Do Markets Reward Racism? It isn’t a Black and White Issue
I’ve been thinking about Tod’s recent post on markets and discrimination. While I found it thought-provoking, I felt there was more that could be said about the relationship between markets, government and social attitudes. I ended up with a post’s worth of material, so I decided I would post my thoughts.
I find the naive “markets can solve anything” view espoused by some libertarians (or psuedolibertarians) at least as irritating as liberals do, but at the same time I think the efficacy of anti-discrimination laws are sometimes overstated by the left. Let me explain why:
First, there are two basic kinds of discrimination in labour markets. The kind Tod was talking about was taste-based discrimination (this is the “we don’t like your kind around here” sort of discrimination), and markets can either support or undermine it depending on circumstances.
It’s true that market discourages employer / business owner prejudice by applying a cost to discrimination (as Gary Becker pointed out so many years ago), but this isn’t a foolproof barrier (such a shame people don’t care more about money and less about community values). There’s also the issue of customer prejudice, which is much more complex. Based on some of the game theoretic modelling that has been done on the subject there are two possible equilibria – if prejudice is near
-universal then employers have an incentive to supply discriminatory business practices, regardless of their personal beliefs.
However, once the level of bigotry among consumers falls below a threshold you get a shift to the other equilibrium. Since driving away customers is bad for business, it only makes
sense for a business owner to do it if there are enough of your existing customers who are prejudiced enough to refuse to patronise your store unless you discriminate. Once there aren’t enough of those people (due to a reduction in the number of prejudiced people or a reduction in the intensity of prejudice) suddenly employers / stores will start changing their polices. How quickly will depend in part on how prejudiced and/or set in their ways the employer / store owner is, but the pressure to abandon their discrimination will be there.
- Prejudice is near-universal and socially sanctioned. Markets will actively reinforce discrimination in this situation.
- Prejudice still exists, but is no longer so widely held, nor intense. Markets will undermine (though not necessarily eliminate) discrimination in this situation.
- We’re no longer in state 1, but not yet in state 2 either. This is a disequilibrium state where discrimination will start to disappear, but in a patchy and uneven way in line with the idiosyncrasies of the individuals involved.
- In State 1, discrimination will not only be supported by the market but will also be politically popular. Voters will likely react poorly to legislation forbidding discrimination, so any legislation the government passes will be pro-discrimination. But in practice this won’t do much because, as noted above, the market will support discrimination anyway.
- Here, there will likely be government opposition to discrimination, but it also won’t be terribly necessarily because the market will be pressing against discrimination anyway. I’ll discuss some exceptions below.
- State 3 is the most likely situation where legislation can have an effect (for good or ill), either by hastening the transition from 1 to 2 with civil right legislation, or by slowing it with Jim Crow type legislation. But note that state 3 isn’t stable, so in the long run, you wouldn’t expect either kind of legislation to change much.
Ultimately my point is that bigotry is a phenomenon of human attitudes, and as such any institution that relies on human attitudes: that includes governments and markets. To a large extent, civil rights legislation is as much an effect of lower discrimination as it is a cause.
So does that make the Civil Rights Act largely useless then? Well, not necessarily. My analysis so far has been assuming at prejudiced is even distributed, and in practice it never is. Where Civil Rights legislation (or its opposite) can make a difference is where a larger jurisdiction has different attitudes to a smaller one. So a more-racist state can prevent a less-racist town from desegregating, or a less-racist country can prevent a more-racist state from indulging its racism. This works for market segments too. Some business owners in a discriminatory society might niche market themselves to non-racist customers, but not if Jim Crow laws stop them. Equally, businesses whose products have to appeal disproportionately to racists may end up discriminating after the majority of society considers the practice abhorrent.
One final note, there is another form of discrimination, typically only appearing in labour markets, that has a completely different dynamic. Everyone has a number of characteristics that will make them a better or worse at a particular job. Some of these characteristics are very difficult for an employer to measure. But if one of these hard-to-measure characteristics is correlated with an easily-measured characteristic, even if that characteristic isn’t directly job-related, it creates some interesting incentives for the employer.
Let’s say that people who wore glasses were more likely to be introverted. If you were an employer looking to hire someone for a job an extrovert would be better suited for it would make sense to be less keen to hire glasses-wearing applicants (unless you had access to a reliable test for introversion). I’m sure how you can see how this logic would pose a problem for certain group who, due to historical discrimination, might possess more negative traits than the average job applicants. I think it’s probably a contributing factor to the gender pay gap. Employers can’t directly test how likely their potential employees are to go on maternity leave, but they can be sure women are far more likely to do so than men.
Dealing with this form of discrimination is very difficult. Even if its regulated against employers have a strong incentive to keep doing it, and figuring out exactly why an employer hired person A instead of person B is tricky at the best of times. The best way to prevent this form of discrimination may be to find employers a better way of measuring the traits they are interested in, or tackling the systemic issue that result in the relationship in the first place. Neither of those is exactly an easy prospect.