Blind Profits

Do markets undermine prejudice?

In his 1957 book The Economics of Discrimination, economist Gary Becker argued that free markets would reduce and eventually eliminate discrimination in the workplace. Firms must pay for their "taste for discrimination," the logic goes, by hiring more expensive white men over equally qualified women or minorities. The more competitive a market is, the more damage discrimination will do to the firm. The business that refuses to change its practices loses to competitors not willing to sacrifice their profits in the name of racial or gender solidarity.

Over the past two decades, the gap between men's and women's pay has indeed narrowed. While women in the labor force generally have more education and experience than before, that doesn't entirely account for the recent gains.

In "Importing Equality?" (available at www.ny.frb.org/rmaghome/staff_rp/sr74.html), a recent study for the Federal Reserve Bank of New York, economists Sandra E. Black and Elizabeth Brainerd tested Becker's theory in certain manufacturing sectors. In concentrated sectors, where a few large firms dominate the industry, women's pay has trailed that of men to a greater extent than in more competitive sectors of the economy, but as concentrated sectors were increasingly exposed to international trade (which acted as competition), the gender wage gap narrowed. They concluded that it was "increased globalization in the 1980s" that "forced employers to reduce costly discrimination against women and thus accounted for part of the `unexplained' improvement in the gender pay gap."

While not exhaustive–manufacturing accounts for only about 15 percent of the economy–the study examined wages in both concentrated and competitive sectors. As Becker predicted, wage parity was closer in the more competitive markets.