A Libertarian Perspective on Economic and Social Policy

Lecture 9

Discrimination

©2007 Jeffrey A. Miron

Introduction

• The U.S. has a long history of bitter conflict over race discrimination, as well as disputes over gender discrimination, age discrimination, and more.

• The U.S. also has numerous policies that ban or limit discrimination in various settings:– Employment– Housing– College admissions

Introduction, continued

• To many, it is self-evident that such policies are desirable.

• To economists and libertarians, however, the question of whether policy should attempt to reduce discrimination is more complicated.

• This perspective says it is not sufficient to observe that discrimination exists:– Analysis must also determine the magnitude of the problem,

whether policies are “effective,” and what costs these policies might impose on society.

• So, this lecture examines the arguments and the evidence.– Focus attention mainly on employment discrimination.– But many of the same issues arise in other contexts.

Outline

• Review economic models of discrimination and the conditions under which markets reduce or eliminate discrimination.

• Examine Evidence on the Extent of Discrimination in the U.S.

• Examine Current Policies in the U.S.

• Discuss the Costs and Benefits

The Economic Analysis of Discrimination

• The economic model of discrimination starts from the assumption that certain persons have a “taste” for discrimination:– Prefer hiring only persons of a certain race;– Prefer buying only from persons of one gender;– Prefer being around only persons of a particular

religion.

• Model assumes this is a feature of the preferences of some people.

Implications of Discrimination:Employer Preferences

• Assume that, say, white employers do not like employing blacks.

• This preference by employers lowers the demand for black employees and, other things equal, reduces their equilibrium wage.

• Any employer with non-discriminatory preferences, therefore, obtains a cost advantage by hiring black employees.

Implications of Discrimination:Employer Preferences, continued

• Since the non-discriminating firms have lower costs, they can set lower prices and take profits away from the discriminating firms.

• As discriminating firms lose money, they exit the industry, which then reduces the demand for white relative to black employees.

• In equilibrium, wages are equal.• Thus, competitive markets provide a potentially

strong counterweight to employer discrimination.

Implications of Discrimination:Customer Preferences

• An alternative assumption is that discriminatory preferences come from customers:– For example, suppose that restaurant patrons prefer

to be served by male waiters; that is, they are willing to pay a higher price even if the quality of the service is the same.

• Then a higher wage for male waiters can persist in equilibrium:– There is no way for any firm to arbitrage the

differential away if all firms face the same pressures from customers.

Customer Preferences for Discrimination, continued

• Even in this case, however, there are economic pressures that counteract the discriminatory preferences of customers.

• Restaurant owners face higher costs than they would if they could use both male and female wait staff, so they might still use both if customer discrimination is weak.

• And some customers do not care, meaning the benefits of accommodating the customers with discriminatory preferences are potentially weak.

Summary on EconomicModels of Discrimination

• Economic forces are likely to put significant limits on the amount of employer discrimination:– It is costly to the employer.

• Economic forces do not necessarily eliminate customer discrimination, but they can still moderate its impact.

• Thus, the amount of discrimination is an empirical question.

The Magnitude of Discrimination

• How can one determine whether, or to what degree, discrimination in labor markets exists?

• As a first pass, one might simply compare the average wages of blacks versus whites or men versus women.

• When one does this, one finds substantial differences. For example,– 22% lower for blacks relative to whites.– 28% lower for white women relative to white men.

The Magnitude of Discrimination, continued

• This simple approach is inadequate, however, since there are many reasons that wages might differ across groups:– Quantity or quality of education or training.– Experience in the labor market.– Degree of commitment to the labor market.

• Thus, measuring discrimination requires a more sophisticated approach than simply comparing wage rates.

The Magnitude of Discrimination, continued

• The standard approach is to use individual-level data and regress wage rates on variables such as age, education, experience, and (dummy variables) for race and gender.

• This literature finds that much of the gap in measured wages can be explained with observable determinants of productivity, but typically some residual effect of race or gender remains.

• These residual differences are typically viewed as measuring the amount of discrimination.

The Magnitude of Discrimination, continued

• The unresolved question about this evidence is whether there are unmeasured determinants of productivity that correlate with race or gender.– In the case of race, one such factor might be educational quality,

since blacks have historically attended lower quality schools than whites.

– In the case of gender, one such factor might be “degree of attachment to the labor force,” if women are more likely to choose episodes of non-participation.

• Thus, it is plausible the magnitude of discrimination is smaller than measured in standard approaches.

• The evidence thus does not rule out the existence of some discrimination:– But it does not suggest that discrimination is rampant or a major

determinant of wage gaps.

Aside: Statistical Discrimination

• Imagine that there are factors other than standard observables that affect productivity but are correlated with race or sex.

• Assume these are unobservable to employers as well, but that employers recognize the correlation between unobservables and race/sex.

• Then it can be rational for employers to use race or sex as a proxy for these unobservables:– Known as statistical discrimination.– Key point is that a profit maximizing but non-discriminating

employer would be tempted to engage in statistical discrimination, and many presumably do.

Statistical Discrimination, continued

• The fact that statistical discrimination might be rational does not necessarily mean it is acceptable.

• But it does change the interpretation of the data, and it does mean this discrimination might have efficiency benefits, given existing differences in characteristics like quality of education.

• Moreover, it has different implications for reducing discrimination than if discrimination is mainly due to preferences.– For example, improving the quality of education as

opposed to using anti-discrimination policies.

Policies to Reduce Discrimination

• Assuming that some discrimination occurs in labor markets, what might policy do to reduce or eliminate it:– Prohibit discrimination in hiring, promotion, firing,

wages, and the like;– Adopt policies that “affirmatively” promote the hiring of

targeted groups.• These are the two main policies that have been

utilized in the U.S., starting in the mid-1960s.• These are generally thought of as separate

policies, but I will argue they should be thought of as one package.

Have Anti-Discrimination Policies Worked?

• To evaluate the effectiveness of anti-discrimination policies, one must first choose a measure of effectiveness:– The obvious measure is something like the

relative wage of blacks versus whites or men versus women.

– There are many variants on this to consider, but leave these aside.

Have Anti-Discrimination Policies Worked?, continued

• The first-order fact is that black-white and male-female wage differentials have declined substantially over the past 50 years:– Exact narrowing of the gap depends on

exactly which measure of wages and which group one examines;

– In some case non-trivial gaps remain; in others, the gaps are small.

Have Anti-Discrimination Policies Worked?, continued

• The critical facts about the trends in these wage differentials, however, are robust:– The gaps began declining well before the U.S. adopted anti-

discrimination policies;– The gaps have continued declining at similar rates since the

adoption of anti-discrimination policies.• This does not mean the policies had no impact; some

research finds an effect.• But overall, it appears that forces other than anti-

discrimination policy played a far bigger role in reducing race and gender wage differentials.

• And, there are plausible candidates for these other forces: – Mainly, increasing educational attainment by blacks and women.

Summary So Far

• Theory suggests limits on the magnitude of discrimination in market economies.

• The evidence indicates fairly modest amounts of discrimination.

• Anti-discrimination policies have probably played some role, but other factors appear to have been more important in reducing wage gaps.

Summary So Far, continued

• Given this assessment, the question of whether anti-discrimination policy makes sense depends critically on the costs:– If these are minor, it is hard to make a

compelling case in either direction (since the underlying problem is modest and the effectiveness of the policies is modest).

• But if anti-discrimination policy has substantial costs, then the case against such policies is strong.

What Are the Costs of Anti-Discrimination Policies?

• Focus first on Affirmative Action.

• There are four kinds of costs to consider:– Confirming Negative Stereotypes– Breeding Resentment– Educational Attainment and Effort– Efficiency

• Address each of these in turn.

Costs of Affirmative Action: Confirming Negative Stereotypes

• One effect of Affirmative Action is to confirm negative views of the targeted group.

• That is, under AA, some observers assume that success achieved by the targeted group results mainly from AA rather than from merit.– Of course, some member of any group are not competent,

regardless of AA.– But AA then gives some people a basis for concluding that

negative stereotypes are in fact accurate.

• Is this a large effect? – No one knows for sure.– Still, this is a potentially counter-productive effect of AA.

Costs of Affirmative Action: Resentment

• A related effect of AA is to instill or exacerbate resentment amongst the non-targeted group against the targeted group.

• Under AA, some members of the non-targeted group do not get jobs, and some assume the reason is AA.

• The degree to which AA has produced this outcome depends on the situation, and in some cases the magnitude is modest.

• But the nature of AA inevitably promotes frustration associated with reverse discrimination, which undermines the goal of producing a non-discriminating society.

Costs of Affirmative Action: Incentives to Succeed

• A third possible cost of AA is reduced effort.• One way to overcome discrimination is to become

“overqualified” via education or working extra hard:– This is costly in the short term but over time can help eliminate

stereotypes and breakdown barriers (the Jackie Robinson effect)

• Affirmative Action, however, might reduce the incentives to acquire human capital or expend extra effort:– Why work really hard or get educated if you will get hired

anyway?

• Thus, Affirmative Action undermines the incentive to compete in the marketplace.– And to the extent it does this, it makes the targeted groups less

qualified, thereby confirming negative stereotypes.

Costs of Affirmative Action: Efficiency

• One final possible cost of anti-discrimination policies is inefficiency imposed by the forced hiring of less qualified persons:– This is a standard criticism of Affirmative Action

• Reduced efficiency is possible, but it is also possible that increased hiring of targeted groups mainly undoes discrimination against persons who are at least as qualified as the non-targeted group:– In this case, there is not necessarily an efficiency loss and might even

be a gain.• The evidence, such as it is, suggests modest effects on both

“sides”:– The degree to which AA has increased the amount of targeted hiring is

modest;– The efficiency reductions associated with the hiring is modest.

• Thus, by itself, the efficiency effects of these policies are probably not huge.– In this sense, the critics of AA have probably exaggerated.

Evaluation So Far

• The discussion of costs has focused on AA, concluding that – AA may have some benefits;– It also has non-trivial costs.

• So a logical response might be:– Society should prohibit discrimination– But not utilize AA, and especially not the more

extreme forms such as quotas.

Prohibitions on Discrimination

• An alternative view, however, is that even prohibitions on discrimination are ill-advised, no matter how well-intentioned.

• One reason for this alternative view is that the distinction is not meaningful in practice:– Anti-discrimination laws inevitably evolve into AA,

including things like quotas, or they have no bite.

• But there are more fundamental reasons:– Even if the only policy were the prohibition on

discrimination, it probably does more harm than good.

Costs of Discrimination Bans:Discouraging Hiring

• If an employer knows he might get penalized for firing, or not promoting, or not giving a raise to, a member of a protected group, one response is to avoid hiring members of this group in the first place.

• Consider age discimination.– Many older workers are productive, but some decline in

productivity over time.– A non-discriminating employer might plausibly want to use

mandatory retirement, or let some older workers go.– But current law forbids this.

• So, some employers simply avoid hiring older workers in the first place.

• Same reasoning holds for other groups, e.g., the disabled.

Costs of Banning Discrimination:An Unfortunate Precedent

• Policy cannot ban discrimination without endorsing the view that firms are partially “public” and can be told to operate in “socially” approved ways.

• Even if this does more good than harm in the context of discrimination, blurring the private/public distinction causes substantial harm in other arenas.– Free speech, campaign finance, smoking bans in restaurants.

• Thus, since the degree of discrimination is modest, is substantially ameliorated by market forces, and generates various costs:– It is better to consistently treat private property as private.– Owners of businesses can use their property as they like, just as

a homeowner can admit or exclude anyone he chooses.

What About Private“Reverse” Discrimination?

• If governments should not prohibit discrimination against targeted groups or promote affirmative action on behalf of targeted groups, should governments prevent private agents from engaging in reverse discrimination:– For example, should private institutions of

higher learning be allowed to practice affirmative action in admissions?

• Absolutely.

Private Affirmative Action, continued

• If one holds the view that private agents can use their property as they see fit, then presumably this applies to actions in either direction.

• Indeed, the fact that some private parties will practice affirmative action is a reason government-mandated AA is less necessary.– Many businesses care strongly about practicing

affirmative action, because many of their customers are black, Hispanic, Asian, etc.

Private Affirmative Action, continued

• Why is private AA better than government AA?– Private AA does not violate the principle that private

agents own their property.– Private AA is more likely to be flexible, modified,

moderate, and varied across firms.– The firms that practice private AA will thoughtfully

weigh the costs and benefits.– Private AA does not generate the same degree of

anger, polarization, confusion and complication.

• Thus, Libertarianism opposes government-mandated AA, but accepts private AA.

Example: Affirmative Action at State Universities

• If Harvard should be allowed to practice AA, what about Michigan?

• The issue is somewhat different, since Michigan is public.

• The best outcome is no state universities:– Then the issue never arises.

• Barring this situation, a state that wants a top university should probably allow, but not mandate, affirmative action.

• There are also constitutional questions, for later.

Discrimination by Government

• What should government policy be with respect to its own hiring?

• Governments have often discriminated in the past– State universities excluded blacks and/or women– Army had separate units for blacks– Public schools allowed “separate but equal”– Racial profiling has been used to enforce drug laws– Government-protected unions have excluded minorities and

women.• Government exists to serve the public, and there is no

reasonable case that discrimination promotes the interests of particular agencies.

• So, governments should not discriminate, but they should not practice AA either.

Conclusions

• The amount of discrimination, while not zero, is far less substantial than frequently portrayed.

• Government attempts to deter private discrimination almost inevitably evolve into complicated and intrusive AA programs, and these plausibly do more harm than good.

• Even limited anti-discrimination policy – bans on discrimination in hiring – are problematic because they legitimize a counter-productive view of firms and private property.

• The best policy is therefore to permit private AA and related practices but take no other steps to reduce discrimination.