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Do Businesses Pay a Price for Racial Discrimination?

A new study suggests they do.

In 2004, the sociologist Devah Pager and two colleagues conducted a study of hiring discrimination in New York City. The results were pretty much depressing, as Pager recounts in a follow-up study released yesterday:

teams of young men were hired to play the role of [low-wage] job seekers. These young men were carefully selected and matched on the basis of their age, physical appearance, and interpersonal skills, and were assigned matched fictitious resumes that reflected identical levels of education and work experience. Teams of three men—including a black, white, and Latino applicant—applied in person for jobs at 170 businesses over the course of 12 months. … The results of this study indicated substantial amounts of hiring discrimination. Whites received callbacks or job offers in 31 percent of all cases, Latinos in 25 percent of all cases, and blacks in just 15 percent of cases.

“In fact,” the researchers wrote in their abstract when the results were released in 2009, “black and Latino applicants with clean backgrounds fared no better than white applicants just released from prison.” This verified an earlier study Pager had done in Milwaukee.

But in her new paper, Pager reveals a silver lining: the establishments that discriminated were more likely to go out of business by 2010.

Nearly a quarter of businesses showed anti-black discrimination in the original study. Just over a third of them were out of business six years later—more than double the rate experienced by non-discriminating businesses. The difference remains when Pager statistically controls for establishment size, sales assets, and industry.

This isn’t conclusive proof that discrimination caused poor business performance—“It is possible, for example, that the kinds of employers who discriminate against racial minorities are also those who make poor choices in other areas of business management,” Pager writes. But nonetheless, the results obviously bring to mind the work of Gary Becker, an economist who in 1957 argued that racial discrimination was inefficient. If one employer refuses to hire black workers just because they’re black, another employer can swoop in, hire them at a discount, and benefit from what they have to offer.

Since then, many libertarians have pinned their hope to the idea that the magic of the free market would stamp out discrimination. That did not come to pass—otherwise, Pager would not have found discrimination to begin with. I spelled out some of the reasons for this in RealClearPolicy two years ago, and Pager provides a good quick summary of them in her new paper (citations removed):

Segregated networks, imperfect information, search frictions, and replacement costs, for example, each may interfere with market competition and the weeding out of inefficiencies, including discrimination. Alternatively, theories of statistical discrimination contend that, at the group level, race may provide meaningful information about productivity, and therefore, race-based decision-making may be consistent with competitive markets.

But Becker was probably on to something, even if it wasn’t a mechanism that would end employment discrimination. Pager’s follow-up suggests that at the very least, businesses do pay a price when they pass over qualified workers of a disfavored race.

One final note: I was a little surprised to see no reference to discrimination against those with criminal records, which the original study also showed. Does that practice hurt businesses, help them, or make no difference? The answer matters a lot as we strive to find jobs for ex-prisoners.

Robert VerBruggen is managing editor of The American Conservative.