Can free markets punish racists?

The Standard mentions the writings of Richard Epstein on racial discrimination and says:

A charitable reading of Epstein’s work is that he believes employment law stopping employers from putting “No Blacks or Jews” on their situations vacant ads is ineffective and counter-productive. Instead, we should allow employers to openly discriminate against people on the basis of race, age and sex because the free market will punish them for their irrational choices.

It’s a very interesting topic on which I’m no expert, so I shan’t wade into the debate on affirmative action. However, the latter sentence quoted just makes no sense from an economic perspective. A free market wouldn’t punish racially biased employers, it would price their racial bias.

Everything has a price, even racism. I’m confident that there is an employee so talented that any employer would hire them, regardless of the employer’s racist bias against them. The question is, how much better does the employee have to be before the employer is willing to hire them? Or, conversely, how much less must the employee charge for their labour in order to get a job? Those questions would be answered in a free market. There would be a wage premium for racially preferred employees which reflected the level of racial bias in the community. Far from punishing employers for being racists, a free market would reflect their preferences across races.

My understanding of Epstein’s work is that he understands all this and yet still favours the abolition of affirmative action. His argument is that you can lead an employer to minority employees, but you can’t make him hire them. While there may be laws against discrimination, it is nigh on impossible to police. If you can’t police them then you’re not going to get anyone hired who wouldn’t have been hired anyway. What you do is prevent the unskilled workers who would have to work at a lower rate than the racially preferred employees from being hired at all.

Is it better that they have a job and are discriminated against, or that they have no job but retain government recognition of their equality? I understand that Epstein plumps for the former, but it is clearly not a question with an obvious answer.

  • rainman

    Interesting topic.

    “I’m confident that there is an employee so talented that any employer would hire them, regardless of the employer’s racist bias against them.”

    Not so sure about this. For the employer to reasonably appraise the talent of the prospective employee, the employer would have to overcome their bias against the prospect’s race. There is little incentive for this. The employer isn’t being a “rational optimiser” – racism just isn’t rational. I do accept there could be extreme cases, but the number of people of such extreme and obvious talent so as to overcome the bias (which would suppress completely any lesser applicants) is so few as to be of academic interest only. This isn’t linear. The result is still profound injustice, which is why it should be fixed outside the market, and why we have affirmative action.

    “Or, conversely, how much less must the employee charge for their labour in order to get a job?”

    If I possess attributes that make me relatively less appealing to an employer (inexperience, poor references, history of failure) then it’s somewhat OK to have to settle for a lower price of labour. But if the attributes being used to assess my appeal are unrelated to me (I may be honest as the day is long, but the employer associates dishonesty with people of my skin colour), then we have an injustice that the market won’t fix.

    What’s the economic incentive for people to stop being racists?

  • Matt: if the market is competitive, the racist firm owner is driven out of business by competitors who are willing to pay for talent regardless of race. That’s the upshot of the Becker approach. The only sustainable discriminatory equilibrium is one where the customers place a value on racism and are willing to pay for it. Even in places where there are horrible racists, they’re usually not willing to front up their own cash to pay. Instead, they pass laws mandating segregation.

  • ben

    Rauparaha,

    I don’t think you understand what affirmative action is.

    The quoted passage doesn’t have much or anything to do with affirmative action. So I’m not sure why you follow it with “so I shan’t wade into the debate on affirmative action”

    My understanding of Epstein’s work is that he understands all this and yet still favours the abolition of affirmative action.

    Isn’t the paragraph preceding this quote part of a standard argument for the abolition of affirmative action? That paragraph is essentially the definition of discrimination used by Becker in “Economics of Discrimination”.

  • @Eric Crampton

    FYI, not Matt – its Rauparaha 🙂

  • Ah, sorry. I should have said Raupahara: !

  • @rainman
    Well, the incentive to stop hiring on a racist basis is that you have to pay a premium for labour and so have reduced profits. There is definitely a feeling of injustice about it, but I think the real question is whether you can do better with anti-discrimination laws.

    @Eric Crampton
    Or if, as in most markets, there is some degree of market power. Obviously it depends on how high the market power rents are, but it is conceivable that they could sustain such racial bias in employment.

    It’s interesting that you say racists aren’t usually willing to pay for their bias. I wonder if they would if the political approach weren’t cheaper.

    @ben
    You’re absolutely right that I’m mixing anti-discrimination and affirmative action in order to avoid repeating the same phrase. I hope the meaning was clear to you despite that.

    It may well be the standard libertarian argument. As I said, I’m not particularly familiar with the theory in the area so I don’t know. If it is standard then, happily, I didn’t write something completely off the wall 🙂

  • @Rauparaha: Check the original Becker work. He gives some empirics consistent with his model: the more competitive the industry, the less discrimination.

    The most plausible story for market-sustained discrimination comes from the work of Glen Loury on statistical discrimination.

    I do a week on the economics of discrimination in my Econ 224 class at Canterbury. Too bad you’re in Wellington or you could sit in :>

  • @Eric Crampton
    Your reporting of Becker’s work seems intuitive: as profits decline the opportunity to discriminate decreases. It does seem unlikely that discrimination would ever reach zero, except in a hypothetical case, though.

    Thanks for the counterfactual offer 😉

  • ben

    @rauparaha

    Who said anything about libertarian? I have no idea what the libertarian argument on this is. Why even raise it? I thought this post was about markets and rewards (or dis-rewards) for racism.

  • @ben
    There are many different arguments both for and against anti-discrimination laws. Becker and Epstein are noted libertarian scholars, one an economist and one a lawyer. Thus what you call the ‘economic argument’ is clearly not limited to economists. Given that the argument favours the unfettered exercise of personal rights and freedoms to overcome discrimination, it doesn’t seem a huge stretch to suppose it is favoured by libertarians, does it? At least two leading libertarian thinkers, anyway.

  • ben

    @rauparaha

    Another fine point, Rauparaha. They’re also both white males. You could equally usefully point that out, too.

  • @Ruaparaha: A libertarian would say that it’s wrong to violate freedom of contract regardless of what the empirics show about actual discrimination. An economist comes up with models predicting when we might see more or less discrimination, then takes them to the data for testing. If the results of those empirical studies are that there really isn’t any wage gap between men and women, blacks and whites, or whatever groups, once you control appropriately for work experience, education, intelligence and whatnot, then a libertarian might point to that as an additional reason to oppose such legislation.

    Go download my syllabus for Econ 224 and read through some of the actual literature on the topic. There’s a lot of it.
    http://www.econ.canterbury.ac.nz/personal_pages/eric_crampton/224-2009.pdf

  • @Eric Crampton
    Really? Even a consequentialist libertarian, as I imagine you would class yourself, would hold that contract has inherent sanctity? Interesting.

    I have read some of Becker’s work on discrimination, but I might flick through your list of readings sometime, thanks.

  • I live in a 3rd world country, and belive me, the rasism is here, all over the place, people are hateing each other and they are not affraid of showing it. I’m talking about minorityes. The strange thing is that everybody loves the turists, no matter what thei nationalities are.

    Cheers from south-east Europe.

  • @Rauparaha: I was thinking of a moral libertarian, not a consequentialist one. A consequentialist libertarian is just a utilitarian who happens to think that markets work well. Whether I’m the former or the latter? Fuzzy mix, but I beat down all parts of the moral libertarian bit when I’m doing economic analysis :>

  • Thanks Raupahara, your article is quite interesting.