Prices may depend on informa-
tion and information upon education. Since educa-
tion is correlated with race, there may be spurious
correlation between race and prices.
This content downloaded from
143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
achieved operationally by the use of a
discount factor which varies with a
person's "taste for discrimination" but,
according to Becker's assumption, does
not vary with the degree of association
between discriminators (whites) and
discriminatees (Negroes). Becker's anal-
ysis indicates that production is segre-
gated if Negroes and whites are substi-
tutes and that it may be integrated if
they are complements. If they are sub-
stitutes discrimination is unstable in the
long run because firms employing Ne-
groes are more efficient. By assumption,
these firms purchase equivalent services
at lower cost. There is reasonably good
evidence indicating market discrimina-
tion against Negroes since the time of
their emancipation. In view of the rather
long history of discrimination, it seems
to me that explanations which are stable
only in the short run are unsatisfactory.
In the following section I present an
operational specification of employee
discrimination and consider some of the
prerequisites for racially integrated pro-
duction. One basic presumption is that
education and physical labor can be
considered as separate factors of produc-
tion. An implication is that laborers with
different "amounts" of education are
complements rather than substitutes.
Now, complementarity can be demon-
strated when differences in education are
the only features by which laborers are
distinguished. If persons with unequal
education are also members of different
races or if they possess any characteris-
tics that impose either real or psychic
externalities on other laborers the mutual
complementarity may be impaired. The
proposition forwarded here is that in
production racial integration does im-
pose external inefficiencies. Thus, com-
plementarity implies that the joint
product of two laborers with unequal
 228 FINIS WELCH
education is greater than the sum of
their individual products. But, if the
laborers are of different races, their joint
product is assumed to be less than if
they are of the same race. It is even
possible that the external inefficiencies
exceed the complementarities so that the
joint product is less than the sum of
the individual products; yet, if this were
the case, we would not expect to observe
integration. To the extent that laborers
are income maximizers, we expect to
observe integration only if there is "net"
complementarity. The essence of the
model is the interaction between external
effects-the inefficiencies and the com-
plementarities. An advantage of this
interpretation is that although integra-
tion can lead to discrimination it may
nevertheless result in increased wages to
both Negroes and whites. Also, this
interpretation does not imply, as does
the Becker model, that monopoly rents
accrue to those who hire only Negroes
at a lower wage.
Consider a market composed of two
groups of persons, N1 and N2, and assume
that there is no discrimination in either
product or non-labor markets. Produc-
tion, Y* , is a function of three inputs.
The labor input is assumed to be separa-
ble into two components-N, physical
labor (the original properties), and E,
education (the acquired skill). Each
laborer constitutes one unit of physical
labor and a bundle of education. The
quantity of education varies between
persons. The third input, X, represents
the class of non-labor inputs. The pro-
duction process is described by
Y* = f(NE,X) (1)
and is assumed to be homogeneous of the
first degree. The price of output is as-
sumed to be unity, and p,, the price of
This content downloaded from
143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
X, is equated between N1 and N2 and is
assumed to be constant.4 The price of
each factor is the value of its marginal
product.
As is indicated in the Appendix, by
imposing the constraint of equilibrium
in the non-labor-input market, that is,
Px= aY*/aX, labor's product-the re-
turn to physical labor plus the return to
education-can be written as a function
of N and E only, in which px appears as
a parameter. This function, represented
by
Y=F(NE), (2)
is also homogeneous of degree 1, that is,
it has constant returns to scale.
It should be observed that whatever
the physical substitution relationship
between N and E may be, by allowing
for equilibrium in the non-labor-input
market, the "net" effect is that physical
labor and education cannot be substi-
tutes, that is, 02Y/ONOE > 0. This
result follows directly from the Euler
equation for first-degree homogeneity.5
If it is assumed that units of physical
labor in one individual substitute per-
fectly for units of physical labor in
other individuals and similarly for educa-
tion, then
N = the number of laborers employed, for each
is assumed to possess one unit, and
E = iriNi, where ri is the number of units of
education possessed by members of the
ith labor group and Ni is the number of
such laborers.
4The restriction of a unity price for output does
not affect the degree of generality, but the assumed
perfectly elastic supply function of non-labor inputs
is slightly restrictive. For example, if the supply
function were positively sloped, the function indicat-
ing value added by labor would possess diseconomies
of scale.
6 If the functional form Y = aN + 1E is ex-
cluded, as in the remaining parts of this paper, then
a2Y/aNaE > 0.
 LABOR-MARKET DISCRIMINATION 229

The wage of a laborer in the ith group Thus, so long as r1 5-? r2,
will then be increase the average wage of each group
dY (Y (Y (recall that &2Y/&N&E > 0), and, there-
Wi = dN= -N + riE (3) fore, the individuals in different groups
are complementary. In fact, in this world
That is, a laborer's wage will be the price
of constant returns to scale, the addition
of one unit of physical labor plus the unit
of any given person to the labor force
price of education times the number of
will not affect the wage of those persons
units of education the individual pos-
having the same quantity of education
sesses. Thus without any form of dis-
and will raise the wage of all other
crimination, laborers' wages would vary
laborers. It is this complementarity
only according to the quantities of
which, it seems to me, helps to contradict
education they "own."
the segregation tendencies implicit in
If all firms have the same production
the Becker model. Of course, segregation
function, then linear homogeneity im-
can still result. Psychic income dis-
plies that firm size and the number of
counts may exceed gains, and/or external
firms are indeterminant, but marginal
inefficiencies may accompany integra-
productivities (factor prices) are de-
tion.
termined as though there were a single
Let us now assume a form of dis-
producer who equates marginal cost
crimination in which laborers of group 1
with product price. When considering a
become less efficient when they work in
market in which labor is segregated, two
the presence of laborers of group 2 and,
firms will be considered, one consisting
symmetrically, members of group 2 may
of N1 laborers and the other of N2. For
become less efficient in the presence of
an integrated market, only one firm is
members of group 1. This assumption of
considered. Assume that r1 and r2 rep-
factor externality is basic to the re-
resent the per capita quantities of educa-
mainder of the paper and should be ex-
tion of the respective groups. And per-
plored. Presumably, the efficiency of
sons who possess, respectively, ri and r2
integrated laborers could decline simply
units of education are defined as being
because they have disutility for inte-
representative of their group, that is,
gration, and, under integrated conditions,
their income will be the average income
some of a laborer's time may be wasted
of their group.
because of his disgruntlement. However,
Now, consider the average wage of
this is undoubtedly an oversimplifica-
each group when production is integrated
tion. The incentive to integrate is derived
and no external inefficiencies exist.
from the assumption that laborers with
if, l=ON
N+ ri unequal quantities of education are com-
OE
plementary in production. In turn, any
and
resultant complementarity must be de-
1FT2 = A)N+ r2 Y rived from an exchange between the
ON TiE'
laborers which results in specialization
Since Y is homogeneous of degree 1, of function. (Perhaps, the more educated
it follows that person assumes a supervisory role.) It is
dl T dIT-'2 2 y therefore possible that the full amount of
d=2 dONO
dN2 d~l ,-EaN~E'
2 the complementarities which would be

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 230 FINIS WELCH

derived from combining two laborers of the full advantages of the comple-
the same group is not derived when the mentarities are not realized with integra-
laborers of the two groups are integrated. tion. Rather than redefine the production
An obvious example of this sort of function to allow for the reduction in
"friction" occurs when the two groups of complementarities, I have redefined the
laborers speak different languages. quantities of labor in terms of segregated
Another example would be a case in equivalent efficiency units.
which intergroup association results in The impact of the induced inefficiency
overspecialization of labor. Combining is expressed as though a portion of a
laborers of the two groups might result laborer's working time is lost when
in a precise division of tasks such that if working under integration. Thus for a
a given task were in the domain of firm employing laborers of the two
group 1 it must always be performed by a groups, the apparent quantities of physi-
member of that group even in circum- cal labor and education would exceed
stances in which a member of group 2 their efjective quantities because of effi-
could perform the task with less resource ciency losses, that is, N = N1 + N2 -
cost. This case would be particularly type 1 loss and E = E1 + E2- type 2
likely if members of one of the groups loss. The losses are assumed to be a
considered themselves superior to the function of association between laborers
other group and consequently believed of the two groups. However, the incen-
that certain tasks (perhaps menial) were tive to combine laborers must also de-
"beneath" them. Of course, this condi- rive from association to gain the benefits
tion may also exist when members of of complementarity between physical
different trade unions are associated labor and education. An entrepreneur is
because of the rigidly defined domain of therefore faced with a dilemma: associa-
activities for each trade. tion of the groups results in both
In each of these examples, association advantages and disadvantages. Presuma-
has an implicit cost, so that the increase bly, optimal association is determined
in production from combining laborers such that the marginal efficiency gains
of different groups is less than it would resulting from the complementarity be-
be if the combination consisted only of tween education and physical labor are
members of a particular group.6 That is, offset by equal marginal losses resulting
from inefficiencies of association between
8 J. K. Chadwick-Jones (1964) reports a case
study in which the effects were similar to those hy- the groups. For simplicity, I will assume
pothesized here. Chadwick-Jones tells of the recruit- that the optimal association is achieved
ment of unskilled laborers in Italy who joined skilled
by associating laborers of the two groups
British laborers in the steel industry. Since the
laborers were to perform complementary functions, in a one-to-one correspondence. That is,
the British labor union supported the recruitment if a laborer of group 1 is hired by a firm
policy. A discussion of the problems arising due to
in which laborers of group 2 are pre-
association between the laborers is provided al-
though there is no empirical support. "It was ob- ponderant, he will, at each point in time,
served, not only that the extent of verbal communi- be associated with one laborer of group 2.
cation possible with the Italian recruits was,
When he is isolated, the complementari-
naturally, very limited, but also that their cultural-
ly-derived attitudes and expectations were inap- ties are assumed to be lost, and when he
propriate" (p. 194). Although we may question the associates with more than one member of
use of the word "inappropriate," it is evident that
group 2, there may be additional losses
the anticipated complementarity was not fully
realized. without compensating gains. Assume

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 LABOR-MARKET DISCRIMINATION 231

also that when a member of group 1 increase the amount of association be-
associates with a member of group 2, tween the groups. In this case a laborer's
wage is given by
proportion pi of the first laborer's effec-
tive time is lost and that the correspond-
dYaY O Ay N Oy aE
ing proportion for the second laborer is
idN aN aN7+ aE'yr; (4)
P2. In this case the effective quantities
of labor are given by assuming that N1 represents the minority
group
N= N1 + N2 -min {N1, N2} (P1 + P2),
ayva
and W1- f-l) a-N + (I 1-f2
E = riN1 + r2N2 where the discrimination coefficients, fi
andf2, are defined as:
- min {N1, N2} rip, + r2p2)
fl = Pi + P2,
The forms of the type 1 and type 2
losses are important since they determine f2= p1+p2 r
how the cost of the inefficiency is to be ri
and
distributed between the groups. In gen-
eral, the form is simply the product of W2= a + r2 -ay
aN E
two quantities: (1) the number of as-
sociating units and (2) the effective input
W1 and W2 indicate the average wage of
loss for each associating unit. Let us persons in groups 1 and 2, respectively.
assume that optimal intergroup associa- Thus, to the extent that the above in-
tion occurs when an associating unit terpretation is descriptive of reality, we
consists of K members of group 1 for would expect discrimination against
each member of group 2. Now the num- members of the economic minority.
ber of associating units is given as K-1 Furthermore, if the majority possessed
min {N1, KN2J. For physical labor, the greater per capita education, we would
loss accompanying each unit is Kpi + P2 expect discrimination against education
and for education is Krip, + r2p2. If, as to exceed discrimination against physical
I assume, K is independent of the respec- labor.
tive numbers of persons in each group, If a laborer derives disutility from
then min {N1, KN2} defines an economic associating with persons of other groups,
minority and majority in a very special a necessary condition for him to inte-
sense. As in this paper, let K = 1 so grate is that doing so increases his wage.
that the concepts of the economic Although this condition is necessary, it
majority and minority are consistent is not sufficient, since, as in Becker's
with their numeric definitions. Thus, example of employee discrimination,
members of the minority group must laborers discount the value of wages
absorb the full effects of the decline in earned under integration. For his model,
labor efficiency because the addition of the increase in wages would have to be
a minority laborer will reduce his effec- sufficient to compensate laborers for the
tive working time and that of one psychic costs of integrating.
laborer in the majority group with It is important that the analysis has
whom he is associated, whereas the considered only average wages. Thus,
addition of a majority laborer will not to the extent that there is variation in

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 232 FINIS WELCH

the quantities of education possessed by crimination coefficient against physical

laborers in a given group, the implica-
tions can be misleading. For example, a
highly educated laborer in the economic
minority could not increase his wage by
integrating since he could select mem-
bers of his own group such that the ratio
of education to physical labor would be
the same in either segregated or inte-
grated production. The incentive to in-
tegrate is derived solely from the possi-
bility of obtaining factor combinations
different from those which exist under
segregation. Notice that as the concept
is defined here, the incentive to integrate
is proportionate to the group differences
in per capita education, (ri - r2)2. Thus,
if over time, educational differences dis- attempt to measure the effects of "sep-
appear, the incentive to integrate also
disappears. Of course, this result is highlyquantity of education a person possesses
speculative. The inefficiency parameters,
pi and P2, are assumed to be constants inand quality of schooling. Quality of
this model. Yet they are obviously af-
fected by social and psychological fac-
tors, of which one is almost certainly
the per capita difference in education.
If, through time, the gains from inte-
gration diminish because of convergence
of educational levels, the costs of inte-
gration may decline for the same reason.
A COMPARISON OF WHITE-NON-WHITE IN-
COME DIFFERENTIALS FOR RURAL FARM
MALES IN THE SOUTH AS OF 1959
The empirical implications of the
preceding model are straightforward.
1. The quantities of effective labor in- nation in the quality of schooling and
puts (physical labor and education) are
determined by weighting labor services
proportionately to their marginal prod-
ucts (wages).
2. For the group against which there
is discrimination, the discrimination co-
efficient is defined as the proportionate
difference in marginal products of seem-
ingly equivalent factors. Thus, the dis-
labor is pi + p2 (as earlier defined), and
the discrimination coefficient against
education is Pi + p2(r2/ri).
In this section, I compare incomes of
white and non-white rural farm males,
twenty-five years old or over, in ten
southern states as of 1959. Three distinct
types of discrimination are considered:
(1) market discrimination in the context
of the above model, (2) historic or de-
rived discrimination, and (3) discrimina-
tion in publicly provided services. Al-
though there may be several important
forms of discrimination in public serv-
ices, the only one considered here is
differential quality of schooling. Thus, I
arate and unequal" school systems. The
is defined as the product of the quantity
schooling is defined as being a function
of the inputs into school systems, and
the quantity of schooling is a non-linear
function of the number of years of school
completed.
Market discrimination is a measure of
differences in the wages of equivalent
factors. Since, for example, Negroes have
less education, earnings should be ad-
justed for differences in education before
estimating the extent of current discrimi-
nation. However, the differences in edu-
cation may have been generated by past
market discrimination and by discrimi-
should be included in a measure of the
total. As long as the magnitudes are ob-
servable, current and historic discrimina-
tion can be separately identified. How-
ever, the incidence of past discrimination
can take more subtle forms in which the
separation of effects is impossible. For
example, earlier discrimination against
the products and services purchased by

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 LAB)R-MARKET DISCRIMINATION 233

non-whites may have generated differ- differentials would reflect the compound-
ences in tastes for market as opposed to ed effects of market discrimination and
non-market sources of income.7 We can the rational response to this discrimina-
observe only the earning capacity of in- tion. Since derived discrimination is ob-
cremental schooling, without an adjust- served simultaneously with market dis-
ment for non-pecuniary reward, and crimination, a problem of identification
would therefore expect the measured arises. Of course, the effects of derived
productivity of schooling to be lower for discrimination are partially observed
persons who place relatively high value since non-whites characteristically attend
on sources of satisfaction that are exter- school for fewer years and for fewer days
nal to the market. each year. Nevertheless, the incidence of
It is also important to note that the leisure while attending school is indis-
quantity of schooling a person possesses tinguishable from current discrimination.
is affected by his ejfective learning time, the estimates of market discrimina-
Thus
for which years of attendance nmay be a tion against the education of non-whites
rather poor approximation. The number provided here are biased upward.
of days in attendance may vary, and it For the base population, the average
is obvious that time passed in school is income of the whites is $2,690 and for
not necessarily productive. Idleness is a non-whites $1,045, the ratio being .39.
student's prerogative. During any given Although a slightly higher proportion of
period a person can choose between non-whites had no income, an adjust-
school attendance, work, and leisure. ment for those without income increases
Presumably, he will be idle as long as the the relative income of non-whites by less
marginal value of leisure exceeds the than .01.9
marginal value of present or future in- In order to adjust income for differ-
come foregone. For a student, the higher ences in age and the ownership of farm
the reward for increased effort, the great-
capital, I have estimated an income-gen-
er will be the effort forthcoming.8 Thus,erating function for the rural farm popu-
market discrimination against the serv- lation in which the logarithm of income
ices provided by the education of non- was regressed upon (1) state of residence,
whites can affect their behavior as stu- (2) years of school completed, (3) age,
dents. For example, non-white students and (4) farm capital.'0 Table 1 provides
who anticipate discrimination against estimates of average income by years of
their education might be absent a higher school completed for whites and non-
proportion of the time, and, while in whites in the ten states, holding the age
school, a higher proportion of their time distribution and the ownership of farm
may be devoted to leisure activities. capital constant at their national average
Once, the effort expended in learning levels. Having adjusted for age and farm
may be less because of the lower value capital, the relative income ratio of non-
of schooling. This is an instance of de- whites rises to .48-an increase of .09.
rived discrimination in which income The most striking feature demonstrated

7 This would be expected if there is discrimina-
tion against purchased goods since there can be no
discrimination against leisure.
8 Here I assume a positively sloped supply func-
tion of labor.
9 The average income of whites with income was
$2,865 and for non-whites, $1,130.
10 The estimates and the estimation procedure are
discussed in detail in my dissertation (Welch,
1966a).

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 234 FINIS WELCH

in Table 1 is that the increase in income, capital constant at their national average
in both relative and absolute terms, per levels. An individual's wage is the sum
year of school completed is greater for of the marginal product of physical
whites than for non-whites. For example, labor, of which he has one unit, and the
marginal
if the distribution of schooling among the product of education times the
non-white population were the same as number of units of education he pos-
the white distribution, the relative in- sesses. Assume that the marginal prod-
come of non-whites would increase to ucts of physical labor and education are
only .56. That an additional year of constant within states but vary between
school is less valuable for a non-white states. Then,
may be interpreted as follows. First,
Wii = MP(N)j + eijMP(E)j,
quality of schooling may have been an
important source of discrimination. Sec- where MP(N)j and MP(E)j denote the
ond, the market may discriminate more marginal products of physical labor and
heavily against the productive services education, respectively, in state -j, and
provided by the education of non-whites eij represents the quantity of education

TABLE 1

ESTIMATED AVERAGE INCOME FOR RURAL FARM MALES BY YEARS OF SCHOOL COMPLETED

YEARS OF SCHOOL COMPLETED

0 1-4 I 5 8 9-11 12 13-15 1More

Whites .$1,320 $1,590 $2,090 $2,340 $3,060 $3,790 $4,700 $6,400
Non-whites .1,070 1,140 1,300 1,480 1,570 1,840 1,920 3,260

than against the physical labor of non- possessed by a representative individual

whites. Third, the non-white may not in state -j who has attended school for
work as hard while in school so that i years. Assume, further, that a person
equivalent quality of services offered by who has not attended school has no edu-
the school systems may not provide cation so that his wage is the marginal
equivalent education. This is the effect product of physical labor. Thus, the
of derived discrimination and cannot be knowledge and skill normally associated
fully identified. with a person who has no formal educa-
To distinguish between the effects of tion is embodied in the physical compo-
inferior quality of schooling and market nent of labor. It follows that Wij - TVj
discrimination, it is necessary to specify = ei MP(E)j.
the income-generating process for rural Now consider the definition of a per-
farm areas and to measure the quantities son's education as being the quantity
of productive factors used to generate times the quality of his schooling. The
income. quality of schooling, Qj, is assumed con-
Let Wij represent the predicted income stant within states, and the quantity of
of a representative individual in state schooling is determined by the number
of school years completed. Let Oi = g(Ss)
-j who has completed i years of school,
holding age and the ownership of farm represent the quantity of schooling pos-

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 LABOR-MARKET DISCRIMINATION 235

sessed by a typical individual who has income of non-whites without schooling

attended school for i years. Under these to whites without schooling). From Table
assumptions, Wij - = =lOQjMP(E)j 2, the discrimination coefficient against
= -3Cj, where Cj = QjMP(E)j is the non-white schooling is .72. Although the
marginal product of schooling in state discrimination coefficient against school-
-j. The values of the Ol's and the C's can is the composite effect of inferior
ing
be estimated by covariance techniques quality of schooling and market discrimi-
where the logarithm of the annual return nation, it is important to recognize that
to schooling, Wij - Wj, is regressed a non-white with no schooling will receive
upon two sets of dummy variables, one 81 per cent of the income of a similar
denoting years of school completed, i, white. Yet, for non-whites, school attend-
and the other state of residence, j. The ance increases income at a rate which is

TABLE 2

SCHOOLING-ATTENDANCE TIME PROFILE AND (AVERAGE) MARGINAL PRODUCT

OF SCHOOLING FOR SOUTHERN WHITES AND NON-WHITES

YEARS OF SCHOOL COMPLETED

0 1-4 5-7 8 9-11 12 13-15 Mo1re

Units of schooling (0ol=0 and

08=1) .................... 0 0.25 0.65 1.00 1.63 2.26 2.64 4.24

Average Return to One Unit of Schooling (Eight Years)

White: $1,160 Non-white: $320

Note.-These estimates were derived from observations of fifty-seven "states" for the eight schooling classes in each state. The
states were ten southern white and ten southern non-white plus thirty-seven states in which no separation by color was possible.
Alaska, Hawaii, and Rhode Island were omitted. The dependent variable for the regression was log (Wii - W0o), and the independent
variables were (1) a set of seven dummy variables to indicate years of school completed, the zero attendance class being omitted,
and (2) a set of fifty-seven dummy variables to indicate state of residence. R2 = .89.

resulting estimate for the profile of time-
in-school attendance into schooling and
the average marginal product of schooling
for southern whites and non-whites are
provided in Table 2. Since the units in
which schooling is measured are arbi-
trary, the estimate is scaled so that one
unit of schooling represents eight years
of attendance. The marginal product of
schooling, therefore, corresponds to an
estimate of the annual increment in in-
come derived from eight years in attend-
ance.
Thus, from Table 1, the discrimination
coefficient against non-white physical
labor is .19 (1 minus the ratio of the
only 28 per cent of the corresponding in-
crease for whites. Thus, school attendance
is simply a better investment for whites.
In short, the opportunity cost of school
attendance, relative to income gains from
attendance, is much higher for non-
whites.
Although discrimination against school-
ing is the relevant parameter to consider
for analyzing investments in school at-
tendance by non-whites, it is useful to
separate this factor into two components:
differential quality of schooling and cur-
rent market discrimination.
Value added by the rural farm popula-
tion is assumed to be a Cobb-Douglas

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 236 FtNIS WELCH

linear-in-the-logarithms function of three mine the quality of schooling. Since the

inputs: (1) N, physical labor, (2) E, eclu- Supreme Court decision regarding segre-
cation, and (3) K, an aggregation of non- gated schools in 1954, separate data for
labor inputs. By assumption this func- white and Negro schools have been un-
tion is homogeneous of degree 1. The available. The last complete enumeration
quantity of physical labor is given by of Negro school-system inputs is for 1945
the number of persons employed, since (U.S. Office of Education, 1950) and is
each represents one unit, and quantity for state aggregates, combining rural and
of education is the quantity times the urban school systems. Data for rural
quality of schooling, where the quantity school systems are, however, provided
of schooling is the summation over the only for 1955 (U.S. Office of Education,
eight schooling classes of the number of 1959). By computing input ratios for
persons in each class multiplied by the non-whites in 1945, the 1955 inputs were
estimated units of schooling for persons prorated between whites and non-whites
in that class. Units of schooling per per- according to the proportions of Negro
son are given by schooling class in Table students enrolled."3 Estimates of the
2. The quantity of non-labor inputs rep- more important white and non-whitc
resents an aggregation (by weights pro- school-system inputs are summarized in
portional to factor shares) of non-labor Table 3.
inputs used in agriculture, adjusted for The determination of factors affecting
the proportion of persons in the rural the quality of schooling is complex; for
farm population whose industry is not example, rural schools are faced with
agriculture." Finally, the quality of special problems because of low popula-
schooling is assumed to be a Cobb- tion density and the lack of centralized
Douglas function of inputs into school control, and as a consequence there are
systems."2 Observations are for individual apparent scale economies in school size
states. which are probably related to the lack
In order to estimate the importance of of teacher specialization implicit in small
the factors determining the marginal rural schools.'4 I find that two variables,
value of schooling, it is necessary to ob- teacher quality-approximated by salary
serve school-system inputs which deter- -and size of secondary school, provide
11 The factor-share weights and the definition of as much information as is available con-
non-labor inputs are given by Yoav Kislev (1965). cerning quality of schooling. And by
12 Thus, according to these assumptions: C7 using
= these variables as the quality index,
QjMP(E), = Q"2ANal(S)a2-RlCa3, Qi = BZ'.l Z. nthe function determining the value of the
and al + a2 + c3 = 1- (The Z's refer to school-
system inputs, and S is the quantity of schooling.)
The quantities N and S = X(3Ni refer to the white education. Omitting the state subscript, j,
effective quantities of physical labor and schooling. Cn/Cw = PQn/Qw. E = Qw +(Cn[C.)2ii3NA
Non-whites should be weighted by their relative = PQ [(C./C.) YiNwi + 10Ad. Thus C, =
marginal products in determining the effective labor (pQW)a2ANa1Sa2-lKaz and Cw = Qa2A NalSa2-a3,
inputs. The basic unit of observation is the state, where E = QWSW + PQnSn, as above, define the ef-
and for the ten southern states considered here the fective quantities of white and non-white schooling,
effective input of physical labor is given by Nj = Sw and Sn.
Nji.1 + Wroj/WuI01)N,,;, where the subscript, j, refers 13 The exact procedure used is described in my
to the state and the subscripts n and uw denote,
dissertation (Welch, 1966a).
respectively, non-whites and whites. According-
lv, the quantity of education is given as Ej= 14 These problems are discussed more fully in my
Quni~z~i~wi j+ pQ 3(7iAYi)j, where p = 1 - [pi + "Measurement of the Quality of Schooling"
P2(r?/rl)] is the relative marginal product of non-(Welch, 1966b).

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC12:34:56 UTC
All use subject to https://about.jstor.org/terms
 LABOR-MARKET DISCRIMINATION 2 ^37

marginal product of schooling can be cent as much to a non-white as a white:

estimated
The estimates alpearing in Table 4
when combined with the average teacher
salary and size of secondary school (Ta-
ble 3) imply that the quality of non-
white schooling is inferior to that of
whites and that, for equivalent years of
school completed, we would expect a
non-white to obtain only 73 per cent as
much education as a white. This differ-
ence in the quality of schooling is directly
attributable to the smaller quantity of
inputs offered by the non-white school
systems. The estimates also indicate that
equivalent education returns only 32 per
T5 The estimation procedure is least-squares
PI re-
+ P2(r2/rl) = .68, this implies that by associating
gression upon the logarithms of the variables.
a2log(p) = - .434; I= antilog (-.434/
.385). Thus, the first-order estimate
of the market-discrimination coefficient
against education is .68, 1 - .32.16
18These estimates are marginally inconsistent
with the earlier estimate of the discrimination co-
efficient against schooling, .72. They imply a dis-
crimination coefficient of .76. However, it is likely
that the unidentified effects of historic discrimina-
tion may have led to an overestimation of the inci-
dence of market discrimination against education.
For example, if these estimates are taken literally,
they can be used to estimate pi and P2, the propor-
tionate decline in labor efficiency, respectively, for
non-whites and whites. The estimates, together with
the distribution of whites and non-whites by years
of school completed, imply that the average white
person has 2.9 times as much education as the aver-
age non-white. If we assume Pi + P2 = .19 and
one white with one non-white, the nonwhite's effort,

TABLE 3

AVERAGE RURAL SCHOOL-SYSTEM INPUTS FOR SOUTHERN

WHITES AND NON-WHITES, 1955-1956

Members of Average Salary Average

Total Current . Number of

Expenditure Strper 100 In

per Pupil* Pupils* Staff rolled per Sec-
ondary School

White. $230 4.6 $3,330 230

Non-white.... 120 4.0 2,310 175

* Per pupil in average daily attendance.

TABLE 4

ESTIMATED COEFFICIENTS OF VARIABLES DETERMINING THE

VALUE OF THlE MARGINAL PRODUCT OF SCHOOLING*

VARIABLES

Quantity of Quantity of Average Enrolment per

Non-White Schooling, Physical Non-Labor Salary of Secondary
2:jijNj Labor, N NInputs,
Labor, ~~~~~Staff,KZ Instructional
eooZ Sch

Coefficient. a2log(p) a2-i al a3 a2y1 a2 2

Estimate. -.434 -.615 .374 .241 .268 .087
S.E .(.326) (.276) (.228) (.126) (.188) (.069)

* The dependent variable is the estimated margin

in Table 2. The observations were for forty-five "states," ten southern white and ten southern non-white states plus twenty-five
other states. Of the fifty-seven "states" described in Table 2, twelve were omitted due to insufficient school-systems data.
t Standard errors are given in parentheses.
R2 = .914.

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 238 FINIS WELCH

The above estimates can be considered school systems (relative quality for Negro
as (1) an overestimate of discrimination schools is estimated as .73), the relative
against education and (2) an underesti- quantity of education per year of school
mate of discriminatory quality of school- enrolment is only .66 for Negroes. This
ing. These biases arise largely because I alteration requires an adjustment in the
have not explicitly considered the effects estimated discrimination coefficient for
of historic discrimination.'7 For example, education which reduces it from .68 to
average annual days of attendance can .58.19
be observed, yet for statistical purposes'8
SUMMARY
this variable was not included, and the
effect of differences in days of attendance My approach to the explanation of
is included in the estimated discrimina- market discrimination entails using a
tion coefficient for education. In 1945, model in which the integration of labor-
southern white students who were en- ers generates external effects which move
rolled in school averaged 149 days in in opposite directions. First, integration
attendance, whereas Negro students av- increases the productivity of laborers as
eraged 136 days (U.S. Office of Educa- a consequence of complementarity be-
tion, 1950). If we assume that the skill tween workers of different education.
acquired per day of attendance is con- Second, it generates a class of external
stant, differences in attendance rates inefficiencies in which the productivity
imply that Negroes acquire only 91 per of a laborer may decline if he is required
cent as much schooling per year of en- to work alongside a laborer of a different
rolment, and, allowing for differences in race. The advantage of this interpreta-
the quality of the services offered by tion is that it does not rely upon imper-
fections in capital markets and product
increases by 7 per cent and the white's declines by differentiation by consumers or upon an
26 per cent. But, when the discrimination co- assumption of specialized factors such as
efficients are adjusted for differences in school-
attendance rates, the estimate of Pi becomes 0 and "entrepreneurship." It is not that these
of P2, .20. considerations are irrelevant; rather, it
17 There are also statistical reasons for anticipat- is suggested that labor externalities
ing these biases. The school systems' inputs are ob- should also be considered in a complete
served subject to rather large errors of estimation
specification of discrimination. Discrimi-
which bias the quality coefficients downward and un-
derstate differences in quality of schooling. Also, the nation and segregation should be dis-
residual variance of the logarithmic estimating equa- tinguished, since, as the analysis indi-
tion is likely to be greater for non-whites than for
whites, implying that by taking the antilog of the
cates, discrimination does not necessarily
average predicted log, the relative understatement result in segregation. Other advantages
of average values is greater for non-whites than are that the model provides for measure-
whites.
ment of the direct social cost of discrimi-
18 There is apparently no systematic within race
nation in terms of product foregone and
relationship between days of attendance and the
value of schooling. The only significant variation oc- that the model is operational since it
curs between whites and non-whites. Thus annual provides an aggregation criterion for
days in attendance is highly collinear with the
combining labor inputs for persons of
white-non-white dummy variable which identifies
the market-discrimination coefficient for education. different races. The most critical features
The separate effects of these variables could not be are: (1) the assumed constancy of the
observed, and the estimated discrimination co-
efficient for education contains the effects of differ- 19 This adjustment alters the implicit estimates
ences in attendance rates. of pi and P2 (see n. 16) to pi = 0; P2 = .2.

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 LABOR-MARKET DISCRIMINATION 239

inefficiency parameters, pi quality

of inferior andof P2,
schooling and mar-
(2) the assumption that the optimal ratio
for association between workers of dif-
ferent groups is constant. More general-
ity would be beneficial. In particular, if
the inefficiency parameters are allowed
to vary so that they can be estimated for
a wide array of market settings, the de-
terminants of their variation can be ana-
lyzed to provide a better understanding
and
ket discrimination against education in-
creases. To elucidate this point I have
also included the estimates correspond-
ing to twelve years of school completed.
These results appear in Table 5.
The policy and social implications of
these findings raise difficult, unsettled
questions. Discrimination against school-
ing obviously discourages its acquisition

TABLE 5

ESTIMATED IMPACT ON NON-WHITE INCOME OF MARKET DIs-

CRIMINATION AND INFERIOR QUALITY OF SCHOOLING

YEARS OF SCHOOLING COMPLETED

5-7 8 12

Income:
White .............................. $2,090 $2,340 $3,790
Non-white .................. 1,300 1,480 1,840
Difference .......................... 790 860 1,950
1. Impact of market discrimination against
physical labor . ........... 250 250 250
2. Impact of discrimination against school-
ing* .... .......................... 540 610 1,700
a) Inferior quality of schooling ... . 200 230 630
b) Market discrimination against ed-
ucation ........................ 340 380 1,070

* The adjustment for interaction between quality of schooling and market discrimination
against education is prorated according to the proportion of the total (difference in the return to
schooling) accounted for by each. Actually, interaction represents 14 per cent of the total dis-
crimination against schooling.

of the underlying sources, social, psycho-
logical, and economic, of market dis-
crimination.
To illustrate the essential characteris-
tics of the model, I have provided esti-
mates for males in the rural South. These
estimates are best summarized by con-
sidering the impact on earnings of both
inferior quality of schooling and market
discrimination for persons who have
completed five to seven and eight years
of school since these schooling classes are
representative of rural areas. One feature
of the findings which is of particular im-
portance is that as a non-white increases
his investment in schooling, the impact
for non-whites. Furthermore, the esti-
mates of differences in quality of school-
ing, although substantial, account for
only 37 per cent of the discrimination
against schooling-implying that market
discrimination against education is a
more important source of income differ-
entials. It would seem that discrimina-
tory quality of schooling is more easily
eliminated than market discrimination,
because legislative authorities have rela-
tively little control over such markets.
In fact, to the extent that market dis-
crimination is determined largely by
sociological phenomena, we cannot ex-
pect these factors to be eliminated either

This content downloaded from

143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
 240 FINIS WELCH
quickly or easily. Nevertheless, the elimi-
nation of discrimination in quality of
schooling may be an important vehicle
for removing income differences; for an
improvement in the quality of schooling
will: (1) reduce the observed discrimina-
tion against schooling, (2) induce an in-
Given that Y* = f(N, E, X) is homo-
geneous of the first degree, according to
Euler's theorem,
Y* N NFn+EFe+ XFx. ()
Also
F, g(X X)7- (2)
Bv inposiivf~i
we have
Xw =h(N) Eo dPx)r (3)
which is also homogeneous of degreeportionately
I in N
REFERENCES
Becker, Gary S. The Economics of Discrimina-
lion. Chicago: Univ. of Chicago Press, 1957.
Chadwick-Jones, J. K. "Italian Workers in a
British Factory: A Study of Informal Selec-
tion and Training," Race, J. Institute Race
Relations (July, 1964).
Kislev, Yoav. "Estimating a Production Func-
tion from 1959 to U.S. Census of Agriculture
Data." Unpublished Ph.D. dissertation,
Dept. of Econ., Univ. of Chicago, 1965.
U.S. Office of Education. Biennial Survey of
This content downloaded from
143.106.202.246 on Wed, 01 Jul 2020 03:33:51 UTC
All use subject to https://about.jstor.org/terms
creased investment in schooling, and (3)
induce greater effort while in school,
which will increase the quantity of edu-
cation per unit of attendance time. In
addition, the reduction of differences in
education may reduce associational fric-
tion, which then reduces discrimination.
APPENDIX
and E. Let labor's product be represented
by
Y= Y*-PxX= Y*-Pxh(N E|P.) (4)
Thus it is obvious that Y is a function of N
and E, given P., and it is also homogeneous
of the first degree. If N and E are varied
equiproportionately, X, according to (3),
must vary by the same proportion. Thus,
total product will vary equiproportionately
with N and E, but since X does also and its
marginal product is given, the return to
X, P.X, will vary by the same proportion,
and labor's product will vary equipro-
with N and E.
Education, 1944-46. Washington: U.S. Gov-
ernment Printing Office, 1950.
Biennial Survey of Education, 1954-56.
Washington: U.S. Government Printing
Office, 1959.
Welch, F. "Determinants of the Return to
Schooling in Rural Farm Areas, 1959."
Unpublished Ph.D. dissertation, Dept. of
Econ., Univ. of Chicago, 1966 (a).
'. "Measurement of the Quality of
Schooling," A.E.R., LVI, No. 2 (May, 1966),
379-92. (b)