Legal Commentary

Competition, Discrimination, and Law--Posner's Comment

By Richard Posner

Becker points to India as an example of a society in which competition has been more effective than law in reducing discrimination in employment. As with most analyses of historical phenomena, determining causation is rife with uncertainty. Had the Indian government not abolished the caste system, would discrimination against untouchables have declined as much as it has?

The question is of more than academic interest from an American standpoint because 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. We also had a caste system in the South until relatively recently. 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 (nor has Becker ever argued that it can be), 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. I will confine my analysis largely to employment discrimination.

If an important class of customers does not want to be served by, say, black employees, or if an important class of workers does not want to work with black employees, then the tendency in the absence of a discrimination law, as Becker explains, will be segregation of the workforce: the market will be served by a combination of all-white and all-black firms. If, however, segregation raises employers' costs by more than the increase in wages that they would have to pay their white employees to induce them to work side by side with blacks, plus the loss of net revenues from white customers who do not want to be served by black employees, there will be competitive pressure on the employers to integrate their work forces. The pressure will depend in part on how strong the whites' aversion to working with or dealing with blacks is. There is no reason for competition to affect that aversion, other than by bringing the costs of it home to employers and through them to their white workers and customers.

Although law can try to eliminate employment discrimination, it is unlikely to be very effective and if it is effective it may not be efficient. Take the second point first. Suppose white employees have a strong aversion to working with blacks. Then forbidding discrimination will impose a heavy cost on the white employees. If there are more of them than there are blacks, the cost to the white employees may exceed the benefits to the black employees. Of course, an antidiscrimination law may rest on a political or moral judgment that costs imposed by thwarting a taste for discrimination should not count in the social calculus, but that is a judgment outside of economics.

Now as to the efficacy of such laws: it is bound to be limited unless enforced by savage penalties, which our discrimination laws are not. There are three reasons for their limited efficacy. The first is that an employer who wants to continue discriminating against blacks can (within limits) reconfigure his work force to reduce his demand for skills likely to be possessed by black applicants for employment, can substitute capital for labor, and can relocate to areas in which the applicant pool contains few blacks. Second, felt legal pressure to hire blacks results in "affirmative action," which both creates resentment among whites and casts some doubt on the average quality of black employees and so in effect stigmatizes the entire class. And third, because a discrimination law makes it more difficult to fire a member of the class protected by the law, it increases the cost of hiring members of the class and so increases the incentive to discriminate in hiring. There is some evidence that the passage of the Americans with Disabilities Act, forbidding discrimination against the disabled, led to an actual decline in the number of disabled persons employed.

Although an employment discrimination law is thus apt to be of limited (though not zero) efficacy, other bodies of law can play a large role—larger even than market forces—in reducing employment discrimination. Much employment is public, and public bodies can decide to incur the costs of eliminating discrimination in their work forces and hire many blacks. In addition, laws that reinforce a caste system, such as the Jim Crow laws in the southern states that persisted into the 1950s, can reduce employment opportunities for blacks beyond what private discrimination would do, for example by limiting their educational opportunities. The repeal or invalidation of such laws can thus indirectly increase black employment opportunities.

Deregulation is a minor but interesting legal change that tends to reduce discrimination. A regulated monopoly is constrained in the amount of monetary profit that it can obtain, but unconstrained in nonmonetary perks, including indulging a taste for discrimination.

Neither legal nor market forces have brought employment parity between whites and blacks in the United States. Parallel with the struggle of blacks for parity, Jews, East Asians, and immigrants generally, have made rapid economic progress and indeed (at least in the case of Jews and East Asians) largely overcome discrimination, yet without significant help from the law. An open economy provides opportunities even to victims of discrimination, especially if the victim group is large enough to achieve economies of scale in trade within the group. As members of the group grow modestly affluent and thus achieve a standard of living that enables them to assimilate to the larger culture, as by consuming similar goods and services and sending their children to good schools, discrimination against them declines because they cease to seem “different” from the majority. When members of a minority group talk and think and act like the majority and have the same tastes and in short share the same culture, the fact that they may have a different physical appearance ceases to count greatly against them, as indicated by high rates of intermarriage in the groups I have mentioned. Assimilation to the dominant culture, as yet incomplete for a great many blacks, may thus be the major force in reducing discrimination, with competition and law playing lesser roles.

Full post as published by Becker-Posner Blog on September 07, 2008 (boomark / email).