Firms that Discriminate are More Likely to Go Bust

by on September 21, 2016 at 7:23 am in Economics | Permalink

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.

discriminationA 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.

1 So Much For Subtlety September 21, 2016 at 7:31 am

I find this hard to believe. I would be interested to know what it meant by discrimination.

After all, discrimination also lowers costs. If everyone comes from the same background, they know how other people will behave and there is less need for HR Departments to regulate how they interact. There is better knowledge within a specific community. Members of a Church know each other better.

So take Hollywood. Has it had a long history of Jews hiring fellow Jews? Certainly. You will know your son-in-law better, and can rely on him more, than on some random stranger. That will lower costs and may well outweigh the costs of not hiring “the best” (as if that can be measured) candidate. After all, Hollywood has hardly done poorly during the 20th century has it?

In fact the best example would be organized crime. When Italian crime syndicates hired other Italians they do so because discrimination is sensible in that context. They screwed up when they started hiring outsiders like Harry Hill.

2 Boonton September 21, 2016 at 8:15 am

“I would be interested to know what it meant by discrimination”

Err says it in the article:

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.

3 derek September 21, 2016 at 8:39 am

The jobs applied for in the study are low wage low skill in Manhattan. Typically high turnover. The qualifications are mostly personal; showing up by 8am, doing the jobs asked. The smart employers in these businesses know that they will go through lots of people, the smart ones move on to better jobs. It is like choosing between a made in Taiwan consumable and made in Mexico consumable; you use it for a short time and throw it away in any case, so you shop on price and availability.

It may very well be that the local circumstances mean that the white guy applying for this type of job in Manhattan is poorer quality than the black guy. What white person looks for a low wage job in Manhattan? Didn’t they all end up in the Occupy Wall Street?

Someone who would hire a white guy just out of jail over a clean Hispanic or Black is simply stupid.

4 Kailer September 21, 2016 at 1:00 pm

My bullshit detector is going off. This sounds too cute to be true in a Malcolm Gladwell sort of way. I agree with becker that discrimination is costly, but costly enough to double your chances of going out of business? I’m sure the authors were very thorough, but I would be very surprised if this could be replicated.

5 Dallas September 22, 2016 at 2:32 pm

In business competition, the difference between success (staying in business) and failing is a fraction of a percent in costs. If I have a cost/performance advantage of just a couple of % and I put that difference into emergency reserves I will have a more robust system to handle the business variation that will occur. Hence, he will go bankrupt.

I would be surprised if it didn’t replicate over decades time scales. It is a very high leverage measure, but may just be reflecting attention to hiring having nothing to do with race or sex.

6 cowboydroid September 23, 2016 at 11:40 pm

Your intuition is incorrectly calibrated.

7 JonFraz September 21, 2016 at 2:45 pm

Re: there is less need for HR Departments to regulate how they interact.

That’s only a very small part of what HR does. Most of HR work is either managing job openings, hiring and departures or processing paper work for benefits.

8 Bryan Atkins September 21, 2016 at 7:44 am

This is more terminal myopia from the economics field, sorta like discussing the efficacy of mouthwash when you’re threatened by cancer.

Going bigger picture, mining this: “We need scarcely add that the contemplation in natural science of a wider domain than the actual leads to a far better understanding of the actual.” Sir Arthur Eddington — “The Nature of the Physical World”

We’ve generated unprecedented environs in-and-across all networks: geo eco bio cultural & tech. These new environs are driven by exponentially accelerating complexity, which includes exponentially accruing knowledge.

We’re way past little policy adjustments. Our problems are deeper and more fundamental.
Here’s one: We’re in Anthropocene.
Part of that: Human cultural selection increasingly drives natural selection.
Part of that: We’re increasingly doing natural selection with world culture’s dominant code for relationship / reality interface: monetary code.
FAIL. Exhibit A: Sky. Exhibit B: Ocean

The idea that world culture’s dominant mechanism for the information processing and ordering of complex relationships — humans using monetary code — could possibly generate selectable relationship hierarchies in the aforementioned networks, and importantly, across time, is more than stupid: it’s omnicidal.

Probably already too late, but here’s some thinking outside the mass grave, some variation re code, including monetary code, in a physics / evolution / complexity context: The Price Is Wrong:

9 Art Deco September 21, 2016 at 9:25 am

Thanks for the word salad. It’s been an education.

10 anon September 21, 2016 at 4:29 pm

When you are on disability for schizophrenia, there’s plenty of time to post long, nonsensical comments on blogs.

11 Ethan Bernard September 21, 2016 at 7:39 pm

Bryan, was that generated by a Markov chain?

12 Govco September 21, 2016 at 2:54 pm

I wish we could create a poll to see if that communicated any of the intended information to the reader.

13 The Anti-Gnostic September 21, 2016 at 7:53 am

I say run this experiment in rmueal time. Eliminate Title VII, Fair Housing, and all the other ‘civil rights’ laws and let the market work its multicultural magic. Didn’t we get Title VII and all these other laws because, apparently, the market wasn’t working its multicultural magic?

14 The Anti-Gnostic September 21, 2016 at 7:54 am

*real time

15 Boonton September 21, 2016 at 9:03 am

I suspect there’s multiple equilibrium points. In a simple case if candidates A and B are equal but B is black then discrimination would face serious market pressure. The usual micro-story would work. B gets paid 25% less so a smart business would hire B and get the same output for less money. Other businesses would follow suit and try to recruit B by offering him more (24% less, 20% less, 10% less and so on). A and B’s wages then could converge upon each other and the market would work ‘magic’.

However culture can be pretty powerful. I think Richard Wright had a story, out of high school he had a job with an optometrist Since he had taken trig in HS the owner decided to let him be trained on grinding lenses. His coworkers were absolutely against it and made it clear they would not train him no matter what. He left the job and the owner’s attempt to run against the stream of cultural racism failed.

From an economic point of view, the candidate A versus B story is far too simple. It assumes the worker you hire is totally independent of all the rest of the inputs in your business and your customers. This might indeed be the case if racism is subtle and mostly unconscious.

16 Art Deco September 21, 2016 at 9:21 am

Richard Wright’s experience with the optometrist would have happened nearly 90 years ago and the smart money says the complaining employees were family members who could not be readily fired.

17 Eric September 22, 2016 at 9:16 pm

I just read the book. (It was good.) The racist employees were not family.

18 chuck martel September 21, 2016 at 10:18 am

“if candidates A and B are equal”

Ain’t no two candidates equal, except supposedly under the law.

19 lemmy caution September 21, 2016 at 2:34 pm

They sent fake resumes so it was pretty easy to have equal candidates.

20 TangoMan September 22, 2016 at 2:22 am

But they weren’t equal candidates because the credentials don’t carry different meaning depending on the race of the candidate. Black HS graduates have a reading ability equal to that of 8th grade white students. If you know this, then why would you treat a black HS graduate as the equal of a white HS graduate? Same with college, maybe even more so when you account for the affirmative action effect.

21 Falcao September 23, 2016 at 6:02 am

Tango man (below) you are obtuse in the extreme. Your conclusions about the academic abilities of black HS/college grads is based on what evidence? Besides, the article refers to ” discrimination ” which cuts across gender, religion, sexual orientation, and various racial groups. Yet, somehow you managed to narrow this down to white vs black. Time to check your own academic ability.

22 Cooper September 21, 2016 at 6:04 pm

Cultural standards evolve.

In 1959, 4% of Whites approved of mixed race marriages. By 1983, it was 43%. Today it’s 87%.

We can use that survey data as a reasonable proxy for racism. If it upsets you that people of different races marry each other, you’re probably a racist.

So discriminatory practices that were considered acceptable by many people in mainstream society in the 1960s are just no longer considered acceptable today. Even if you removed the legal protections, there are so few hardcore racists left it’s extremely unlikely that mass segregation would emerge in a free market.

In the context of this study, discriminatory firms are being run by that leftover group of bigots. They are not a representative slice of American society. They’re a bigoted minority. It makes sense that such people would also be bad at business. They’re behind the times.

23 Cliff September 21, 2016 at 8:43 pm

That narrative would seem to undermine arguments that systemic racism is prevalent today

24 Falcao September 23, 2016 at 5:53 am

Hardcore racism is actually easier to deal with than subtle/latent racism that drains self-belief with a thousand cuts and a sweet smile.

25 Dallas September 22, 2016 at 2:55 pm

Being old enough to recall the time before title VII, etc. it was not a time when we let “the market do its multicultural magic”. It was a time when governments and political leaders blocked markets with can’t sell to Jews, Blacks, Chinese, etc. type laws for everything from hamburger counters to housing.

Do you honestly think that markets would pick having separate restroom or drinking fountains? Do you think markets would gerrymand boundaries, increasing transportation time and cost, to get specific racial purity outcomes in schools? To get non-optimal outcomes it takes political leaders promising benefits to their group if they screw some other group (the age old method of ruling).

26 cowboydroid September 23, 2016 at 11:42 pm

“Didn’t we get Title VII and all these other laws because, apparently, the market wasn’t working its multicultural magic?”

That’s the mythology, anyway. Reality doesn’t seem to support that narrative.

27 Julien Couvreur September 25, 2016 at 1:36 pm

“Didn’t we get Title VII and all these other laws because, apparently, the market wasn’t working its multicultural magic?”

Let me rephrase that to understand the implicit argument. Law X exists, therefore it addresses a problem better than if the law wasn’t passed.

If that could be shown to be true, without all the required and difficult counter-factual analysis, that would be quite powerful!

Even if we assume that policies are well-intended (they try to address a real problem which people want to solve faster than is naturally occurring), what makes you think they actually achieve that purpose?
Consider poverty rates before/after the Big Society programs, or workplace fatalities before/after OSHA, …

28 Axa September 21, 2016 at 7:55 am

Perhaps discrimination just signals preexisting structural problems in the firm. If business is declining, the boss will push HR into being more “selective”. No matter if discriminating works or not, the boss “acted”. From the salaryman perspective, this information is very valuable. Discrimination can be seen as the fear-o-meter of the employer. If the business is going down due to multiple causes, what’s the motivation to work there in first place?

29 Boonton September 21, 2016 at 8:17 am

” No matter if discriminating works or not, ”

I’m not following. If discrimination works why would a ‘boss’ wait until his firm is in trouble to begin using it? The simpler explanation is that it doesn’t work therefore firms that use it more are more likely to fail over the long run. Occam’s Razor.

30 Axa September 21, 2016 at 9:04 am

Indeed, your explanation is simpler. Then discrimination may be a useless objective that may be pursued by people trying justify their position.

31 Dan September 21, 2016 at 10:33 am

This sounds like a comment on the election.

32 Art Deco September 21, 2016 at 9:23 am

Let’s offer a suggestion that it signals that the person doing the hiring is bad at his job generally.

33 Jack September 21, 2016 at 8:31 am

Doesn’t this pretty much prove that women don’t really earn 75% of what men earn for doing the same job?

34 Seth September 21, 2016 at 8:36 am

Yes, you have read Alex correctly.

35 Slocum September 21, 2016 at 9:22 am

Not that this is proof, but women don’t earn 75% of men’s salaries for the same jobs. Women earn less overall because they’re not doing the same jobs (they choose different careers — particularly ones that offer security, portability, and work-life balance) and even in the same careers they’re not approaching them the same ways (women are far more likely to work part time and have significant gaps in employment). This is true even among highly paid professions (female physicians are far more likely to work part time). When you look at new childless graduates in their first jobs, women don’t actually earn less, they earn more.

36 BC September 21, 2016 at 12:53 pm

Kristen Bell released a video on “pinksourcing” recently that went viral []. Ironically, many of the commenters, and maybe Kristen Bell herself, seemed not to understand that the video actually presents an argument against the existence of the so-called wage gap.

37 rayward September 21, 2016 at 8:32 am

According to a study released yesterday by the Economic Policy Institute, the black-white wage gaps are larger today than in 1979.

38 Ex-engineer September 21, 2016 at 8:48 am

This model has nothing to do with the way firms are actually managed – in which “cultural fit” is regarded as very important and is often used to justify exclusion of employees over a certain age.

See the comments here:!n=12

39 Norfolk September 21, 2016 at 9:36 am

Employers have 3 basic question for prospective employees:

– Can you do the job ?
– Will you do the job ?
– Will you fit in here socially & culturally ?

Also, “discrimination” is a 2-way street– Workers can easily discriminate against potential employers in choosing jobs… and there are no government sanctions nor social stigma for workers shunning employers based on race, religion, etc. But there are substantial economic costs to arbitrarily restricting one’s market choices, just as there are for employers.

40 byomtov September 21, 2016 at 10:03 am

there are substantial economic costs to arbitrarily restricting one’s market choices, just as there are for employers.

The key being the word “arbitrarily.”

41 Matt September 21, 2016 at 9:06 am

What is the causal chain supposed to be? Racial discrimination is going to eliminate some amount of candidates from the hiring pool, but unless it eliminates all of the qualified ones it’s hard to see how it makes a significant difference.

42 Art Deco September 21, 2016 at 9:17 am

Perhaps their metric of ‘discrimination’ is an indicator of bad hiring policies in general.

43 Art Deco September 21, 2016 at 9:16 am

OK, if Darwininan processes eliminate ‘discriminatory’ firms, why do we have employment discrimination law? What does it do other than impose compliance costs on firms, induce over consumption of higher education (as that is one method of labor market screening that is not made difficult by employment discrimination law), and provide employment for lawyers and minority benefits brokers?

44 byomtov September 21, 2016 at 10:01 am

if Darwininan processes eliminate ‘discriminatory’ firms, why do we have employment discrimination law?

The premise is wrong. Darwinian processes do not eliminate discriminatory firms. And even if they do, as per the paper, it seems to take a long time and affect only a minority of discriminatory firms.

Note that only 36% went bust, while 17% of non-discriminators did. So at most 19% of discriminatory firms go bust because of discriminatory practices.

Besides, this was in 21st century New York. The value of discrimination varies by time and geography. In 1957, when Becker wrote about this, an employer in the South would have been financially irrational not to discriminate, openly and explicitly. They in fact did just that, despite the fact that Jim Crow laws, in general, did not require such discrimination. There was no law against having white workers report to a black supervisor. But nobody did it, because it would have caused a mutiny.

It is a fundamental mistake to ignore context when discussing how market forces will operate. “Market forces” are simply the aggregated decisions of private individuals. If those individuals don’t want to buy a car from a black salesman the auto dealer would be foolish to hire one, relative compensation levels notwithstanding. Libertarians just don’t seem to understand this, as they repeat these arguments over and over.

45 Brian Donohue September 21, 2016 at 10:51 am

This is a good comment, and deserving of a thoughtful response.

46 Art Deco September 21, 2016 at 11:53 am

My thoughtless response will be to point out that the choice is not between ‘discrimination’ and ‘no discrimination’. It is between merchants hiring according to their lights and hiring with a view to avoiding unpredictable costs imposed by shark-lawyers (in robes and out of robes) and grant-funded okupiers.

47 JonFraz September 21, 2016 at 2:50 pm

A firm that has an obvious history of not hiring certain people (despite their fitness for the job) is likely to be sued also.

48 byomtov September 21, 2016 at 12:30 pm

Thank you.

49 anon September 21, 2016 at 3:39 pm

Are you sure you don’t want to see hair and makeup before you make a decision?

50 bbt2 September 21, 2016 at 11:30 am


“Libertarians just don’t seem to understand this…”

??? … don’t understand what?

…what {false} arguments are libertarians repeating over and over ??

Please clarify your comment in plain language.

51 byomtov September 21, 2016 at 12:37 pm

Libertarians, or rather those who advance this sort of argument ignore the possibility that discriminatory hiring practices, or even business practices in general, may be more rational from a financial point of view than non-discrimination. This depends on the values of the society you operate in, not on an oh-so clever theory that ignores the attitudes of your employees and potential customers.

See my example of a black supervisor. Or, suppose you run a restaurant in a racist society, like the Jim Crow south. If you serve black customers you will lose a large part of your white business – more than you gain by serving blacks. Then it becomes profitable to refuse to serve blacks, even if you yourself don’t care. This is true even if no law forces you to discriminate this way.

52 Anon7 September 22, 2016 at 3:15 am

So greedy employers have the power to drive down the wages of their poor employees, but they are powerless in the face of their bigoted employees. Clever theory indeed.

53 Julien Couvreur September 25, 2016 at 2:04 pm

“those who advance this sort of argument ignore the possibility that discriminatory hiring practices [in a racist society]”

Sounds like a strawman and nirvana fallacy in one. Who says that markets are perfect? Last I heard from the most hardcore free-market libertarians, the question is a comparative one.

Let me put it in another way. If you introduce the force of government into the situation, do you think the minorities are likely to benefit from it in such a racist society?

Besides, even in the most racist society, there will be competitive pressure to hide the fact that you’re hiring minorities or outsourcing to a minority provider. Also, without such hiding, there will be temptation fo managers to hire minorities at least for low-status jobs, and over time slightly better jobs. Such trade and mutual benefits will likely erode prejudice and diminish antagonism (see impact of trade on international relations and peace).

54 Art Deco September 21, 2016 at 11:50 am

No, only 36% went bust during the time period in which they were tracked.

55 byomtov September 21, 2016 at 5:18 pm


And only 17% of the others went bust during that period.

We don’t know what happened after 2010.

56 other derek September 21, 2016 at 10:10 am

Darwinian processes don’t totally eliminate discriminatory firms, but the fact that discriminatory firms do poorly may indicate that our anti-discrimination laws push society closer to optimum by forcing firms not to discriminate. As a result, anti-discrimination laws may pay for their own compliance costs via better hiring practices.

The caveat is of course that perhaps the people who would discriminate are likely to be bad business owners, so it might be incorrect to infer causation.

57 Art Deco September 21, 2016 at 11:45 am

push society closer to optimum by forcing firms not to discriminate.

How does having a nest of lawyers second-guessing your personnel practices push you closer to optimum?

58 JonFraz September 21, 2016 at 2:52 pm

It’s called the Rule of Law and even when it sometimes produces absurd results, it’s better overall than leaving disputes to private vendettas.

59 The Anti-Gnostic September 21, 2016 at 3:39 pm

Actually it’s anarcho-tyranny.

60 Art Deco September 21, 2016 at 4:42 pm

Evidently JonFraz fancies freedom of contract and freedom of association amount to criminal activity.

61 Dan September 21, 2016 at 10:39 am

Let’s apply that logic to another type of offense: “If social disapprobation deters murder, why do we need to keep laws against murder?”

62 The Anti-Gnostic September 21, 2016 at 10:59 am

Laws aren’t preventive. They’re to put people on notice of punitive consequences for certain behaviors. Most people refrain from murder out of instinctive revulsion to killing another human being, not because there’s a law against it. Pathological individuals are going to murder regardless.

At the least, we can agree we don’t need laws telling people to do what they normally do. For example, we don’t need a law telling people to eat when they get hungry lest they starve. Alex is taking the position that the market will resolve discrimination without shelves of laws, regulations and generously pensioned bureaucrats and wealthy lawyers and pure cost-HR departments to enforce it.

63 Art Deco September 21, 2016 at 11:48 am

Dan, people are not hired all the time, and most any hiring decision is an exercise in guesses and trade-offs between candidates. No one’s core interests are violated when someone refuses to hire that person.

64 Bill Benzon September 21, 2016 at 9:42 am

” 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.”

Shouldn’t “discriminating” be “non-discriminating” in both cases?

65 Miguel Madeira September 21, 2016 at 11:02 am


66 bill benzon September 21, 2016 at 6:11 pm

Because it’s the discriminating firms that achieve lower production costs by paying their workers less. Hence they can afford to cut prices. The firms that don’t discriminate, that don’t pay attention to whether or not an employee is male or female, black/brown/yellow or white, well or poorly educated (by the standard relevant to the job), have to pay the wages needed to attract the most expensive category of worker.

67 David H. September 21, 2016 at 9:52 am

To me this makes sense. A business that’s thriving feels free to devote effort to achieving diversity and parity among employees. A business that’s struggling will employ the best people they can get and pay them as little as they can get away with. They don’t have the extra capacity to worry about social justice. They are just barely holding it together. So of course the latter kind of business is more likely to collapse than the former. It’s not because discrimination hurts the bottom line; it might even help a bit. It’s because fairness is something that every business probably wants, but only the profitable ones can actually afford.

68 Art Deco September 21, 2016 at 10:00 am

Diversity is not an achievement. It is a condition, and often one that requires costly adjustments.

69 other derek September 21, 2016 at 10:12 am

Anti-discrimination laws don’t really force diversity; they force judging only on merits.

There’s a big difference between giving extra diversity points in college admissions and telling businesses not to discriminate.

70 Art Deco September 21, 2016 at 11:56 am

they force judging only on merits

Yeah, that was the point of Griggs v Duke Power.

Nyuk nyuk nyuk.

71 Cliff September 21, 2016 at 8:50 pm

If only.

Haven’t you learned that Silicon Valley is the whitest place on Earth? (Oh, Asians are white now, by the way)

72 anon September 21, 2016 at 10:20 am

I think the thing confusing people is that while most companies did those “costly adjustments” decades ago, the laggards shape the perception of the whole.

Ginni President of IBM, folks.

73 anon September 21, 2016 at 2:09 pm

A related bit by Will Wilkinson, on how the future does not arrive everywhere at the same time.

74 Anonymous September 21, 2016 at 4:33 pm

Start-ups are not diverse. They can’t afford to be. They also are much more likely to go out of business. It’d be interesting to compare growth rates to diversity. I bet companies with higher growth rates (i.e. startups) are less diverse.

75 anon September 21, 2016 at 6:21 pm

I’ve been in startups with Omanis and Persians. 25 years ago.

Of course, that’s California, where things like that are not unusual and have not been for a long time. The founders of AST (at one time big in the PC business) were Albert Wong, Safi Qureshey and Thomas Yuen. That was 1980.

76 Cliff September 21, 2016 at 8:52 pm

All of those people are white actually

77 anon September 22, 2016 at 1:27 pm

And here I said you were unfunny. Or a Cliff.

All of course would have been excluded from citizenship under the Asian Exclusion Act of 1924.

78 AC September 21, 2016 at 10:28 am

Alternative: firms that are aware that they’re more likely to fail (eg because they’re not in commanding-heights niches like education and healthcare) are more likely to make efficient use of the information they have at hand, such as discrimination.

The author clearly never thought through the causal chain, otherwise he’d realize his claim is as silly as saying that being really obsessed with food causes people to starve, or that shivering makes people freeze.

79 Art Deco September 21, 2016 at 11:58 am

Dunno. Haven’t read the paper. Any social researcher who does not think about reverse causation is guilty of gross malpractice.

80 lemmy caution September 21, 2016 at 2:37 pm

“My firm is failing – Time to hire some white people”

81 AC September 21, 2016 at 6:39 pm

Business is booming. Might as well hire some diversity to keep the PR people happy, now that we can afford it.

82 TallDave September 21, 2016 at 10:49 am

Racial discrimination should be inefficient (or at least much less efficient than a more systematic process), but I’m not sure this is the study that proves that.

These young men were carefully selected and matched on the basis of their age, physical
appearance, and interpersonal skills, and were assigned matched fictitious resumes
that reflected identical levels of education and work experience. Teams of three
men—including a black, white, and Latino applicant—applied in person for jobs at
170 businesses over the course of 12 months (see online supplement, Appendix A
for additional methodological details). The results of this study indicated substantial
amounts of hiring discrimination. Whites received callbacks or job offers in 31
percent of all cases, Latinos in 25 percent of all cases, and blacks in just 15 percent
of cases.

If their resumes were fictitious, what you’re really measuring is some combination of firms’ ability to detect someone lying about their resume and applicants’ ability to lie convincingly about their resumes. Those results are interesting but I’m not sure they say what the authors seem to think they say.

83 Art Deco September 21, 2016 at 12:02 pm

One of these studies made use of fake resumes with Ivy League – type degrees on them. Some of the resumes were then graced with names like ‘D’Shawn’. The trouble with testing racial discrimination with this method is that seeing a name like ‘D’Shawn’ on an Ivy League resume is more likely to provoke a call to the alumni office at the institution to verify the degree. That’s discriminatory in a way, but more regarding a cultural signal than a racial category.

84 The Other Jim September 21, 2016 at 10:55 am

While academics may need a published paper to understand that businesses that discriminate are more likely to fail… businessmen are already very keenly aware of that fact.

And being businessmen, who are seeking to stay in business…. they therefore choose not to do it.

If that shocks you, I cannot help you.

85 prior_test2 September 21, 2016 at 11:48 am

‘And being businessmen, who are seeking to stay in business…. they therefore choose not to do it. ‘

Oddly enough, of all the gunshops I have ever visited in Virginia, not a single one seemed to employ anyone but white men. Of course, the last visit was before 2000, so undoubtedly most if not all of those gun shops have gone out of business, replaced by the ones employing women and African-Americans.

(The gun shop I always found most interestingly located in NoVa was near the interection of Rts 28 and 50, right on the Dulles glide path. Yep, apparently still there – )

86 JWatts September 21, 2016 at 11:58 am

Geez, how many times are you going to post links that totally undermine your own point.

prior_test2 : ” replaced by the ones employing women and African-Americans.”
At the top right of the page you linked to:
VP PRESIDENT: Deborah Curtis
TRAINERS: Mark Richardson, Katie Myers, Robert Thibeault

87 Paul September 21, 2016 at 5:15 pm

Adding to JWatts’s comment. Donnel Dover, senior sales staff at Blue Ridge Arsenal is black.

88 JWatts September 21, 2016 at 10:59 am

It’s clearly discrimination when you pass over a more qualified applicant for a less qualified applicant, but is it discrimination when you preference one race when a pool is equally qualified?

Assume a black owned and operated business interviews 10 people (5 black and 5 white) for 3 open positions, determines they are all equally qualified and hires 3 of the black applicants. Is that discrimination? Is it illegal? Should they be subject to government sanction?

89 JWatts September 21, 2016 at 11:01 am

And to follow up, in the above example, it seems unlikely that the business would be more likely to fail, since all the applicants were equally qualified.

90 Joan September 21, 2016 at 11:59 am

Bad example. Paying someone from group X 25% less is discrimination and even if it is not the criteria used in the paper. Howeer I doubt that is why non discriminatioy frims fail less often. More likely it is because bad managers are more likely to use race to judge employees

91 albatross September 21, 2016 at 2:18 pm

Yeah, if you can get away with paying 25% less for the same work, it’s probably not going to hurt your bottom line, at least until you get sued for employment discrimination.

92 Marcos Gallacher September 21, 2016 at 12:41 pm

Ludwig von Mises in his “Human Action” 1949 book raises the point that discrimination is a cost borne by the employer. He probably also addessed this sbject in the German language (1940) precursos of Human Action. As I understand Becker´s formal and rigorous paper on discimination appeared nearly a decade later (1957).

On reading Human Action I was surprised by Mises´s insights of many of today´s modern microeconomics subjects. E.g. compensating differentials, human capital, firm governace, public choice, the role of ideology in economic growth (topic discussed more recently by McCloskey).

93 albatross September 21, 2016 at 2:17 pm

I wonder whether this paper would have been more likely, less likely, or equally likely to be written and published and brought to our attention, if it had noted no effect of discrimination, or a positive effect on discrimination.

I also wonder (I haven’t read the paper) how much choice the authors had in their definitions. Did they only collect data about how many had gone bankrupt in a given time, or did they have many different measures of success/failure and a choice about which one to look at. (And similarly for discrimination–was it just one measure, or was there some choice in how they defined which businesses were discriminators and which weren’t.)

94 lemmy caution September 21, 2016 at 2:45 pm

They used the data from an earlier study to determine the discriminators then checked which ones were still in business. I mean they could have fudged things but my bet is that they did not.

95 albatross September 21, 2016 at 8:56 pm

Ok, that sounds reasonable. Ever since I started reading about the replication crisis in social psychology, I think about some version of those question for every paper I hear about.

96 SPENCER September 21, 2016 at 3:40 pm

What about firms that take advantage of discrimination.

When he was running an economics firm Alan Greenspan was well known for hiring female economists because he could get better quality economists at a lower cost than his competition.

97 Massimo Heitor September 21, 2016 at 4:15 pm

Many companies discriminate against hiring workers that wear clown suits to interviews even if their wage rates are slightly less than average. Does this mean such companies will be pushed out of business?

What if workers who wear clown suits tend to be problematic workers and cause problems? Then the companies that _don’t_ discriminate against workers in clown suits would be punished.

Now, substitute race/ethnic discrimination for clown suits. What if companies really can make more informed hire decisions by being race aware and employing intelligent racial discrimination? Of course, they would profit and benefit. And the naive companies that play race blind would suffer.

98 y81 September 21, 2016 at 5:02 pm

The cited study suggests that companies (if any) that are using race as a proxy for some other, hard to observe but important variable are not, in fact, benefiting thereby, since they are suffering a higher failure rate than their peers.

99 Bc September 21, 2016 at 5:24 pm

I am surprised no one has pointed out that (very probably) bigots are
1. Less educated
2. Behind the times
And thus likely to be out competed.

Separately, as an employee at an all white, all male IT startup I can state that the reason we have no African American or female employees is bc they are harder to find and we don’t have the resources/time to find them. Not overt racism/sexism in other words, just different priorities (no excuse I know). As we grow larger I am sure diversity will become more important.

100 Epoche September 21, 2016 at 6:50 pm

All government schools use racial and gender quotas as a precondition for receiving government monies so I’m not sure that your argument proves anything. Secondly if a white male outcompetes a member of the protected class it could trigger a disparate impact lawsuit unless it qualifies as a business necessity per the supreme court so what purpose would be served in pursuing a higher education?

101 Anonymous September 21, 2016 at 7:09 pm

Maybe those most likely to discriminate against Blacks are Arabs, Asians, or Hispanics.

I also work in the tech industry, I hear this kind of thing all the time. “Yeah, we’re all white guys, but we’re totally different from the rubes and we’re going to hire some diversity Real Soon Now.

102 albatross September 21, 2016 at 8:59 pm

The tech industry is incredibly diverse. There aren’t many blacks or hispanics, and there are relatively few women (depending on the field–plenty in biotech, not so many in software), but there are a huge number of people from all over Asia.

103 Julien Couvreur September 25, 2016 at 2:12 pm

That’s an interesting observation. Somehow Chinese or Indians seem to do well in the tech industry, at least compared to blacks or hispanics.
How do people who think employer bigotry is the main cause explain this?

104 Massimo Heitor September 21, 2016 at 6:36 pm

The book “Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy”

Makes the case that data driven computer algorithms optimize business profits and decision accuracy but are racially discriminatory and undermine racial equality.

Big data technologies are generally designed to maximize profits and business outcomes, not increase ethnic diversity or equality, so one would naturally expect them to be racially discriminatory.

Consider historic “redlining” where companies such as banks would discriminate against ethnic neighborhoods. The practice was very profitable, but was outlawed. That was kind of a precursor, to database driven AI + computer discrimination.

105 anon September 21, 2016 at 6:50 pm

I think there is risk, but I think faulting the data is grasping the wrong end of the stick.

Redlining was bad because it was a rude and arbitrary division between groups. A line was literally drawn on a map, and loans (even good loans to good risks) were not made on the wrong side of that line. That’s completely opposite from a big data analysis. Good and bad risks would now be judged on many axis, and not just one. An individual with a good credit rating and a steady job has a better chance at a loan when that data is examined than when it is not.

106 Cliff September 21, 2016 at 8:57 pm

Maybe that was the most efficient thing to do.

107 albatross September 21, 2016 at 9:16 pm

If you want to think clearly about discrimination, you need to distinguish between rational and irrational discrimination.

Irrational discrimination means letting your prejudices override your reason. That’s where you refuse to hire a qualified black guy for a job he could do because you don’t like working with black people. In that case, the discrimination (which is a socially damaging thing) aligns with you losing money. The paper being discussed seems like it must be thinking in terms of this kind of discrimination. The core idea here is that you’re making a bad decision for yourself, that also has social costs. It seems reasonable that some combination of education and regulation can get rid of most irrational discrimination, because it’s in the interests of the people doing the discrimination to stop.

Rational discrimination means letting your reason determine your decisions even when that leads to discriminating. An employer who prefers hiring 50-year old widows to hiring newly-married 20 year old women, because he doesn’t want to have to pay for maternity benefits and deal with maternity leave, is probably *rationally* discriminating. The core idea here is that you’re making a good decision for yourself, but one with some social costs. There’s always going to be an incentive to find ways to rationally discriminate, because it pays. My guess is that it’s generally going to be very hard to get rid of rational discrimination. Also, the whole society becomes better off if there’s less irrational discrimination; when you get rid of rational discrimination, you’re making a tradeoff between good decisions and some kind of social cost.

All kinds of discussions w.r.t. discrimination seem to me to get wrapped around the axle by way of failing to make this distinction.

108 TangoMan September 22, 2016 at 2:12 am

In that case, the discrimination (which is a socially damaging thing) aligns with you losing money.

Some people stay in bad marriages because the cost of divorce is too high. Others get out of bad marriages regardless of the economic penalty they will incur. Clearly people are putting a price on their happiness, their ideals, their peace of mind.

A businessman who discriminates and who incurs costs due to his avoidance of hiring someone he doesn’t want to work alongside all day long also gets a benefit in terms of his mental happiness.

The core idea here is that you’re making a bad decision for yourself, that also has social costs.

There are also social benefits. Diversity between firms is increased while diversity within the firm is decreased. If every firm does not engage in discrimination then diversity between firms ceases to exist. That’s a social loss. The firm which discriminates and thus increases diversity between firms creates a social good.

Secondly, by hoovering in the favored demographic and bidding the cost of their labor up, this creates opportunities for non-discriminating firms to hire the people who’ve been discriminated against. If the employment ecosphere has 1,000 positions and there are 1,000 applicants, then the actual diversity mix within each firm is meaningless, so no social loss on this front.

I understand your argument on the difference between rational and irrational discrimination but I’m not really convinced that irrational discrimination exists once we can cost out emotional benefits which accrue to the discriminator.

109 anon September 22, 2016 at 1:35 pm

By the same logic there is no drug abuse, because drugs feel good.

110 Jack PQ September 21, 2016 at 10:23 pm

Prof. Tabarrok: the study does not sound at all like a field experiment. Rather, it’s a plain old vanilla comparison of two groups in a sample of data. We don’t know anything about causality–where’s the identification?

Moreover, given the small sample size, it is likely to be just noise. A small sample, by chance some comparisons will turn out to be significant.

It’s interesting, but it’s pretty thin gruel…

111 carlolspln September 22, 2016 at 12:04 am

Putative mechanisms, causation & embarassingly minuscule samples sizes are petty details, beneath the purview of Alex T.

Torture the data!

112 James Hass September 21, 2016 at 11:27 pm

All these examples assume the business does not face pressure from an armed force, “a second government” if you will. The presence of the Klan and groups like them prevented business from acting freely and using their own judgement. That has very largely passed, and the rationalizations for cooperating with them have passed too.

113 Epoche September 22, 2016 at 7:07 am

Why was discrimination never a social problem before the 1960s? Why can’t private individuals decide whom to hire, train or promote?

114 Troll me September 23, 2016 at 9:51 pm

Negroes used to “know their place”. Now they have some fanciful notions like they should have the same rights as the rest of us (which are increasingly diluted in practice, no matter what the situation may appear like on paper).

Or something like that.

The absence of complaint often indicates a worse situation than when it is spoken of openly. If you are ruled over so thoroughly that you dare not even mention the nature or origin of what oppresses you, should that silence lead an external observer to conclude that the situation has become worse when people are speaking openly of how to overcome that oppression (or, the case being presently discussed, the historical and somewhat ongoing discrimination)?

115 Art Deco September 22, 2016 at 7:43 am

The Klan was a fad organization which had a five digit membership in 1919, a seven digit membership in 1924, and a five digit membership in 1931. They formally dissolved in 1944. A mess of klanlets appeared after 1944, but they were briefly consequential in local areas in perhaps three states and inconsequential everywhere else. While we’re at it, even in the Klan heyday, the frequency of lynchings continued to decline, much as it had for the twenty-odd years prior to the foundation of the Klan in 1915.

116 Troll me September 23, 2016 at 9:55 pm

The KKK itself was a pyramid scheme and probably not actually all that relevant in terms of substance. They put a face to an underlying ugly reality, but were not the cause of it. Nor, in the long run, did they offer it much legitimacy.

117 Epoche September 22, 2016 at 7:50 am

Isn’t having the government dictate every conceivable social relation a form of discrimination? In the UK white males have been designated a minority group because of reverse discrimination.

118 required September 22, 2016 at 9:02 am

Firms that discriminate the least, yet still have discrimination from the society, will be more powerful.

If your customers are rich white straight christians, then so be it as long as you don’t have competition.

Note that any business that sells to exclusively rich would still sell exclusively to the rich. The poor’s wallet is too small to affect the market.

119 Troll me September 23, 2016 at 9:42 pm

Competition for the wallet of the poor brought us Walmart (largest retailer on the planet) and probably brought forward industrialization of China by several years at least.

I would consider both of those to have “affected the market”.

120 RRR September 22, 2016 at 9:47 am

Here’s a question:
When “diversity” programs which are common in most firms are implemented, they often engage an element of discrimination. If the quota ‘requires’ X% minorities, Y% women, etc. and anyone who doesn’t match those predetermined goals is set aside regardless of qualifications, that is discriminatory. There is bias in the decision making. I have personally seen hiring discussions where the final conversation of the hiring managers didn’t revolve around who was best, and whether ‘diversity’ was being achieved (I should add that I’m over 50, and I’m always amazed that age is NEVER a consideration in diversity training).

I once applied for a promotion at a firm and was told I was ‘not diverse’ enough. Which, I presume, means that I’m a white male and they needed to fill a quota.

So does that count as discrimination that can hurt a business? I, personally, would say it is and does. I’m curious what Pager would say? Is ‘discrimination of a certain type’ the only discrimination that matters?

121 Epoche September 22, 2016 at 10:13 am

But you are not a member of the protected class so you’re arguments don’t matter. Not only do you not matter but you are a bigot for bringing the issue up.

122 mb l September 22, 2016 at 12:15 pm

lol – exactly

123 Shawn Eng September 22, 2016 at 12:33 pm

What would Kant do?

124 CH September 22, 2016 at 10:27 pm

Bad research. Not to mention small sample size, but the authors didn’t discuss the probabilities of success rate and return on investment (ROI), which matter a lot.

We all know that startup companies in Silicon Valley have very high failure rate, while opening a Subway or McDonald’s has low failure rate. Does that imply that the latter one is better?

125 Suman September 23, 2016 at 4:32 pm

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126 J Strappe September 24, 2016 at 11:25 am

Written by a ‘feminist’ ofc.

I read about a major investor who avoids putting his cash anywhere near firms that proudly announce trendy buzzwords like ‘diversity’ and ‘quotas’ – and makes a killing from it. At the far reaches of absurdity, a 100% female engineering or tech firm sounds like a really really bad deal.

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