When Is Discrimination Profit-Maximizing?

16 May

Consider the following scenario: There are multiple firms looking to fill identical jobs. And there are multiple eligible workers given each job opening. Both the company and the workers have perfect information, which they are able toacquire without cost. Assume also that employees can switch jobs without cost. Under these conditions, it is expensive for employers to discriminate. If company A prejudicially excludes workers from Group X, company B can hire the same workers at a lower rate (given that the demand for them is lower) and outcompete company A. It thus reasons thatdiscrimination is expensive. Some people argue that for the above reasons, we do not need anti-discrimination policies. 

There is a crucial, well-known, but increasingly under-discussed nuance to the above scenario. When consumers or co-workers also discriminate, it may be profit-maximizing for a firm to discriminate. And the point fits the reality of 60 years ago when many hiring ads specifically banned African Americans from applying (‘Whites only’, ‘Jews/Blacks need not apply’, etc.), many jobs had dual wage scales, and explicitly segregated job categories existed. A similar point applies to apartment rentals. If renters discriminate by the race of the resident, the optimal strategy for an apartment block owner is to discriminate by race. Indian restaurants provide another example. If people prefer Brahmin cooks (for instance, see here, here, and here), the profit-maximizing strategy for restaurants is to look for Brahmin cooks (for instance, see here). All of this is to say that under these conditions, you can’t leave it to the markets to stop discrimination.