Promotion signaling, discrimination, and positive discrimination policies

• Author: Oliver Gürtler,Marc Gürtler
• DOI: http://doi.org/10.1111/1756-2171.12303
• Published date: 01 December 2019
• Date: 01 December 2019

RAND Journal of Economics

Vol.50, No. 4, Winter 2019

pp. 1004–1027

Promotion signaling, discrimination,

and positive discrimination policies

Marc G¨

urtler∗

and

Oliver G¨

urtler∗∗

This article studies discrimination in a model in which promotions are used as signals of worker

ability. The model can account for statistical and taste-based discrimination. In the short run, a

positive discrimination policy is beneficial for workers in the middle of the ability distribution,

because these workers arepromoted if and only if the policy is in place. Instead, workers of either

high or low ability suffer fromthe policy. In the long run, the policy benefits all targeted workers.

The model can explain empirical findings about the effects of a gender quota on the boards of

Norwegian companies.

1. Introduction

In many countries, certain worker groups are underrepresented in high-level jobs, and their

underrepresentation in these typically very well-paid jobs is one of the main reasons for the wage

gaps that are observed in practice. As an illustration, consider The Economist Group, which,

in response to the newly enacted United Kingdom (UK) gender pay gap reporting regulation,

reported a median pay gap of 29.5% and declared: “The fact that there are more women in

junior roles and more men in senior roles [ . . .] is a major reason for the pay gap.”1There is

ample evidence that certain groups of workers are discriminated against in the workplace.2It is

thus conceivable that discrimination is an important factor explaining the underrepresentation of

∗Braunschweig Institute of Technology; marc.guertler@tu-bs.de.

∗∗University of Cologne; oliver.guertler@uni-koeln.de.

We thank two anonymous reviewers, David Martimort (the Editor), as well as Jed DeVaro, Christian Ewerhart, Ori

Haimanko, Matthias Kr¨

akel, Patrick Legros, Johannes M¨

unster, Hideo Owan, Martin Ruckes, Patrick Schmitz, Anders

Stenberg, David Wettstein, and participants at the 41st Annual Conference of the Eastern Economic Association, the

18th Colloquium on Personnel Economics, the Annual 2015 Conference of the Vereinf ¨

ur Socialpolitik, the 85th Annual

Meetings of the Southern Economic Association, the Econ and Finance Workshop in Karlsruhe, the research seminar

ULME in Ulm, the DICE research seminar in D¨

usseldorf, the DARTworkshop in Graz, the research seminar at Linnaeus

University,the research seminar at Ben-Gurion University of the Negev, and the research seminar at Erasmus University

Rotterdam for helpful comments.

The copyright line for this article was changed on February 06, 2020 after original online publication.

1www.economist.com/paygap(last retrieved on February 28, 2019).

2Fang and Moro (2011) as well as Lang and Lehmann (2012) provide surveys of the economic literature on

discrimination.

C2019 The Authors. The RAND Journal of Economics published by Wiley Periodicals, Inc. on behalf of The RAND

Corporation.

This is an open access article under the terms of the Creative Commons Attribution License, whichper mits use, distribution

and reproduction in any medium, provided the original workis properly cited. 1004

G¨

URTLER AND G ¨

URTLER / 1005

certain groups in high-level jobs. The objective of the current article is twofold. First, we aim to

develop a promotion-based theory of discrimination. Second, we wish to study the effects of a

quota policy, which enforces more equal representation of groups in high-level jobs and which

has recently been adopted in several countries (e.g., in Norway and Germany).3

Our model builds upon the idea, first illustrated by Waldman (1984), that promotions are

signals about workerability. Waldman(1984) assumes that employers learn their workers’ abilities

and he shows that they find it optimal to use a threshold promotion rule, promoting all workers

whose ability is sufficiently high. As a consequence, when external firms observe a worker’s

promotion, they infer that the worker’s ability exceeds the cutoff value and, thus, they upgrade

their assessment of the worker’s ability. In turn, they have a greater interest in hiring this worker,

with the result that the worker receives more generous wageoffers. Recent empirical studies find

results that are consistent with predictions derived from the promotion-signaling model.4

We consider a promotion-signaling model with two periods and two different groups of

workers. In the first period, firms hire workers and assign them to a low-level job. Each firm

learns the employed workers’ abilities and then decides whichworkers to promote to a high-level

job for the second period. We say that a worker group is discriminated against if the workers

from this group face a more stringent promotion threshold than the workers from the other group,

implying that workerswith given abilities have a smaller chance of being promoted. We showthat

the model can capture both (endogenous and exogenous) statistical discrimination and taste-based

discrimination against a certain group of workers. Endogenous statistical discrimination occurs

because of a potential multiplicity of equilibria, meaning that workers who are discriminated

against are trapped in an inefficient equilibrium with a high promotion threshold. Exogenous

statistical discrimination exists if the ability distributions are different for the two workerg roups,

whereas taste-based discrimination is caused by employer preferences regarding the workers

emanating from the two different groups.

We then introduce a quota policy into the model, requiring workers from an originally

disadvantaged group to fill a certain share of the positions in the high-level job. We show that in-

troducing the quota lowersthe promotion standard for workers who were originally disadvantaged

and are thus favored by the policy, and increases the promotion standard for workers disadvan-

taged by the policy. We distinguish between the effects of the policy on the employed workers

at the time of the policy introduction, and which we term the policy’s short-run effects, and the

policy’s long-run effects on workers who begin their career after the policy has been introduced.

For an employed worker, the policy only affects the worker’s second-period payoff. There

are two effects. First, the worker is more likely to be promoted and to obtain a wage increase,

which obviouslybenefits him or her. Second, the positive signal of promotion to the high-level job

becomes weaker, whereas the negative signal of being reassigned to the low-level job becomes

stronger. This results in lower wages in each of the jobs, which clearly hurts workers. Summing

up, the policy introduction leaves those workers worse off who have either very high ability,

such that they would have been promoted even without the policy, or who have such low ability,

that they are denied promotion even when the policy is in place. In contrast, workers in the

middle of the ability distribution benefit from the policy because those workers are promoted if

and only if it is in place. It is possible for the negative effects on the workers of either low or

high ability to outweigh the positive effects on the workers of middle ability, so that a worker’s

expected payoff may actually decrease. For a worker who begins his career only after the policy

has been introduced, the policy also affects the worker’s period-1 wage. The reason is that the

policy changes a firm’s profit from hiring a marginal worker (i.e., the marginal revenue product

of labor). When hiring a worker from the group targeted by the policy, a firm finds it easier to

fulfill the quota constraint and will change the two groups’ promotion standards as a result. This

3Fryer and Loury (2005) argue that such positive discrimination policies are highly controversial, and therefore

emphasize the importance of economic reasoning in the evaluation of these programs.

4See DeVaroand Waldman (2012), Bognanno and Melero (2016), and Cassidy, DeVaro, and Kauhanen (2016).

C2019 The Authors. The RAND Journal of Economics published by Wiley Periodicals, Inc. on behalf of The RAND Corporation.