By the 1930s, labor markets in the South had come to display a distinct “racial wage gap,” supported by systems of vertical workplace segregation. Not only were job categories classified by race, but black wage rates typically peaked about where white pay grades began. These structures persisted through World War II and the 1950s, showing few signs of softening even in the presence of rapid urbanization and industrial employment growth. [emphasis added]This gets exactly to the laissez-faire notion that discrimination is unsustainable in business, from either a customer- or an employee-relations perspective. The reasoning is usually expressed in this manner:
"If a firm discriminates, they will fail to maximize business and/or fail to hire the best workers, which will lead to their downfall. Therefore, anti-discrimination laws are unnecessary."Of course, the missing word is "eventually." Over a long enough time span, the above reasoning is probably true, but history has shown that such social institutions can endure for generations.
On a macro level, such institutions retard the growth of the efficiency of labor, which, in the long-run, is the sole determinant of overall economic growth. Indeed, Wright argues in the book that the Civil Rights Movement benefited white and black alike.
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Suppose you are looking at a situation in which discrimination is:
ReplyDelete1) economically unfair and
2) a consequence of private choice (as opposed to public policy).
Then this situation describes an opportunity for an unbiased entrepreneur. The entrepreneur would:
- open a business in the industry with unfair discrimination;
- hire unfairly-discriminated-against workers at higher wages than they could have received otherwise;
- sell the industry's good or service at a price below the price which can be met by unfairly-discriminating firms.
This entrepreneur can help himself with profit while reducing the gap of unfair wage discrimination.
I offer this as a challenge. If you know unfair discrimination exists and is not a consequence of some public policy over which you have no control, then perhaps you have a duty to be that entrepreneur. The persistence of the unfair discrimination can be seen as your fault.
I'm afraid, Rich, that you miss the point. While such entrepreneurial opportunities do occasionally exist (see Greenspan Associates LLC in the early 1970s), oftentimes the discriminatory institutions are sustainable in the medium-term, as Professor Wright notes. The points you raise, however, do lend themselves to further unpacking. If we seek to answer the question, "How is it that these institutions are sustainable?" we could start by determining why the opportunities you describe are not more prevalent. One answer could be that, in the case of employment, the low-skill labor pool is sufficiently large that laborers are price-takers and the premium required to pay those the employer wishes to hire (the favored group) is correspondingly small. Another way to achieve this equilibrium to introduce geographic restrictions and entry costs. While not rising to the level of 'failure,' these market imperfections can offset the effect of such previously described premia and allow discrimination to persist. There is also a social norm effect. An example of this would be in service industries. An employer who sells a service primarily to the favored class may face disincentives to hire members of the less-favored class. In this case, an entrepreneurial competitor may fail even if his employees are objectively better at their jobs. None of these examples are possible, of course, if you believe that markets are always and everywhere efficient, or if you believe that all discrimination is caused by the government.
ReplyDeleteThank you Jonas. Perhaps I missed your point in my haste to make my point. If so I have no right to expect that you might have completely understood my point.
ReplyDeleteLet me add that the most ugly of unfair discrimination has been accomplished through government law. For example, slavery as practiced in the US was allowed by state constitutions and written into government laws. If a slave escaped, the government’s arm of law enforcement helped the slave owner, not the escapee. Later, in the civil rights era of the 20th century, Rosa Parks started a stir when she ran afoul of another government law, this law establishing discrimination in seating in buses.
But still I do not believe that all unfair discrimination is caused by government. I suppose on the contrary that most people are quite naturally biased and clannish in most of their personal interactions -- including most certainly in the votes they cast in political elections.
But a marketplace of economic exchange is a melting pot. A bigot who sees that differently colored people are offering a better price, for a desired good or service, will often find a way around his bigotry to make a trade, and feel proud of himself for finding the good deal. Thus I expect market action to place limits on the disparity caused by bigotry. Furthermore, repeated trading at arm’s length often starts relationships with deep mutual appreciation and respect, overcoming earlier bigotries.
But once again government can mess this up when government intervenes in markets. Below I copy a few sentences from David Henderson’s tribute to Armen Alchian (“An Economist Who Made the Science Less Dismal“, Wall Street Journal, February 20, 2013).
"Alchian also used the analysis of property rights to explain racial and ethnic discrimination. In a 1962 paper coauthored with the late University of Chicago economist Reuben Kessel, Alchian -- himself subject to anti-Armenian discrimination early in his life -- pointed out that discrimination was more pervasive in private firms whose profits were regulated by the government."
Admittedly, none of what I have added above addresses the subject you raise again Jonas, being the duration of cases of unfair discrimination in absence of state provocation. That is a worthy subject. But the bias of an observer of unfair discrimination plays a large role. If I were to study situations in which Prof. Wright reports unfair discrimination, in most of those situations I expect I would find something government had done which aggravated the start or continuation of unfair discrimination.
Rich-I still don't think I understand how property rights are to be guaranteed in your paradigm
ReplyDelete