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Companies That Discriminate Fail (Eventually) -- Commentary

Sept. 23, 2016
Businesses can’t afford to let their gender and racial prejudices get in the way of rational economic decisions.

“The corporate world is a boys’ club, and it’ll always be a boys’ club,” said a banker who struck up a conversation with me a few years ago in a coffee shop near the university where I once taught. “Male managers are always going to hire men over women, because they feel more comfortable around men.”

“Aren’t there some managers who just hire whoever’s best for the job?," I asked.

“Yeah, there are some,” he said. “I don’t know what’s going on with those guys.”

Gary Becker might have had an idea of what was going on. For decades in the mid-20th century, the future Nobel-winning economist wrote about the economics of discrimination. His theory was, in a nutshell, that the people who make hiring decisions at companies are bigoted -- they’d rather work with people of their own race or gender. Essentially, this is the same explanation that the banker gave me in the coffee shop. According to Becker, bigoted employers will pay lower salaries to the people they don’t like, resulting in gender and racial wage gaps.

But Becker also made a surprising claim that enraged many who had themselves suffered discrimination. He said that companies run by bigots would be driven out of the market by competition. In a perfectly competitive market, companies that don’t pay employees what they’re really worth will be outcompeted for talent by unbiased companies, and eventually driven out of business.

Obviously, that doesn’t happen in real life and there is lots of evidence that discrimination still exists. Becker was committing a common sin of economists -- using an overly simplistic model to make grand, definitive claims. In reality, there are many factors affecting corporate performance other than the pure competition for talent.

But just because Becker wasn’t totally right doesn’t mean he was totally wrong. Economic competition might not eliminate entrenched bigotry in society, but it could help erode it over time. There’s evidence suggesting that this is the case.

A couple of studies in the late 1990s by economist Sandra Black, of the Federal Reserve Bank of New York, showed how increased competition in the U.S. manufacturing and banking industries was followed by a shrinking of the gender gap in those businesses.

In manufacturing, that competition was largely international amid the increase in foreign trade during the late 20th century. Black showed that concentrated industries, which were probably more insulated from competition to start with, saw more of a reduction in their gender wage gap when they were also affected by trade. In other words, when foreign competitors from places such as Japan and Europe forced U.S. manufacturers to up their game, competing for female talent -- and giving women a much-deserved raise -- was one way they did so. Black also finds that deregulation in the banking industry had similar effects.

More recently, the evidence has multiplied. In 2013, economists Fredrik Heyman, Helena Svaleryd, and Jonas Vlachos found that companies that get bought out in a takeover tend to increase their percentages of female employees. In older, established industries, it’s likely to be the less successful businesses that get bought out, so this implies that these companies were suffering in part because of their refusal to hire enough women.

And in 2014, economists Andrea Weber and Christine Zulehner found that companies with fewer female employees than the industry average tend to have lower survival rates.

An interesting new piece of evidence comes from a sociologist -- Harvard University’s Devah Pager. Back in 2004, Pager conducted a field study of companies in New York City to find out which ones engaged in more racial discrimination. Research assistants of various racial backgrounds were sent out with identical resumes to apply for jobs at companies. Overall, white and Latino applicants got far more callbacks than their black counterparts. So discrimination was fairly widespread.

Pager then kept track of which companies discriminated the most, and checked back with them in 2010, after the financial crisis. She found that companies that had showed signs of racial discrimination were almost twice as likely to have gone out of business. That was true even after controlling for things like company size.

Conclusion: Discrimination doesn’t pay. Although Becker wasn’t right when he claimed that competition would quickly drive all discrimination out of the market, he was right that bigotry represents an albatross around a company’s neck. Businesses can’t afford to let their gender and racial prejudices get in the way of rational economic decisions.

So will the market eventually wring bigotry out of the business world? Attitudes like those of the banker in that coffee shop won’t disappear. They will no doubt continue to inspire wars of words on social media. But employees, managers and executives increasingly have to keep those attitudes to themselves, if only for the sake of the bottom line.

By Noah Smith

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