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gary becker 1, rational choice haters 0

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One of the most striking arguments of Gary Becker’s theory of discrimination is that there is a cost of racial discrimination. If you hire people based on personal taste rather than job skills, your competitors can hire these better works and you work at a disadvantage. I think the strong version argument isn’t right. Markets do not instantly weed out discriminators. But the weak version has a lot of merit. If you truly avoid workers based on race or gender, you are giving away a huge advantage to the competition.

Well, turns out that Becker was right, at least in one data set. Devah Pager has a new paper in Sociological Science showing that discrimination is indeed associated with lower firm performance:

Economic theory has long maintained that employers pay a price for engaging in racial discrimination. According to Gary Becker’s seminal work on this topic and the rich literature that followed, racial preferences unrelated to productivity are costly and, in a competitive market, should drive discriminatory employers out of business. Though a dominant theoretical proposition in the field of economics, this argument has never before been subjected to direct empirical scrutiny. This research pairs an experimental audit study of racial discrimination in employment with an employer database capturing information on establishment survival, examining the relationship between observed discrimination and firm longevity. Results suggest that employers who engage in hiring discrimination are less likely to remain in business six years later.

Commentary: I have always found it ironic that sociologists and non-economists have resisted the implications of taste based discrimination theory. If discrimination in markets is truly not based on performance or productivity, there must be *some* consequence. However, a lot of sociologists have a strong distrust of markets that draws their attention to this rather simple implication of price theory. I don’t know the entire literature on taste based discrimination, but it’s good to see this appear.

50+ chapters of grad skool advice goodness: Grad Skool Rulz ($2!!!!)/From Black Power/Party in the Street

Written by fabiorojas

September 22, 2016 at 12:20 am

2 Responses

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  1. Fabio – reminder me what Becker said about the consequences of market effects. Didn’t he argue that if discriminating firms were more likely to fail that eventually the practice of discrimination would be weeded out of the market? If that’s true, it’s interesting that discriminatory practices persist even though they don’t appear to give firms any kind of competitive advantage (and seem to have the opposite effect).

    Like

    brayden king

    September 22, 2016 at 4:16 pm

  2. @Brayden: Markets do not weed out and then remain static. New entrants that discriminate have no barriers to entry. Thus, we can observe discrimination over time but tied to an evolving population of firms. All we need in the conceptual model is that new entrants haven’t learned from successful, non-discriminating incumbents.

    Liked by 1 person

    Randy

    September 22, 2016 at 4:40 pm


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