Labour mobility and wage discrimination: Theory and evidence

Pierre Deschamps, José De Sousa

Racial wage discrimination can proliferate in labour markets with large frictions because workers facing discrimination find it difficult to relocate. This column presents evidence of the interaction between frictions and discrimination in the English Premier League, the top tier of English football, using the 1995 Bosman ruling as an exogenous shifter. Before the ruling, wage discrimination resulted in teams with more black players outperforming competitors with equivalent payrolls. The decrease in frictions associated with the ruling allows players to escape discrimination by relocating.

The large demonstrations in the US after the deaths of Eric Garner and Michael Brown last summer indicate that racial animus – conscious or unconscious – is still alive. This appears to translate into racial discrimination in labour market outcomes, such as wage discrimination (Charles and Guryan 2013, Lehmann and Lang 2011).

Is there an effective way to prevent discrimination in wage-setting when employers are prejudiced? In a recent paper, we examine whether job-to-job mobility constraints are a possible explanation of race-based wage differentials (Deschamps and de Sousa 2015). Constraints on labour mobility – such as quotas, work permits, or restrictive contracting rules on national labour – may limit the ability of workers to move from prejudiced firms to unprejudiced ones and in turn allow firms to act on their prejudice.

Our theory: Job-to-job mobility constraints and wage discrimination

To explain the impact of worker mobility constraints on wage discrimination, we derive a simple theoretical model merging labour market frictions with the Becker (1957) assumption of taste for discrimination. For a given level of talent, firms offer workers two types of contracts: perfect and imperfect. A job offer is ‘perfect’ when the worker receives a wage that perfectly rewards his talent, and ‘imperfect’ when the worker earns only a fraction of what his talent is worth. The worker accepts the imperfect job offer if the wage offered exceeds his reservation wage, and searches on the job. When making a job offer, the firm faces a tradeoff between diverting a share of the worker's talent, and seeing the worker potentially poached by a rival – which induces a costly turnover.

We assume that the taste parameter for discrimination affects the job offer tradeoff. A prejudiced firm has lower disutility when it terminates an employment relationship with disliked workers, and thus, its probability of offering these workers a perfect job offer is lower. This results in race-based wage differentials for a given talent. Interestingly we find that this discriminatory behaviour does not survive in all circumstances. Prejudice does not translate into discrimination when labour mobility constraints are sufficiently low. The intuition is straightforward – when mobility constraints are low, firms have low monopsony power since employees can easily find new jobs and equally talented workers receive the same perfect contract, independent of their race.

Evidence from the European football market

We investigate the effect of worker mobility constraints on wage discrimination by exploiting a policy shock that completely changed the labour market for football players – the Bosman ruling, which came into effect in December 1995. Specifically, the pre-Bosman era had two important restrictions on job-to-job mobility:

Transfer fees needed to be paid for out-of-contract players; and

The number of foreigners was restricted by a quota system.

The ruling removed the quota barriers for EU nationals and the obligation to pay a fee for out-of-contract players. Players can now field offers from potentially any country in the EU. This policy change created a compelling quasi-experimental variation to identify the causal effect of mobility on racial discrimination.

The football market has an additional advantage – it offers a simple test for racial discrimination in salary setting (Szymanski 2000). Assessing whether a group of workers is facing wage discrimination is difficult because we may not be able to capture productivity exactly. With this caveat in mind, Szymanski's `market test' is particularly elegant. Under the assumption that football is an efficient market, a team's wage bill should perfectly reward the talent of its players and explain the club's performance. As shown in Figure 1, wage expenditures and performance are heavily correlated in the English top division between 1981 and 2008.[1]

Figure 1 Average wage bill and performance in the English top division, 1981-2008

Discrimination can be said to exist if clubs fielding an above-average proportion of black players systematically outperform clubs with a below-average proportion of black players. This implies that, for a given wage bill, a team can improve its performance by employing a higher share of black players, who are being paid less than their talent would warrant. Szymanski finds evidence of discrimination while performing his test on a panel dataset of professional English clubs between 1978 and 1993, before the Bosman ruling. We extend the analysis one step further. First, we theoretically demonstrate why discrimination can survive in equilibrium when mobility constraints are high. Second, we exploit the Bosman ruling shock and provide empirical evidence that discrimination disappears with low mobility constraints.

The Bosman mobility shock and the decrease of racial discrimination

We interpret the Bosman ruling as a shock to job-to-job mobility constraints and compare the pre- and post-Bosman situation of black versus white English players. In the pre-Bosman era, we find that performance depends significantly on the team's racial composition. Therefore, teams fielding an above-average proportion of black players outperform clubs with a below-average proportion of black players, for a given wage bill.

How economically meaningful is the estimate of discrimination in the pre-Bosman period? Let us compare the 1993 situation of two clubs that are identical except in their share of black English players:

A club that does not employ black players; and

A club that employs 3.7 black players (the 1993 average).

Based on our estimates, we find that to obtain the same performance with equally talented white players, the club employing no black players should pay £800,000. This value amounts to 15% of the average wage bill in 1993.

After Bosman, we find that wage discrimination disappears. Performance is now independent of the racial composition of teams. This result holds for different specifications (OLS, within, IV, GMM) and dependent variables (rankings or goal difference). The decrease in discrimination appears to be extremely fast – we find evidence of discrimination in the five years before the ruling, but none in the following five years. This result is consistent with our theoretical predictions on the effect of relaxed mobility constraints on wage discrimination.

Are we truly capturing the effect of a mobility shock?

A potential objection to our findings is that what we are measuring may not truly be the effect of the Bosman ruling but a change in attitudes toward racism and racial discrimination. Lang and Lehmann (2012) document a smooth decline in prejudiced views on school segregation, social interaction, and blacks in politics, as measured by national polls and surveys in the US. But the data reject the idea of a dramatic reduction in discrimination over our period of analysis. Moreover, since the Bosman ruling, racist incidents in football – whether from fellow players, owners, managers or supporters – continue to make the headlines in English newspapers. As a recent example, in August 2014 it was alleged that the Cardiff City manager Malky Mackay had shared racist emails and texts with the director in charge of transfers, Iain Moody. Frequent incidents suggest that racist attitudes are still present at all levels of English soccer.[2]

Of course, any shock that is contemporaneous to the Bosman ruling would confound its effects. In order to check whether the increase in labour mobility is driving the decrease in discrimination, we present two further pieces of evidence.

First, we find that black English players changed clubs more often than white players, but only after Bosman. This can be explained by football players ‘voting with their feet’ when discriminated against. Before the Bosman ruling, players who wanted to move when they were discriminated against were not necessarily able to do so. Due to restrictions on job mobility, the probability of finding a new, non-prejudiced employer was lower. Once restrictions were lifted, black players increasingly changed clubs if they were discriminated against.

Figure 2 below contrasts the turnover of black (B) and white (A) English players by comparing their share in the total number of transfers with respect to their share in the total population. This variable is positive if black players change clubs more often in a given year than their white colleagues and negative if they do not. Before the Bosman ruling, white players tended to change clubs more often than black players, but this tendency was reversed after Bosman.

Figure 2 Relative mobility of white and black English players

The second piece of evidence is based on using a different sample of players. Although the market was liberalised for most football players, non-EU members still face restrictive contracting rules. The UK has stringent work permit conditions that may not necessarily be met by prospective players. Since these players are less mobile than EU players, it is likely that they still face discrimination. Although our results are not significant in all specifications, we find evidence that non-EU black players are still discriminated against after Bosman, which we attribute to the restrictions in job-to-job mobility that they still face today. This seems to confirm our intuition that prejudice translates into discrimination with high job mobility constraints.

Conclusion

Theoretically, a large decrease in labour market frictions can erode the monopsony power of firms, leading to a decrease in wage discrimination. We test whether this result holds empirically using a natural experiment in football labour markets. Our results could be important for public policy. If we consider restrictive contracts to be an important component of the typically nebulous ‘labour market frictions’, increasing labour mobility and reducing frictions could lower discrimination. A heartening interpretation of our results is that the proper labour market conditions can cause wage differentials between white and black employees to disappear even if racist attitudes remain.

References

Becker, G S (1957), The economics of discrimination, University of Chicago Press.

Charles, K K, and J Guryan (2011), “Studying Discrimination: Fundamental Challenges and Recent Progress,” Annual Review of Economics, 3(1), 479-511.

Deschamps, P, and J de Sousa (2015), “Labour mobility and wage discrimination,” LIEPP Working Paper, n°35.

Gneezy, U, and J List (2013), The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life PublicAffairs.

Kleven, H J, C Landais, and E Saez (2013), “Taxation and International Migration of Superstars: Evidence from the European Football Market,” American Economic Review, 103(5), 1892-1924.

Lang, K, and J-Y K Lehmann (2012), “Racial Discrimination in the Labour Market: Theory and Empirics,” Journal of Economic Literature, 50(4), 959-1006.

Price, J, and J Wolfers (2010), “Racial discrimination among NBA referees,” Quarterly Journal of Economics, 125(4), 1859-1887.

Szymanski, S (2000), “A Market Test for Discrimination in the English Professional Soccer Leagues,” Journal of Political Economy, 108(3), 590-603.

Endnotes

[1] We use data collected by Kleven et al. (2013), to which we have added data on the skin colour of players and the wage bill of clubs.

[2] In a web appendix, we show strong evidence of racism in the English football in the post-Bosman era.