Discrimination, Economics Of

Failure to Eliminate Discrimination in Competitive Markets

A perfectly competitive market that rationally valued profit opportunity and human potential would tend to minimize discrimination. Nondiscriminatory market actors would exploit profit opportunities left behind by those indulging a discriminatory preference. Over time, one could expect rational economic actors who did not share the market encumbrance of irrational discrimination to drive discriminators from the market. Thus, under conditions of perfect competition, perfectly informed market actors would be pressured to transact without respect to race, gender, sexual orientation, disability, or other economically irrelevant factors. Under these circumstances, there would be no need for market intervention in the form of antidiscrimination laws.

However, because discrimination is not an exclusively economic dynamic, but instead involves complex social conventions embedded within and without the law, it continues to persist in racialized societies and in cultures tolerant of other forms of discrimination, such as that based on gender or against the physically challenged. Free markets in these more realistic conditions will not resolve discrimination, which will fester and operate to destroy a society's ability to fully unleash and exploit its human capital with accompanying macroeconomic drag.

Economists and other social scientists have amassed an impressive empirical record showing that discrimination does indeed resist market resolution. Studies from Australia, Europe, the United States, and elsewhere undertaken over the last thirty-five years [Page 416]have consistently shown that the social conventions underlying discrimination persist after legal prohibition and are slow to respond to market pressures. This record shows that disadvantaged groups continue to suffer pervasive and durable discrimination in any society having a discriminatory history.

In one study, Ian Ayres (1995) demonstrated that discrimination trumps profit motives in a wide variety of markets in the United States. For example, he showed that automobile dealers typically demand diminished markups from white male customers as compared with women or people of color. In another study, Ayers, along with Fred Vars and Nasser Zakeriya, reported that African American taxi drivers received smaller tips than white cabbies. More recently, a test of how individuals in the United States screen résumés found that employers selected résumés with African American names for interviews less frequently than résumés with white-sounding names. This more recent empirical record builds upon earlier audit studies in the crucial labor markets involving paired audit teams actually interviewing for positions; here, studies controlled for a variety of other factors so that discrimination was the most probable explanation for divergent outcomes.

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