Thursday, September 22, 2016

Firms that Discriminate are More Likely to Go Bust

From Alex Tabarrok.
"Discrimination is costly, especially in a competitive market. If the wages of X-type workers are 25% lower than those of Y-type workers, for example, then a greedy capitalist can increase profits by hiring more X workers. If Y workers cost $15 per hour and X workers cost $11.25 per hour then a firm with 100 workers could make an extra $750,000 a year. In fact, a greedy capitalist could earn more than this by pricing just below the discriminating firms, taking over the market, and driving the discriminating firms under. The basic logic of employer wage discrimination was laid out by Becker in 1957. The logic implies that discrimination is costly, especially in the long-run, not that it doesn’t happen.

A nice test of the theory can be found in a paper just published in Sociological Science, Are Business Firms that Discriminate More Likely to Go Out of Business? The author, Devah Pager, is a pioneer in using field experiments to study discrimination. In 2004, she and co-authors, Bruce Western and Bart Bonikowski, ran an audit study on discrimination in New York using job applicants with similar resumes but different races and they found significant discrimination in callbacks. Now Pager has gone back to that data and asks what happened to those firms by 2010? She finds that 36% of the firms that discriminated failed but only 17% of the non-discriminatory firms failed.

The sample is small but the results are statistically significant and they continue to hold controlling for size, sales, and industry.

As Pager notes, the cause of the business failure might not be the discrimination per se but rather that firms that discriminate are hiring using non-rational, gut feelings while firms that don’t discriminate are using more systematic and rational methods of hiring.
As she concludes:
…whether because of discrimination or other associated decision making, we can more confidently conclude that the kinds of employers who discriminate are those more likely to go out of business. Discrimination may or may not be a direct cause of business failure, but it seems to be a reliable indicator of failure to come."

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