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Should the government force non-discrimination?

April 5, 2012

Just because something is undesirable does not mean it should be illegal. Policymakers must also weight the costs of enforcement and unintended consequences of the law. The decision to force others not to discriminate is a tradeoff between more force and more discrimination.

Economics of Discrimination
According to the standard economic model, a company’s profit from hiring a worker is equal to the workers’ productivity minus their wage. If a group of workers has higher productivity than their wages, it will be more profitable to hire them than other workers. Thus, discrimination is unprofitable because companies are avoiding the lowest wage workers for a given productivity level. Companies who only care about the bottom line will be willing to hire anyone who can get the job done. Wages make up the majority of a firm’s costs; usually around 2/3rds of their revenue goes to paying wages. If a firm can hire a group of discriminated-against workers who are just as productive, they can drastically increase their profits. Normally, a firm’s profit margin is about 8%. If a firm can save even 10% on their wage costs by hiring discriminated-against workers, their profits will almost double. The free market punishes firms who discriminate on a basis that does not reflect productivity, but some discrimination based differences persist.

There are a few exceptions. Ironically, the more likely an employee is to sue for discrimination, the more an employer has an incentive to lower their wages to offset the expected future legal costs. Also, if a company’s customers are willing to pay a higher price for goods and services produced by a particular group, the firm will be willing to pay that group a higher wage. Thus, if a group is discriminated against because they are disliked, wage disparities will persist longer than if a group is discriminated against because they are disadvantaged – once their productivity goes up, so too will their wages.

Commentary
The question is given a group that is discriminatory, what should people do, and what should government do, and what legal principals should be considered? The first best situation would be where people were more tolerant. The second best situation would be where people could self sort into groups large enough that discrimination was not a big deal for either group. As long as there were a decent variety of companies willing not to discriminate, the discriminated-against could work for the non-discriminatory companies and avoid discrimination. Freedom of association and avoidance of coercion should be weighed against the benefits of a law.

The right thing to do may be unpopular and forcing it on the population can lead to backlash. Education is the basis of economic policy, not the frontier of economic science. If you can’t convince someone of something, it can’t really be a stable policy in a democracy, since people will vote it out. Force flows from political support, which flows from popularity. Policy can be used in either direction; changing cultural norms is fundamental. Policy can only go so far against what people believe is right, so I think effort to change people’s minds is better spent in the long run than effort to only change policy.

Further reading:
Costs of employing women

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