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Is pay discrimination possible in a laissez faire economy?

melian          22 May 2015 06:23 AM

Many studies concluded that people belonging to certain minorities are paid substantially less for the same amount of work. Mainstream politicians do not generally dispute this claim and though some prefer to keep silent on this topic, many actively demand the government to do more in order to end the discrimination.

Personally, I have trouble understanding how pay discrimination is mathematically possible in the private sector unless it is actually mandated by the government. Suppose most employers are indeed bigots who pay people from a minority A only 80% of what they pay to a group B for the same job. In this situation, non-bigots or employers for whom greed outweighs their bigotry, would have an excellent opportunity to make a fortune and drive their competitors out of business. All they would have to do is not to hire anyone from the group B when qualified candidates from the group A are available and ready to work for a lower salary.

Since people from the group A can be hired with 20% discount, these employers would be able to make huge savings on employees’ wages. Besides boosting their profits, this policy would make their companies far more competitive, allowing them to expand their business and drive their bigot competitors out of the market.

The pay discrimination may still persist in organizations which cannot go bankrupt and where employers are not motivated by profit (i.e. government agencies). But is seems inconceivable that the pay discrimination would survive in the private sector for more than a generation.

Am I missing something?

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FrameBenignly 24 May 2015 11:51 PM

Perfect competition only exists on a drawing board. It's useful because it closely enough mirrors the real world that it often produces the same effects as semi-perfect competition, but it often fails when looking at labor issues. I think that's probably why labor economists tend to have many radical beliefs.

Most big companies got where they are by doing one or two things really well. Google designed a really popular search engine. Starbucks created a streamlined system for selling gourmet style coffee. They aren't going to lose to Microsoft Bing or Costa Coffee just because one company has a slightly better HR manager. This leaves a lot of room for errors to creep into businesses that are very hard to remove. The nature of the market can change faster than the market can resolve these issues.


Alice 21 June 2015 04:18 PM

That's not so simple. Let's assume for example that 80% of companies have pay discrimination against women. If women knew about this, and knew what companies they were - then of course things would work out the way you suggest, the equal-opportunity companies would get stronger female applicants etc. But usually these things are not clear at all for a female job applicant. Different places offer different salaries, and there could be many factors at play here. They would also need to know to apply very widely to stumble upon the non-discriminating companies.

Also, as someone else noted, bigoted co-workers may make a big difference. I think this can be a really big factor. For example, if the majority of the co-workers in a male-dominated area feel more comfortable in all-male environment, it may be better for the company to keep its discriminating policies up. Once it hires many women, it may be seen as being a less prestigious workplace by some potential male (and female!) candidates (again, due to their bias), and this way the company may lose potentially strong workers.

I'd say once the percentage of biased people in the given area of employment becomes small enough, the dynamics that you have described should even things out. But when until that happens, I am not convinced that this reasoning works.


quirkyllama 30 October 2015 11:04 AM

The best counterarguments are:
1) Friction. There are real frictions in the market. Suppose Coke paid minorities 25% less. You cannot out-compete Coke just with a 25% wage advantage.
2) Non-competitive markets dominate. You allude to this, but huge sections of the economy are essentially non-competitive. Education + Health Care is like 25% of GDP. Add in other direct Government spending, plus local monopolies, non-profit sector and you end up with a large percent of all wages paid by non-profit driven employers.

That said, you find approximately the same "wage gap" across both very competitive industries and non-competitive industries, so neither explanation really holds much water.


ChristianKl 22 May 2015 02:19 PM

We do seem to live in a world where companies that are more willing to employ woman have a competitive advantage.
If you take female CEO's as an example the companies grew three times as fast as the SAP500.

McKinsey also has gathered data that suggest that companies with high diversity reap profits.
In the United States, there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent. [...]
The unequal performance of companies in the same industry and the same country implies that diversity is a competitive differentiator shifting market share toward more diverse companies.

At the same time the effect doesn't seem to be strong enough to kill all low diversity companies within a single generation.
That the effect isn't even stronger could be explained by factors such as customers who discriminate and that there aren't enough business owners who make the strategic choice of trying to increase the diversity of their business.


Jiro 1 July 2015 04:02 PM

People are willing to pay money for intangibles. People will pay more for a meal in a restaurant with good food and service than a restaurant with bad food and service, even if they come away from the restaurant equally fed in both cases. The employer gains disutility from hiring blacks/women, and will only hire them if the decrease in salary compensates the employer for the loss in utility from the intangible of having undesirables around.

The fact that the employee will be better off from not discriminating will not stop this, for the same reason that people will not stop visiting good expensive restaurants (and such restaurants will not go out of business) because they'd be "better off" visiting a cheap one of poor quality--the cheap one doesn't provide the same experience, and experiences are subject to market forces.


DanielLC 26 May 2015 03:30 PM

One simple way is imperfect information. If black people are generally worse workers than white people, and adjusting for whatever is in the resume and interview is insufficient to fully explain the difference, then the rational thing to do would be to pay blacks less.


Fwiffo 22 May 2015 09:55 AM

Usually the problem is not bigoted business runners but bigotted customers. A greedy but unbigoted enterpreneur will correctly identify that not conforming to their customers bigotry will cost them money. One could try to argue with the custmers that being bigoted is silly but as long as they prefer the product with which they can be a bigot to a cheaper world-view challenging product the economic signal for rectifying isn't there.

There is an argument that not being picky about the ethnicity etc of the workers gives the consumer some economical benefit. However economies of scale and related effects can mean that it remains a niche that expands slower than the market-section as a whole. Then there is the sad interpretation that for some consumers the product enabling their bigotry is something they are happily more or less concoiusly willing to pay for, that is that it is legitimate product quality.


DonaldMcIntyre 23 May 2015 04:08 PM

If such society is free of racism and other "group: discrimination practices, pay discrimination is possible in a laissez faire economy only if there is privacy in the deals struck with each worker,or groups of workers.

Many businesses like complex software implementation or even wealth management for individuals, where there is imposed leagl confidentiality for business purposes, the fact that each customer doesn't know how much the provider is charging to other customers, then the provider can extract as much revenue from each customer by maximizing what they are willing to pay for the underlying product or service.

The above is possible because in a normal demand curve we see aprice set for the "market" which is where the supply curve crosses it. But there are many customer obove and below those levels that would have paid more or less if they didn't have open market information.

Many industries, especially where the marginal cost of each product sold tends to zero, charge very different prices to many different customers. For example may charge a customer 1% for a trade and an equivalent client 0.50% per trade just because the latter demanded a discount.

In the case of wages I've seen many companies, an recently it was known in Hollywood for equally famous actors in the same movie, that employees don't know the salaries of their peers. This is a perfect situation to negotiate the lowest salary each employee would charge for the same jobs.


VoiceOfRa 23 May 2015 07:23 PM

Yes, if ability correlates with say race.