The Economics of Discrimination and Inequality

The Economics of Discrimination and Inequality

1. Introduction

The book has grown out of our shared experiences as teachers and as participants in various research programmes. It is in a sense a byproduct of our attempts to interest others in our particular research specialties and to interest each other in other people’s work. But behind this is the conviction that for him who is prepared to spend the time and effort to acquire the necessary background, the potential payoff in the application of economic theory to discrimination issues is very high. If one sets alongside each other all of the relatively few contributions to the economics of discrimination which we regard as having seriously attempted to employ explicitly or implicitly some theoretical framework and which have been published in the past decade or so, one can see an impressive body of work. But these works are scattered over economic journals and volumes of collected essays, sometimes in special issues on discrimination. They vary greatly in quality and in how much they attempt to do. The simple fact is that those who have ventured upon this terrain have often had to grope more or less alone for ideas, and attempts to fit together ideas in one area with those in another area are still relatively uncommon.

There are in the UK labour market, and elsewhere, wide arrays of established, systematic inequalities. They are of many different types. Many are religious or ethnic; discrimination against women occupies a very special position and will be discussed separately. Some types of discrimination have features in common with others and thus may be susceptible to similar types of theoretical interpretation. However, even when this is so, the situational and institutional details can be sufficiently different that specific policy implications should not be tarred with the same brush. We could make a division between discriminations operating at the recruitment state and those which are post entry. But in whatever way we categorise the problems, the overwhelming majority of economists who have addressed themselves to these issues have done so in an eclectic and unsystematic way. We think that the use of economic theory has been and can be of great value in throwing light on these questions. This is the central theme of the present volume.

2. Causes of Discrimination and Inequality

Taking the simplest case first, consider differential treatment of equally efficient workers or customers. If no transfer between the groups can take place and there is perfect competition among the employers in the discriminating group and among the employees in the target group, and if there is a constant demand for labour in each group and a constant supply price of labour from those groups, the wage differential will be that of the margin between the demand and supply of target group labour, with the discriminating employers hiring only at the lower wage. This is the difference between two equilibrium wage rates computed by drawing two marginal revenue products schedule for target group workers.

The demand for discrimination may stem from a desire to create and maintain status consistent with one’s discrimination. If the common understandings about some characteristics of members of other groups are accurate and are widely shared, the dissatisfactions of those engaging in discrimination may reflect the disparity between the status to which they believe members of the other group are suited and the status to which they have attained; or the dissatisfaction may arise from social mobility having brought the discriminating group into competition with the other group. But frequently there are stereotypes regarding the inferiority of other groups for which there is little or no evidence, and it is therefore necessary to consider the manner in which a target wage or ceiling on employment or other differential treatment of customers may be rationalized. Earning a profit from discrimination in these cases requires that there be a functional or positional relationship between the group discriminated against and the various groups of existing or potential employees and/or present or prospective customers for the product in question.

It is essential here to distinguish between elements that are likely to produce net profit to the discriminators and those that are not. An employer, for instance, may discriminate against a minority race because he has a taste for doing so, or because the pressures of other discriminators whom he respects are effective upon him. If his action is in any degree influenced by the anticipated responses of his customers, his discrimination will raise his costs and hence tend to raise the price at which he will sell his product. Thus we do not picture the employer’s hiring decision as analogous to a monopoly seller’s decision whether or not to sell a little more.

3. Economic Impacts of Discrimination and Inequality

Gary Becker’s theory of human capital can also be applied to the economic impact of ethnic and racial discrimination. When wages of a minority group are less than the majority, for the same type of work, there will be a loss of potential earnings because that individual will be unwilling to invest in specific or general training of human capital. If it is expected that a particular form of training will increase earnings, and a minority individual anticipates that he will get less from the investment than a similarly skilled majority group member, he will forgo the training in order to take the higher paying job with less training. This increased competitiveness for the inferior type job will drive down wages for the minority group even further.

Once discrimination and inequality have been defined, we may consider the economic impacts of these social issues. While most discussions of discrimination look at how the behavior of one person affects the welfare of another, in an economic context, we must also consider the impact of the discriminatory equilibrium on the welfare of the discriminator and the discriminatee. In a framework of competitive markets, employer or consumer discrimination will result in market disequilibrium, and this discrepancy results in a loss of economic efficiency. Inefficiency in the form of misallocated resources means that some individuals will be paid too much and others too little or priced too high or too low, relative to their productivity in the respective job. This efficiency-wages model is especially true when it comes to racial discrimination.

4. Policy Approaches to Address Discrimination and Inequality

Evaluating the effectiveness of policies to reduce discrimination can be complex. However, one useful framework that allows us to assess policies both to reduce discrimination and eliminate poverty was proposed by Michael Reich. Reich uses the analogy of an “attic” where white males reside on the ground floor, while 15 million minorities and women live in a cramped attic. In the attic, they face utter poverty and significant harassment from those above. Defensive policies designed to promote equality and address discrimination would involve moving the minorities and women from the attic to the ground floor. Non-defensive policies are those which improve conditions in the attic, without affecting the relative position of minorities and women. By providing a simple taxonomy for the classification of policies, Reich has enabled complex debate regarding policy effectiveness to be more focused.

Effective policy approaches for addressing discrimination and inequality require two steps. The first is to identify where in the market discrimination is occurring and where minorities and women are losing economic ground. The second is to evaluate the relative effectiveness of direct remedies to discrimination and indirect remedies through general policies that are not directed exclusively toward minorities.

5. Conclusion

The societal discriminations shaped the economic status of some groups. The discrimination can lead to inequality, and if the challenge for equality exceeds the cost, the burden will fall on the discriminated group, as the dominant group will resist to maintain their position. Breaking this cycle is difficult because there is uncertainty between the challenge and the outcome. This situation perpetuates inequality, as other affected groups observe it and choose not to get involved or improve their position. This situation is different from market discrimination. In the market, competition is inevitable, so if a company discriminates in hiring, the discriminated group can find another company that does not discriminate and receive fair wages. This will lead to the loss of the discriminating company, as consumers who buy the product have no discrimination in paying and will choose the price that has no difference. This is the opposite of what happens in society. The situation is under Condition A, but it leads back to the cycle of inequality and pushes the discriminated group to Condition B. If this situation persists for a long time, the group will accept inequality as fate, making it difficult to remove. Especially if society agrees and has the same perception of the condition and its cause.

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