Market Competition and Indiscriminate Outcomes

PrejudiceIt is well-documented that women and ethnic minorities encounter various expressions of discrimination as it relates to market experience. From overt issues like wage inequality to more subtle expressions such as credit denial, discrimination impacts many areas of both individual experience and market exercise. Against the backdrop of this sociological framework, numerous economists hold the position that market competition, particularly in the long run, will drive out discrimination from its present position of influence. However, there are growing schools of both economic and sociological thought that indicate that the issue of discrimination might not be so easily eliminated. In this paper, I will explore certain aspects of this ongoing debate. After clearly defining discrimination, discussing some related components, and providing some examples of impact, I will look at the current literature regarding the traditional economic model and the interplay between discrimination, utility, and pecuniary rewards. It is my assertion that the major current complication is the clash between rational markets and irrational human behavior. Finally, it is this very concern that will form the foundation for my suggested solutions and policies at the close of the paper.

Discrimination is a deeply entrenched component of the human experience. Pager defines it as follows, “According to its most simple definition, racial discrimination refers to unequal treatment of persons or groups on the basis of their race or ethnicity” (Pager 2008, p.182). She then proceeds to further explain two important and distinct elements of discrimination, differential treatment and disparate impact:

Differential treatment occurs when individuals are treated unequally because of their race. Disparate impact occurs when individuals are treated equally according to a given set of rules and procedures but when the latter are constructed in ways that favor members of one group over another (Pager 2008, p. 182).

That is to say, the first aspect, differential treatment, is often more properly understood as those more overt expressions which directly target and impact specific individuals and groups. In contrast, disparate impact, while it may not have an underlying racial agenda, actually produces outcomes that are discriminatory in expression. In the end, both components manage to accomplish the same outcome; people are treated unfairly on the basis of “ascribed” characteristics such as sex or race rather than “achieved” characteristics such as education and accomplishment (England 1992, p. 57).

A related component in this definition of discrimination involves the idea of stereotypes. “Stereotyping refers to a process whereby expectations based on gender, for example, are so strong that they dominate how the individual is perceived (Storvik 2008, p. 732).” The complication in this regard arises from an emphasis on group perception as opposed to specific individual performance or action. Examined from the position of social identity theory, we can see how such thinking can become increasingly problematic, particularly in the market place. Those members of the “outgroup” become increasingly defined by the felonious and distorted perceptions of the “ingroup.” For example, laziness becomes attributed to race and high levels of turnover become attributed to gender. In the market environment, such generalizations work to deny both particular individuals and entire groups equal access, opportunity, and pay. Some would argue that there is a subtle distinction between discrimination and stereotyping, but for the negatively-impacted individual such arguments carry little weight or relevance. In the end, their opportunities are forfeited through the prejudices of another person or organization.

In fact, it is questionable to spend much time arguing terminology when one looks at some of the existing data and literature regarding the impact and magnitude of discrimination. Charles reports the following information regarding wage gap:

Our various results suggest that racial prejudice among whites accounts for as much as one-fourth of the gap in wages between blacks and whites. This is a significant share and is associated with a present discounted loss in annual earnings for blacks of between $34,000 and $115,000, depending on the intensity of the prejudice of the marginal white in their states (Charles 2008, p. 805).

It seems apparent from such numerical estimations that the sheer economic impact of discrimination is undeniable. Despite having equal levels of education and experience, many ethnic minorities suffer from unequal pay. Jackson further enhances this discussion by stating, “A substantial body of evidence demonstrates that individuals from racial or ethnic minorities are discriminated against when applying for jobs (Jackson 2009, p.670).” Additionally, these expressions of inequality are not limited in their magnitude to the lower ends of the social spectrum. Reporting on hiring-related discrimination in the English professional soccer league, Szymanski states that “soccer clubs in England hiring a below-average proportion of black players have tended to perform worse than would have been predicted in the market (Szymanski 2000, p. 600-601).” It would appear that certain teams and managers have intentionally discriminated against blacks in their hiring practices even though such practices have negative impact on the organization’s success both in terms of performance and profit. Given such evidence, it would seem that even athletes, as well as other more generally defined members of the “elite” classes, are not exempt from discrimination. Finally, Paula England reminds us in her work that this discrimination is not solely a racial issue. “In the United States, as in most nations, women earn substantially less than men (England 1992, p.23).” Discrimination has a profound and lasting economic impact on both race and gender. It would appear that in those places and systems where there are differences between people, there will also be differences in treatment and, subsequently, differences in economic impact.

It is at this point in which the debate involving short-term and long-term impact begins to foment among economists and sociologists. Most traditional economists would argue that in the long-run, perfectly competitive market models would drive-out the influence of discrimination on hiring practices and wage gap inequality. For example, “Arrow argues that since prejudiced employers sacrifice profits by discriminating, such employers are ultimately driven from the market in the long run in a competitive setting (Charles 2008, pp. 774-775).” To further explain, the idea inherent in the neo-classical model is that the employee wage in the labor market is determined by the equilibrium point between supply (the number of available workers) and demand (the number of requested workers). That is to say, employers who are seeking to maximize their earnings will pay their employees neither more nor less than the rate dictated by the market. As England explains:

A profit-maximizing employer will pay no more than the market clearing wage because there is no need to do so and no gain from doing so… Competition with other employers for the same workers forces the employer to pay no less than the market wage (England 1992, p. 48-49).

With regard to discrimination, this economic model is complicated by the interjection of a second demand line, one representing the lower wages that are paid by the prejudiced employer to the discriminated group. The reasons for this market discrimination are varied, ranging from Becker’s posit of “a taste for discrimination” to more recent conclusions involving statistical, error, and monopsony discrimination. For the sake of brevity in this paper, I would argue that for the discriminated individual the ultimate source of the prejudice has far less meaning than the final outcome. In economic terms, the result is a wage gap, a disparity in pay between otherwise equal groups or individuals. Despite equal education and experience, many ethnic minorities and women suffer from this impact in the workplace because employers are able to secure labor at a “discounted” rate based on prejudicial practices.

With a view to the long-run, such hiring practices provide a market advantage to those employers who are nondiscriminatory in their practices. They receive labor at a reduced cost and their MRP (marginal revenue product) subsequently increases. In the end, they are able to command a larger return on their investments and secure greater profit, thereby expanding their opportunity for capital investment and growth. In contrast, the discriminating employer ends up spending more money to satiate his “taste for discrimination” and shrinks his profit margin until the point at which he can longer compete in the market. Faced with bankruptcy, the discriminating employer is forced to sell to the nondiscriminating employer and is subsequently driven from the market. The result is that the market is now dominated by nondiscriminating employers and the previous disparity in wages and hiring practices is adjusted to reflect equal treatment and opportunity regardless of ethnicity or gender.

In theory this economic model would hold accurate, particularly within the parameters of both the long run and the perfectly competitive considerations. The complication, however, arises when one introduces the reality of irrational human behavior into the equation. Much of the basis for economic thinking is founded upon the idea of rational choices, i.e., people make their decisions at the point in which their own level of personal satisfaction will be maximized. Discrimination and prejudice complicate the model by introducing irrational behavior into rational models. For the nondiscriminating employer, utility, or satisfaction, is defined by profit or success.  For the discriminating employer there is a complicating concern, his prejudice. Charles, appealing to Becker’s work in Economics of Discrimination, explains it as follows:

Becker represents prejudice as a distaste for, or aversion to, cross-racial contact. Thus, an employer’s utility… depends both on his profit and on the number of blacks he employs, with each black worker he hires bringing him disutility (Charles 2008, p. 777).

The traditional, neo-classical economic understanding of utility has now become complicated by the presence of the subjective and nebulous idea of discrimination. England argues that such utility is willing “to take less profit than the maximum possible in order to indulge their taste for discrimination (England 1992, p. 65-66).” In essence, the discriminatory employer may well experience greater satisfaction from his prejudicial practices than from the pecuniary results. Given such a condition, the rational market is now held “hostage” by irrational behavior. Although most economists will readily admit that money is solely a means to utility and not the explicit end, much of the interchange in market models is founded on the idea that employers and consumers make their decisions based on maximizing pecuniary considerations, chiefly because profit and increased capital gains further enhance the ability to experience particular nonpecuniary satisfactions. The presence of an irrational behavior, one that is quite willing to sacrifice profit for prejudice, lies outside the traditional parameters of most rational economic explanations and models.

In closing, I would like to proffer a few possible solutions based on the current literature.  First of all, I would argue that as discrimination is ultimately an equality issue, continued government regulation and pressure upon employers and companies that practice prejudice is required. Speaking about the role of policy in Norway and the subsequent equality gains, Storvik makes the following comment, “Considering the strong focus that Norway’s state bureaucracy places on the objective to increase the proportion of female managers, the equality in treatment is not surprising (Storvik 2008, p. 748).” It is my opinion that much of the “structural discrimination” (Pager 2008, p. 197-198), particularly those expressions with a legacy of historical evidence, requires clearly-defined policy expectations with commensurate punishments if established processes and systems of discrimination are to be changed. It is hard to argue that many of the gains with regard to racial and gender equality would have happened in recent decades without an emphasis upon equality on a governmental level. Social mores have certainly undergone a profound transformation but the threat of legal repercussion is often the only means of changing entrenched, systemic processes of discrimination. Storvik, drawing from Ferguson, states that “it is necessary to develop new types of organizational structures (Storvik 2008, p. 734.)” Such structural changes often require legal motivations that can only be instituted through policy changes on both a state and a national level.

Secondly, I would draw upon Goldin’s work with blind auditions in orchestra audition, to suggest a similar practice of “blind hiring procedures” (Goldin 2000, p. 719). Goldin describes the process of blind auditions as follows:

In blind auditions (or audition rounds) a screen is used to hide the identity of the player from the committee… Each candidate for a blind audition is given a number, and the jury rates the candidate’s performance… Only the personnel manager knows the mapping from number to name and from name to other personal information (Goldin 2000, pp. 721-722).

Given today’s current technological and computer capabilities and efficiencies, I suggest similar “blind auditions” in the work environment. If hiring practices are truly intended to be nondiscriminatory, it would seemingly be easy in the beginning stages of the process to eliminate all ascribed considerations (e.g., race, gender, and age) from the application or resume. The HR department, like the personnel manager referenced above, could assign random numbers to applicants; thereby, the relevant hiring manager or department would be only be able to view such information as is pertinent to achievement considerations like experience, education, and skill level. While such a process would clearly not work at the higher levels of the hiring process that require personal interviews, they would certainly minimize potential bias in the earliest stages. As an illustration of this point, Pager shares this particularly relevant finding from Bertrand and Mullainathan:

…researchers mailed equivalent resumes to employers in Boston and Chicago using racially identifiable names to signal race (for example, names like Jamal and Lakisha signaled African Americans, while Brad and Emily were associated with whites). White names triggered a callback rate that was 50% higher than that of equally qualified black applicants (Pager 2008, p. 187).

Given that it would certainly not seem unreasonable to extend the same study to gender-based naming scenarios, blind hiring processes, as suggested above, would eliminate the possibility of such forms of racial and gender discrimination.

Thirdly, I will draw from the work of both Storvik and Goldin, in making some concluding remarks regarding a more general approach to procedures, people, and “pool” size. It would appear that while the causes of discrimination are varied, the possible solutions and responsive policies are just as equally eclectic in their nature. Summing up their research involving the blind auditions, Goldin makes these remarks:

Using the example we just offered, the increase in the probability of a woman’s being hired out of an audition accounts for 66 percent of the total increase in the fraction female among new hires. Half of the 66 percent comes from the switch to blind auditions. The other half could have resulted, for example, from a greater acceptance of female musicians by music directors. The remainder (34 percent) of the increase in the fraction female among new hires is accounted for by the increased percentage female among audition candidates (Goldin 2000, pp. 736-737).

The thought here is that is a combination of three main factors, each of which, in turn, reflects a very intentional approach to a specific form of discrimination in the market environment, resulted in marked improvement in female representation in classical orchestras. The first deals with systemic (or structural) discrimination by addressing the processes and procedures that enable prejudice to find expression in the market. Secondly, a focus on eliminating social (or cultural) discrimination is an ongoing process of education in the public sector as previously entrenched stereotypes are replaced with factual evidences of equality. Thirdly, there is the need to address selection biases by increasing the size of the applicant “pool.” Storvik emphasis this final aspect, stating that, “Seen in light of the finding that the number of job offers increases with the number of applicants, it seems that women would apply more often (Storvik 2008, p. 750). By focusing on repairing broken processes, transforming public perception, and encouraging ethnic minorities and women to become more personally active, the gains in equality of past decades should continue to expand in both impact and magnitude.

In closing, I would appeal again to the neo-classical economic models that first initiated this discussion. Does market competition drive out discrimination against women and ethnic minorities? My contention is that the presence of irrational human behavior complicates the theoretical outcomes of the rational market model. If traditional understandings of utility, as defined by linkages between profit and personal satisfactions, can be undermined by the prejudice of key individuals within the market structure, there is no reason to believe that discrimination can or will be entirely “driven out” by market competition. The presence of irrational human behavior will also ensure that some level of discrimination is always present. However, having said that, I believe that by instituting a combination of the above listed measures, e.g., continued government pressure that guarantees equality, blind hiring processes, and the understanding of the need for personal involvement, the impact of discrimination can be greatly minimized in the market environment. The long-term hope of such an approach is that the inherent economic penalties of the market will eventually become so great that they drive discriminating employers and organizations to change their public practices even as they hold steadfastly to their private prejudices. At least in this way, the impact of discrimination will be minimized to the point of exception rather than the rule, enabling both individuals and minority groups to experience both equal opportunities and expected outcomes in the market.

Works Cited

Charles, K. K. and Guryan, J. (2008). Prejudice and wages: an empirical assessment of Becker’s The Economics of Discrimination. The Journal of Political Economy, vol. 116, no. 5, pp. 773-809.

England, P. (1992). Comparable Worth: Theories and Evidence. Aldine de Gruyter, New York (Ch. 2).

Goldin, C. and Rouse, C. (2000). Orchestrating impartiality: the impact of “blind” auditions on female musicians. American Economic Review, vol. 90, no. 4, pp. 715-741.

Jackson, M. (2009). Disadvantaged through discrimination? The role of employers in social stratification. British Journal of Sociology, vol. 60, no. 4, pp. 669-692.

Pager, D. and Shepherd, H. (2008). The sociology of discrimination: racial discrimination in employment, housing, credit and consumer market. Annual Review of Sociology, vol. 34, pp. 181-209.

Storvik, A. E. and Schøne, P. (2008). In search of the glass ceiling: gender and recruitment to management in Norway’s state bureaucracy. British Journal of Sociology, vol. 59, no. 4, pp. 729-755.

Szymanski, S. (2000). A market test for discrimination in the English soccer leagues. Journal of Political Economy, vol. 108, no. 3, pp. 590-603.