Using observable characteristics as proxies for information about worker productivity is known as what?

• A. Adverse selection
• B. Stereotyping
• C. Job merit-based evaluation
• D. Statistical discrimination

Answer: (D)

Using observable characteristics as proxies for information about a worker’s productivity is statistical discrimination. When employers don’t have complete or perfect information about an individual’s abilities, they may rely on group-level patterns—such as education, age, gender, or race—to estimate how productive a person will be. Decisions about hiring, pay, or advancement are then based on what the group tends to do, rather than on the person’s actual performance. This can be efficient in theory, but it can also lead to unfair treatment and misallocation of talent because individuals are judged by group averages instead of their own merits.

This differs from adverse selection, which centers on who chooses to participate in a market given imperfect information and can distort the pool of applicants itself. It’s also more specific than general stereotyping, and distinct from job merit-based evaluation, which relies on objective, individual performance data rather than proxies.