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Thursday, December 3, 2015

Freedom Makes Bigots Pay

The Free Market Penalizes Prejudice

Labor regulations have a long history of hurting women and minorities. Yet, when thinking about the economic damage society has inflicted on nonwhites and on women, many people blame the personal prejudices of the people doing the hiring.

The State against Minorities

In The State Against Blacks, Freeman writer Walter Williams explains how various government restrictions on the freedom to work hurt minorities. For example, much legislation reserves certain kinds of work for union laborers. When it’s difficult for minorities to join unions, as it often is, those laws disadvantage minority workers.

Do we tolerate an economic system in which blacks and women persistently earn lower wages?

In the chapter “Minimum Wage, Maximum Folly,” Williams explains that minimum wage laws are another block to employment opportunities for the less skilled, many of whom are minorities. By making it illegal for lower-skilled workers to do a job at lower pay, minimum wage laws make hiring more expensive and higher-skilled workers (who are often white union members) become the more economical alternative for employers. Further, the often-dreadful education offered in inner-city government schools denies many poorer blacks the chance to develop the literacy and numeracy on which they can build higher-paying skills.

Freedom for Bigots?

But suppose these kinds of legislated disadvantages were done away with, so that we had truly free labor markets and quality schooling even for the poor. Would that mean equal employment opportunity for all?

Full freedom of exchange in labor markets would allow employers to discriminate on the basis of race, gender, or any prejudice or whim that strikes them. Wouldn’t such freedom result in unequal pay and fewer job opportunities for women and minorities? Don’t we need government to restrict the liberty of racists and sexists in order to curb discrimination in hiring?

The question seems to put people who love both liberty and equal employment opportunity in a bind. If we insist on liberty of association for bigots — for their freedom, say, to hire only white males if they choose — we seem to condone racism and sexism and to tolerate an economic system in which blacks and women persistently earn lower wages.

But is that so? Is government restriction of employers’ (even ill-used) freedom of association the only way to protect the wage levels and opportunities of historically disadvantaged groups?

Prejudice Is Expensive

No, it’s not. Market forces, if a market is free, strongly regulate wages and salaries, effectively forcing employers to pay equally skilled and experienced blacks and women what they pay white males, or very nearly so. (Skills and experience are critical to the analysis. See Freeman writer Steve Horwitz’s illuminating Learn Liberty video, “Do Women Earn Less Than Men?”)

To see why, suppose for a moment (against the empirical evidence; see Horwitz) that women are receiving only 75 percent of what men with the same skills and work experience are receiving. Suppose also that you are prejudiced against women, and that you are starting a new business for which you need to hire a couple of new employees. And suppose, finally, that you must pay $60,000 a year each if you hire men, but only $45,000 a year each if you hire women.

As long as any wage gap exists, there is an incentive for profit-seeking employers to take advantage of it.

Remember, now, you are a sexist … whom would you hire?

The answer turns out to be that it depends on how sexist you are, doesn’t it? To indulge your sexism, you would have to pay $30,000 a year more for the two male employees. Would it be worth it?

If it’s not, if your desire for profit outweighs your sexism, then your very act of hiring two women while bypassing men will bid up the pay of women in your area, closing the wage gap a tiny bit. If other employers in your industry also care more about keeping their costs down than about the gender of their employees, they also have a strong incentive to hire women, or even to lay off some of their more expensive male employees and replace them with less expensive female employees. If they do so, they, too, will bid up the salaries of women and let down the salaries of men. The wage gap will narrow still further. And as long as any wage gap exists, there is an incentive for profit-seeking employers to take advantage of it.

In this manner, the sheer financial well-being of employers — their greed, if we must put it that way — tends to equalize the pay of equally skilled and experienced workers, regardless of sex and race. If businesspeople by and large care more about making profits than about sex and race, there is unlikely to be much of a wage gap.

Determined Discrimination

But suppose many employers in a region or industry do care more about their prejudices than about getting wealthier faster. In such cases, market forces are still likely to curb that prejudice and equalize the pay of equally skilled and experienced employees. That’s because businesses with higher costs tend to lose market share to competitors with lower costs. If only a few companies hire without prejudice, employing women or blacks who do equally good work as white men do for lower pay, those companies will be able to charge less for their products, other things remaining equal.

If businesspeople by and large care more about making profits than about sex and race, there is unlikely to be much of a wage gap.

Customers will prefer the nonprejudiced companies’ lower-priced products; those companies will grow and take market share from the prejudiced companies with higher costs. Over time, customers’ color-blind, sex-blind choices of lower-priced products will tend to drive out of the market the companies whose prejudice increases their costs.

Profit versus Prejudice

Nonprejudiced companies’ growing demand for blacks and women will bid up their pay, too. The decreasing demand for white men, as prejudiced employers lose market share and cut workers, will lead white men to accept lower pay. The wage gap will close, or nearly so.

Of course, some prejudiced employers who run their companies well could stay in business on the strength of other capabilities, but their profits would be lower. That’s one of many great things about freedom, isn’t it? It makes the bigots pay.