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Do Markets or Laws Work Best in Eliminating Employment Discrimination?

My students will recognize this question, because it is a theme we deal with regularly in my courses.  If employers select workers not on the basis of their productivity, but on the basis of some irrelevant personal characteristic, like skin colour, should the state step in to regulate discriminatory hiring or leave it to market forces to correct the problem?

Classical economic theorists (and their neo-conservative political allies) often argue against employment discrimination legislation, and assert that ‘free markets’ will correct discriminatory practices in the long run (then again, as Keynes argued, “in the long run, we are all dead’!).  Here’s a brief explanation of why classical economists believe markets will correct discriminatory hiring practices (provided by Gary Becker):

An employer discriminates against … women, or other minority members when he refuses to hire them even though they are cheaper relative to their productivity than the persons he does hire. Discrimination in this way raises his costs and lowers his profits. This puts him at a competitive disadvantage relative to employers who maximize their profits, and hire only on the basis of productivity per dollar of cost. Strongly discriminating employers, therefore, tend to lose out to other employers in competitive industries that have easy entry of new firm

In other words, discriminatory employers will (in the long run!) be less competitive and be forced to changed their ways or go out of business.  Richard Posner, one of the godfathers of neo-classical economics, argues in this posting that, while markets alone are unlikely to eliminate employment discrimination, laws targeting discriminatory hiring are also doomed to failure:

we have laws against so many forms of employment discrimination–discrimination on racial grounds, of course, but also on grounds of ethnicity, religion, sex, disability, and age. …  So do we need discrimination laws, or can competition be relied on to eliminate discrimination?

The answer I would give is that competition cannot be relied upon to eliminate discrimination… but that, even so, laws against discrimination may not be desirable on balance, at least from the standpoint of economic efficiency, as distinct from making a political or moral statement. They may also not be very effective.

Posner’s argues that, from an economic perspective, the cost of implementing anti-discrimination laws will usually be hirer to society than any resulting benefit.  And, from a legal perspective, he argues that the laws are not likely to be effective because racist/sexist employers have ways to avoid the law and a law requiring employers to hire specific classes of people will stigmatize those workers and create unproductive resentment among other (non-targeted workers).   What do you think about that argument?  Can anyone think of a response to Posner?


One Response to Do Markets or Laws Work Best in Eliminating Employment Discrimination?

  1. Nathan Zimmerman Reply

    September 27, 2010 at 1:18 pm

    It seems that Posner is promoting discrimination/segregation until those discriminatory organizations go under or change theirs ways. This sounds incredibly inefficient, and what do those who are discriminated against do in the meantime? Again, as Keynes said, “in the long run, we’re all dead!”…so in the meantime, is it fair for some to live an underprivileged life?

    I think history suggests that a nation, for instance the US, does not run effectively when a significant portion of the population is denied fundamental rights and segregation barriers exist. Regardless, I think the most efficient way for an organization to overcome it’s discriminatory culture is by consistent exposure to the employment equity designated groups who they have formed negative opinions about–this seems to be the best way to break down stereotypes and to humanize those who are being discriminated against.

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