Discrimination and Firm Performance

Image result for politically incorrect guide to capitalismIf an employer has an opening that pays $50,000 in salary, and the Christian applicant will bring in $51,000 in extra revenue to the firm while the Muslim applicant will bring in $55,000, then to discriminate against the creed of the latter will cost the employer $4,000 in potential profits…No government inspector or watchdog agency is required: by definition, discrimination is automatically “fined” in the free market. In addition, not only does the market catch discrimination whenever it occurs, but the amount of the “fine” is also exactly proportional to the severity of the discrimination…In short, employers are free to discriminate in the free market, but this discrimination certainly isn’t free.

– Robert Murphy, The Politically Incorrect Guide to Capitalism, pg. 31.

It turns out there is good evidence for this theory. As economist Alex Tabarrok reports at Marginal Revolution,

A nice test of the theory can be found in a paper just published in Sociological Science, Are Business Firms that Discriminate More Likely to Go Out of Business? The author, Devah Pager, is a pioneer in using field experiments to study discrimination. In 2004, she and co-authors, Bruce Western and Bart Bonikowski, ran an audit study on discrimination in New York using job applicants with similar resumes but different races and they found significant discrimination in callbacks. Now Pager has gone back to that data and asks what happened to those firms by 2010? She finds that 36% of the firms that discriminated failed but only 17% of the non-discriminatory firms failed.

The sample is small but the results are statistically significant and they continue to hold controlling for size, sales, and industry.


So don’t discriminate. Not only is it unethical, it’s bad for business. But if you do, I hope you go out of business.