Market nudges and discrimination

When it comes to the corporate version of systematic discrimination, the type based on preference for gender, sexual orientation, race, or some other generalized variable, businesses can employ the practice in two main ways.  Labor discrimination refers to employment preferences on said grounds.  On the other side of the spectrum, discrimination can also manifest in barring potential customers from transacting.

Markets, in all their unplanned, decentralized glory, inherently punish those who choose to discriminate.  Those skeptical of the efficiency and utility of the market routinely gloss over this point, yet its logical truth is as sound as they come in the sphere of economics.

On the employment side, routinely discriminating against a certain group or demographic has the effect of shrinking the potential pool of labor.  A smaller labor pool is a more expensive labor pool.  If you really needed to fill a key position and there were only 2 or 3 candidates qualified to take on this important role, their bargaining power, and thus negotiated salary, would be quite high.  Now imagine the same role, with the same crucial nature attached to it, yet picture 10 or 100 or 1,000 qualified candidates interested.  The wage really only has one direction to go.

Categorically refusing to hire competent labor, for whatever non-economic reason, results in a financial hit relative to the counter-factual alternative.  As a firm moves away from precisely zero discrimination to some positive amount, this will almost always be the case.

Similarly, slicing off discriminatory chunks of would-be customers has the obvious effect of shrinking one’s market opportunity.  Less customers means less sales and therefore less profit.  For unprofitable companies, discrimination means less time treading water and covering fixed costs and therefore quicker financial distress and bankruptcy.

From both angles, discriminators see their bottom lines lessen compared to what they otherwise would have been.  This is very much a good thing, assuming that you believe discrimination on the aforementioned arbitrary grounds is not a nice thing to partake in.

Not to be missed here are a few key characteristics of the procedural market mechanism that “punishes” discrimination and “rewards” its inverse on any number of corporate axes.  First of all, this perpetual nudge or disincentive is not designed by anyone.  The only preconditions here are a few key tenets of private property, such as the institution itself as well as a reasonable and stable rule of law.  No matter what might be consciously drawn-up to fix business discrimination, such proposals are not competing against an alternative that rewards or even allows these practices.  In fact, it is the opposite.

Second, the market mechanism requires no acknowledgment of its existence on behalf of the person responsible for the discrimination.  The process operates impersonally and in the background, constantly pushing back against discriminatory behavior.  While this system doesn’t thrust the prejudice or shortcomings into the face of those harboring them, such a process has its benefits.  It should, all else equal, result in less discriminatory active businesspeople, rather than a legally-enforced anti-discrimination regime which may remove some of the behavior from its midst but not the persons themselves, whose tendencies will tend to pop up in other areas, even if they might have to hire you or sell you goods (e.g. customer service, hostile workplace environment, promotions, reviews, etc…)

Moreover, confronting people about their politically incorrect and widely condemned behavior is often a good strategy for causing the confronted to double-down and retrench rather than the opposite.  Now you might say they deserve that, but it’s not clear if this is a benefit from a results perspective.  So the impersonal market nudges have their advantages.

This is not to say that a legislated approach to abolishing discrimination is not an effective or even preferred way of going about the issue; it certainly can be on various grounds.  In societies or areas with large amounts of deeply-rooted prejudice or skepticism of out-groups, such behavior may go on for long periods of time and can, indeed, be rewarded instead of punished, temporarily reversing the laws of economics where this behavior is praised or intentionally reinforced.

Nevertheless, government is a blunt tool and legislating problems away never quite goes as planned.  Imagine, for instance, the pendulum swinging too far to the one side, where salaries and wages are mandated to always be equal regardless of race or gender or even age.  Such a policy would be disastrous for economic efficiency and corresponding standards of living.  Women, as a whole and thus on average, make different educational choices and still shoulder different burdens in terms of household responsibilities like child-rearing (although this gap is closing).  They enter into less-risky professions, usually work less hours, and have career trajectories punctuated by maternity leave.  These things affect productivity: when you control for as many variables as possible and really isolate gender in econometric studies looking at wages, the large pay gap shrinks from those CNN-headline figures of 25-30% to almost nothing.

A comparable dynamic goes for minority groups and different races that are disproportionately concentrated in urban areas, such as blacks.  Policy failures including terrible public schools, the war on drugs, minimum wages, restrictive market regulations, and prejudiced law enforcement can disadvantage groups in many ways and job skills and productivity aren’t going up as a result.

Pure unfettered markets allow for the pricing of different productivity levels without fear of government fines or lawsuits.  If different groups display different relevant characteristics on average, regardless of why, monolithic legislative impositions will do more harm then good.  Meanwhile, the impersonal nature of the market helps ensure that what should be priced differently is, while simultaneously guarding against and nudging away true discriminatory, non-productivity based screening.

The left would have you believe that discrimination runs rampant in business today, parading around with impunity.  There is no corner of American capitalism untouched by it.  The truth is that it exists, yet it’s not all that common or meaningful.  If it was a widespread practice, on either the employee or customer front, then bloodthirsty capitalists have one of the largest pieces of low-hanging competitive advantage fruits floating before their very noses: don’t discriminate.

Bigger pools of labor and customers mean lower expenses and more sales and profits.  If women or homosexuals or Latinos were systematically under-compensated today in the U.S. economy, a surefire way to get a leg up on the competition would be to exclusively hire only these groups.  How, exactly, do the critics reconcile their market-skeptic indictment of the profit motive and greedy property owners with these big free lunches persisting all over the place?  I have yet to see a good explanation.  We are supposed to believe that all profit opportunities are exploited to the utmost in capitalist society, except, of course, for those that conveniently fit the ideological narrative of people who are just so certain they exist.

Until a better explanation (send me them if you’ve seen ’em!) emerges, don’t forget that markets provide a real incentive to avoid discrimination.  It might not be the best that can be done, but it is something after all, and no one had to think it up or continually maintain it.

The business person who acts on their racist, sexist, or homophobic views generally won’t do as well as they could have, they won’t escape unscathed, especially in today’s America.  The ballot box, however, offers no such impersonal push-back.  And that, if nothing else, is a distinction worth remembering.

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