We all know the moral and ethical arguments for why racial and religious discrimination is a bad thing. However, companies do not, to paraphrase Milton Friedman in The Corporation, necessarily see themselves as having a “social duty” beyond delivering a profit to their shareholders so these arguments are often not the most compelling.
It is therefore interesting to see that, aside from the moral arguments against racial discrimination, there are some very powerful commercial arguments. In another fascinating podcast at Econtalk, Russ Roberts and Bryan Caplan discuss the economics of discrimination.
Caplan argues, like Nobel prize winning economist Gary Becker before him, that the market will punish companies that engage in racial discrimination. The reasoning is that companies that make recruitment decisions based on both race and profitability will not be able to compete with companies that make recruitment decisions purely on profitability.
The rationale is that the company that cares about race will end up making compromises in the recruitment of people; they will pass, for example, on the most suitable candidates for a role if they are the wrong race or have the wrong surname. Companies that don’t allow such considerations to influence their judgement will therefore always seek the best candidate and not compromise profitability for race. Just as the selection of substandard materials will affect a company’s ability to compete effectively, so will it be hobbled by the selection of substandard employees — regardless of the colour of their skin. This, of course, works best during a period of low unemployment and high industry demand for labour; during times of high unemployment, the likelihood that racist employers will be able to find the optimum employee in their preferred racial group is, of course, increased.
Interestingly, the observation is also made during the interview that in an environment in which a particular race such as African Americans or a group such as women face rampant discrimination, there are strong commercial incentives for companies to hire from this group. For example, if African Americans were to earn 20% less than whites, any company that hired only African Americans would benefit by effectively receiving a 20% discount on human labour as compared to a company that insisted on only hiring whites (and paying a ‘racial premium’).
For this reason, some racist governments have had to pass laws to prevent or limit the hiring of the discriminated against group. For example, the South Africans passed apartheid laws in an attempt to stop white employers hiring black employees to take advantage of this wage gap, and the White Australia Policy was implemented, in part, to prevent white workers being undercut by cheap and effective Chinese and Polynesian labour. This is intuitive: the only reason a state needs to pass laws to control the hiring of a particular group is if employers would be hiring from that group without the passage of these laws.
5 comments ↓
The economic argument assumes a highly competitive environment and heterogeneity in the ‘taste’ for discrimination on the part of employers and consumers. Such a circumstance would seem unlikely … unless you lived in Mississippi.
It also assumes that ‘racist’ companies and racists within companies wouldn’t collude to exclude particular groups. This might not happen between firms, but one could certainly conceive of such a thing happening within, say, a faculty at a university.
But there’s two sides to the coin. If employers are getting cheaper labour, then the workers are either losing their jobs or having to reduce their wages.
It reminds me of what happened to my neighbour. He was trying to set up a vineyard, using money earned in his lucrative IT job. He declared that he would never use Australian labour in his vineyard, as he could get a better deal from recently arrived Indian immigrants. This worked well until his own boss had the same idea and sacked him in favour of contract labour from India.
Now his wife, in her late 50s, has suddenly had to go back to full-time work at a time when she hoped finally to retire.
The Western nations are almost alone in pursuing a radical dog-eat-dog individualism. It won’t work because every other group remains much more cohesive and mutually supporting.
(Which is why it’s odd that you used only white examples of “racist” companies who recruit only their own kind – it’s much more common for non-white races to stick together and do this; think of the Chinese, the Koreans and Japanese, who show a strong group preference and who should therefore be floundering economically according to your theory).
Mark,
I think that whilst “the west” and perhaps the americans created this hyper-individualism, this is now only one of two cultural alternatives on Earth. The Indians and chinese are now just as individualistic as westerners, something that we will realize only when they overtake us. China and India have become examples of western nations, and perhaps even more competitive without the restraining influence of traditional christianity.
For them the incentive gap is greater for them than it is for well fed well housed westerners.
So your example of the indian taking over the job of the white man will be writ large on a global scale.
But we should not worry, I’m sure they will need someone to clean their toilets and walk their pets.
The intent of posting this was only to highlight the interview as it is useful for Muslims to know that, alongside the moral and ethical arguments, there are some pragmatic arguments against racial and religious discrimination. It is also beneficial for all minorities to know that even though they may face discrimination, by closing the skills and education gap between them and the dominant ethnic or religious group, it is possible for the discriminatory climate to work to their advantage: making them more attractive employees than others because of the price differential. The economics applies regardless of the races involved but since we are talking about Australia and the United States, that is why I selected ‘white’ in my examples above.
Anyway, since you brought up the issue of offshoring jobs, it’s important to remember that there has always been this sort of churn; in the past, for example, it was largely technological advances that made people redundant.
It is also important to remember that the money that companies save by sending work overseas doesn’t just disappear but is often reinvested in the company leading to the creation of more jobs. If we take the IT example, since 1999 US labour market statistics show the loss of roughly 70,000 computer programmer jobs. Many of these have gone to India. However, the same statistics show the creation of 120,000+ software engineer positions (higher paid than programmers). Therefore, many of those people who lost their relatively low paid programmer jobs were able to find employment in the better paid software engineering jobs that were created as a result of the cost saving from the offshoring.
Yes, it often causes hardship to some people but, at the same time, it can also benefit many more people.
Leave a Comment