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The Economics of Discrimination

It is only unfortunate that human history, over the centuries, has been laced with fabrics of prejudice.

Prejudice causes the stratification of society which creates a hierarchy determined by power and resources. Whenever a hierarchical structure prevailed, the marginalised were discriminated against. Under the conservative backdrop, hegemonic meta-narratives were constructed to justify and advance the prejudiced mentality. Women, African-Americans, Dalits, and countless other marginalised communities have been victims and witnesses of hate throughout history.

The oppressors’ chauvinism manifested in forms ranging from outright violence to micro-aggressions; from deprivation of opportunities to biased representation in pop-culture; discrimination seeped in every aspect of human existence. But since sustaining social stratification is a battle of power — and power is often derived from economic strength and resources — the oppressors often used their economic prowess as a tool in maintaining social oppression. Hence, it is not surprising that the issue of discrimination has a dominant economic perspective. 

In a quest to retain power and control over resources, there is an embedding of roles and characteristics. A social image is constructed that is deeply ingrained and imbued in the society. A homemaker will always be a woman, a blue-collar worker will mostly be an African-American, a CEO will be a white male. This typecasting through the hegemonic lens deprives communities of equal opportunity but more importantly, it forges social perceptions of the role certain people should play, resulting in strong social conditioning. 

Our social conditioning influences our decision-making which often externalises in our actions as economic agents. Many consumers choose not to watch female-centric movies, employers may be hesitant to employ African-Americans, banks might resist giving loans to marginalised communities. Within the economic sphere, discrimination most commonly manifests through the issues of job opportunities, education and equal pay. 

The job market, like any other market, works using the market forces of demand and supply. Firms demand mental and physical effort which is supplied by labour for a specific wage rate. When employers are prejudiced against certain communities, the demand for their labour falls and hence, fewer individuals from the community are employed. The lower demand also pushes down the wages, as those few employed end up working at lower wage rates, causing a pay-gap. This is how discrimination influences the labour market. But the idea of discrimination is a little more complex than just that. 

While one would think that discrimination is as simple hate and raw prejudice, there are two major theories of employer discrimination that separate this bias into taste-based and satistical discrimination. In both cases, employers treat the members of a certain group differently based on their own perceptions of the group. 

Taste-based discrimination is what the layman believes discrimination would look like in the job market — the employer’s personal preferences (taste) causes him/her to discriminate against a certain community. In such a case, the employer is willing to ignore merit and even forego profits to suit his/her prejudicial preferences.

An example of taste-based discrimination can be seen in the field experiment conducted by Marianne Bertrand and Sendhil Mullainathan. To comment on discrimination, the researchers designed a field experiment where fictitious resumes were sent of individuals with White-sounding names and African-American sounding names. Four resumes were sent to each employer — two high-quality and two low-quality with a randomly assigned African-American name and a randomly assigned White name to each kind. The experiment yielded that white-sounding names receive 50% more callbacks than African-American sounding names. For every 15 resumes sent, an African-American sounding name received 1 callback, while a white-sounding received one call back for every 10 resumes sent. 

In contrast to taste-based discrimination, statistical discrimination occurs when the employer’s expectations of a certain community cause him/her to discriminate against them. Therefore, in statistical discrimination, the employer uses gender, race or colour as the variable to judge the productivity and skills of a job applicant because statistically the employer has seen members of a community share certain characteristics. For example, if based on personal observations an employer has seen that Indians lack good English speaking skills, then he would be less likely to hire any Indian because he has already judged them to lack those qualities. While it is grossly unfair to use personal observations and probability to judge applicants using their observable variable (gender, race, colour etc.) and make assumptions, employers that engage in statistical discrimination are looking to maximise profit rather than forego it. 

While these two economic theories give greater clarity on the different motives and methods of discrimination, the pressing topic of discussion is that of worth. The idea of worth is closely attached to discrimination, especially in the economic and labour market arena. Employers hire workers at a certain wage rate because they find value in their effort; it has a high worth. Thus, their demand is derived from their perception of the value the workers bring to their company; the value of the marginal product of labour. Therefore, when discriminating, employers are making a judgement of worth — they deem members of marginalised communities to have lower worth and their effort to have a lower value. This implies that just by belonging to a certain group, a worker’s efforts have instantly less value. It enforces the idea that being a part of a community is a taint or a blemish in the individual’s identity. It makes people ashamed and embarrassed of their identity and forces them to abandon it to resemble the dominant group in order to thrive in the setup. 

How others value a worker’s effort changes the way many workers view themselves. Our own sense of worth is essential to our confidence and the way we see ourselves. By implying and propagating the perception of a community’s lower worth, employers meddle with a worker’s psychology on a completely different level. Not only is it crushing for one’s self-esteem, but also extremely discouraging. If merit has little role to play in the rewards for one’s effort, why would anyone invest in education and training? The field experiment by Bertrand and Mullainathan says ‘Taken at face value, these results suggest that African-Americans may face relatively lower individual incentives to invest in higher skills’. If members of a community have observed the discrimination against them, they would feel the disincentive to train and educate, further worsening their cause. 

In the larger narrative, discrimination in the labour market aids the dominant class by suppressing minorities using lower wages to deprive them of resources. It ensures that certain groups are always at the mercy of employers. This is made even worse in a monopsony where there is only one firm hiring. The low demand for labour forces certain individuals to work at any going low wage rate, much lower than what their labour is actually worth. 

In the grander scheme of things orchestrated by the oppressing class, the labour market has become a crucial instrument in maintaining and propagating discriminatory behaviour. That is how deep discrimination has seeped into our lives; into our workplaces, our homes and our minds. While government regulation will help reduce discrimination in employment and wage inequalities, changing the societal view and challenging our social conditioning is the best way to root out discrimination, to eradicate prejudices, to break the glass ceilings…


Advaita Singh is a second-year Economics and Finance major at Ashoka University.

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