Race and the Economics of Discrimination

July 13, 2020

The current political moment has caused economists to reflect on how they make sense of racial disparities.

The current political moment has caused economists to reflect on how they make sense of racial disparities. The economics of discrimination could fill an entire course, but this article sketches out the basics.   We can simplify the economics of discrimination by identifying two basic approaches: Neoclassical and Political Economy.  The Neoclassical approach focuses on individuals who are presumed to be rational and self-interested. It views discrimination in the context of the exchange of goods and services in competitive markets.  In contrast, the Political Economy approach focuses on groups and institutions. It presumes individuals are motivated by both self- and group-interest and views discrimination in the context of the production of goods and services in markets that often are not that competitive.

Some Neoclassical economists argue that discrimination results from a “taste for discrimination.”  The idea is that some people prefer to interact only with certain groups, in other words they are prejudiced. For example, some employers prefer to hire and sell to a specific group.  Neoclassical economists argue that competitive markets penalize those who discriminate -- employers who do not hire the most qualified, productive worker due to their group membership incur higher production costs and earn lower profits.  Thus, market forces discourage discrimination.  Gary Becker was key in developing this theory. Some argue that the decline in the gender wage gap starting in the 1980s provides empirical support for Becker.

Neoclassical economists also discuss statistical discrimination. This refers to the idea that in the absence of complete information, individuals use group averages to infer the likely characteristics of another individual. For example, a doctor has read several studies showing depression is more prevalent among Caucasians than African Americans.  An African American patient visits this doctor complaining of low-energy and problems sleeping, and the doctor discounts the possibility of depression because of the patient is a member of a group with lower rates of depression.  Instead the doctor focuses on potential physical causes, delaying treatment for the actual problem. 

Critics of Neoclassical “taste” models of discrimination note that markets have not eliminated discrimination – it’s still with us.  The idea of statistical discrimination also has problems. As Dr. William Spriggs recently pointed out, the theory of statistical discrimination assumes that race is a meaningful marker of difference for economic agents independent of history or social norms, and further finds only negative attributes correlate with being African-American. He argues that the data behind the theories of statistical discrimination are weak, rendering such approaches as more of a justification than an explanation of racial injustice. 

Political Economists argue that because institutions shape access to resources across different group, markets create incentives to discriminate. One possibility is that discrimination against a particular group in the labor market reduces competition for specific jobs, advantaging the group with the power to discriminate.   For example, for years the American Medical Association worked to keep Blacks and women out of medical school, assuring that White men secured more medical school slots and most of the medical jobs.  Some firms have pitted racial groups against each other in order to weaken labor’s ability to organize for higher wages and better working conditions. For example, Ford hired black workers to replace striking white workers during the 20th century, exacerbating racial divisions in order to weaken the power of laborer as a cohesive group in order to keep labor costs low. Similarly, discriminatory lending practices occur when banks “redline” minority neighborhoods, making it difficult or impossible for the people who lived there to get loans.  Buying a house is an important avenue for building wealth.

Prof. Bruce Pietrykowski’s recent book, Work (2019), notes that:

The problem of income inequality must be understood in terms of the race and gender of workers in the economy.  Both racial and gender discrimination compound the problem of inequality when people with the same education and skills receive lower income largely because of their race (non-White) or gender (female) or the intersection of race and gender (Latina). 

William Darity, Jr. is a leading economists in the area of discrimination and helped develop stratification economics. Stratification economics blends economics and social psychology, and emphasizes the influence of within-group hierarchy and across group hierarchies.  That is, people get utility and are motivated by their status within a group and by the status of groups with which they identify.  For example, some people get utility from being in the racial group “White” and will take action to preserve that group’s higher socioeconomic status in the U.S., even at their personal economic expense.

Some think that racial biases create racial inequities in the market, but Historian Ibram X. Kendi argues that racial prejudices are created to justify denying certain groups access to resources so the oppressing group secures and maintains economic advantages.  Rather than ignorance leading to racial bias and then to discrimination in market, he thinks the reverse causal pattern holds. He notes that highly educated, intelligent individuals, such as Thomas Jefferson, promoted racist ideas in order to gain economic benefits.  Slave holders needed reasons why slaveholding was acceptable in order to have a steady supply of cheap labor and earn greater profits, so they created negative racial stereotypes of Africans.

Most economics courses discuss the issues of discrimination and inequality to some extent. In the Fall 2020 term, courses with significant coverage of discrimination include ECON321 (Labor in the U.S. Economy), ECON361 (U.S. Economic History), and ECON442 (Economic Development).  In the winter 2021 term ECON325 (Economics of Poverty & Discrimination) will be offered.  ECON375 (Heterodox Economics) also covers the economics of discrimination, it will be offered in the Winter 2022 term.

Recommended Further Reading

Articles/Videos:

How Gary Becker Saw the Scourge of Discrimination, K. Murphy (2015) - summarizes Becker’s work on discrimination.

What Economics has to Say about Racial Discrimination, K. Arrow (1998) – critiques the Neoclassical approach and highlights the role of social interactions outside the market that influence markets.

Stratification Economics: Explains what motivated William Darity, Jr. to study economics, why he concluded standard economic explanations for discrimination fall short, and why he developed an alternative – stratification economics. Darrick Hamilton explains stratification economics in this 20-minute video.

In Economic Opportunity and Economic Growth Tim Taylor, a.k.a. The Conversable Economist, discusses estimates of economic growth associated with greater equality of economic opportunity (reduced discrimination).

Books:

 Unlevel Playing Fields: Understanding Wage Inequality and Discrimination (4th edition), R. Albelda and R. Drago, Economics Affairs Bureau, 2013

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