6 The Economics of Discrimination
Caroline Krafft
What is discrimination?
Discrimination is the unjust or unequal treatment of an individual or group based on a specific characteristic, such as their race, age, or gender identity. In the United States, a number of laws forbid discrimination on the basis of age, disability, national origin, pregnancy, race/color, religion, or sex.[1] Globally, the United Nations (UN) has passed conventions on eliminating all forms of racial discrimination and discrimination against women.[2]
Although the definition seems straightforward, identifying when an individual or entity is discriminating in practice is quite challenging. This difficulty is because disparities (differences in outcomes) may be the result of current or past discrimination. The fact that women earn 84 cents for every dollar men earn[3] may reflect employers’ discrimination in setting wages, but may also reflect the fact that women choose different majors, or are more likely to take time out of the workforce to care for children. Of course, that women choose different majors may also reflect discrimination in human capital accumulation.
Likewise, the fact that Black men have a one in three lifetime likelihood of imprisonment, while white men have a one in seventeen chance[4] may be due to a variety of factors, such as historical housing discrimination and poor local labor market opportunities, as well as discrimination in the criminal justice system.[5] Identifying the source of disparities—for instance in the case of imprisonment, whether disparities are due to unequal and discriminatory outcomes around education, employment, or poverty as factors in committing crimes, or in unequal chances of arrests, convictions, or sentences—is critical to addressing and reducing these disparities.
Causes of discrimination
Discriminatory “tastes”
Economists have two main theories concerning the causes of discrimination. The first theory is that individuals have “tastes” or preferences for discrimination.[6] This taste-driven discrimination theory suggests that factors such as social and physical distance and relative socioeconomic status contribute to tastes for discrimination. Contact with a minority group and the size of a “minority” group matter as well (the minority in this case could actually be a majority that has historically been disempowered, e.g., women).[7] Tastes for discrimination mean that individuals are effectively willing to forfeit income to avoid certain transactions or interactions. For instance, landlords may prefer to rent only to individuals of a certain race or religion, even though they could charge higher rents if they opened up to a broader market.
Statistical discrimination
The second theory is statistical discrimination, which assumes discrimination is essentially an information problem.[8] For instance, in the labor market, employers may have imperfect information about the productivity of individual workers. Consider the case