The Economics of Discrimination
WARREN L. COATS, JR.
ECONOMIC DISCRIMINATION, to distinguish
it from other types, generally refers to dis-
crimination in the market place and in
particular in labor markets. Racial and
sexual discrimination in labor markets can
lower wages or raise unemployment or
both. In his important seminal work on the
subject, Gary Becker treated discrimina-
tion as follows:
If an individual has a taste for dis-
crimination, he must act as if he were
willing to pay something, either directly
or in the form of reduced income, to be
associated with some persons instead of
others. When actual discrimination oc-
curs, he must, in fact, either pay or for-
feit income for this privilege.
This article examines some of the wage and
employment implications of economic dis-
crimination by discussing the extent to
which discrimination has affected Negro
and female employment and wages, by dis-
cussing the role of free market capitalism
in discrimination, and by discussing the
major stumbling blocks to the full economic
participation of blacks and women in
American society. Although most refer-
ences are to blacks and women the analysis
is meant to apply to any groups experienc-
ing discrimination.
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I
IN THE 1960 censuses, the latest for which
these figures are available, average hourly
earnings of nonagricultural employed per-
sons show that male wages averaged 65 per-
cent higher than female wages (or $2.79
to $1.70) while white wages averaged 60
percent above those of nonwhites (or $2.58
to $1.61).*
Interesting regional differences emerge
from these figures, contrasting the South
with the rest of the country. The figures
show that average hourly earnings in the
South were 25 percent lower than else-
where. More to the point, the average hour-
ly earnings of nonwhites were about 60 per-
cent greater elsewhere than in the South.a
These figures suggest a substantial amount
of the discrimination against nonwhites and
females generally, with a more serious de-
gree of racial discrimination in the South
than that exhibited in the rest of the coun-
try.
Although these results accurately reflect
actual wage differentials, the figures great-
ly overstate the degree of discrimination.
To prefer a white worker who is more pro-
ductive over a nonwhite one who is less
productive is no more to discriminate in
our sense than to prefer a white worker
Winter 1974
 who is more productive to one who is less
productive. Discrimination exists when be-
tween two workers of equal productivity
one is systematically preferred by some be-
cause of race or some other characteristic
not directly related to the worker's produc-
tive contributions. The preference for a
pretty secretary over a homely one, other
things equal, is an example of such discrim-
ination.
If blacks predominantly hold lower pay.
ing jobs because they possess fewer skills,
their average earnings would be lower than
that of whites even in the absence of dis-
crimination. Discrimination exists when
someone is paid less for doing the same job
as someone else. The relative earnings f i g
ures reported above can be adjusted or
standardized to remove the effect of differ-
ences other than race in average earnings.
Victor Fuchs, from whose study of census
data the earlier figures were taken, stand-
ardizes with respect to age, sex, education
and city size. This means that earnings for
whites versus nonwhites are compared for
groups of the same age, sex, education and
city size. Such standardization reduces the
25 percent average hourly earnings differ-
ential between the South and non-South by
two-thirds but only reduces the comparable
60 percent differential between Southern
and non-Southern nonwhites by one-half.'
Similar results are achieved with the total
U.S. average hourly earnings for males ver-
sus females and for whites versus non-
whites. In the South the average hourly
earnings of whites were 78 percent greater
than for nonwhites and elsewhere were 32
percent greater. After standardization for
differences in skill and city size the white-
nonwhite earnings differential in the South
was cut from 78 percent to 10 percent and
was actually reversed in the rest of the
country. The difference between male and
female average hourly earnings was also
eliminated in all region^.^
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Harry Gilman conducted a similar inves-
tigation of white and nonwhite unemploy
ment rates.6 He found that the average rate
of nonwhite unemployment from 1953 to
1961 was double the average rate for whites
(9.8 percent for nonwhites versus 4.8 per-
cent for whites). However, if nonwhites are
disproportionately represented in jobs or
industries with above average unemploy-
ment rates even for whites, to that extent
nonwhite unemployment rates would be
higher than for whites, even if there were
no discrimination. Gilman finds that by
standardizing for these industrial and edu-
cational differences roughly half of the non-
white-white unemployment difference is
eliminated.6 He also found (a rather sur-
prising result) that the unemployment dif-
ferential was substantially less in the South
than in the non-South. That is, nonwhite un-
employment rates were greater than white
unemployment rates by a substantially
smaller margin in the South.
Although there is considerable evidence
that blacks are more discriminated against
in the South than elsewhere' as seen in the
standardized figures showing lower relative
wages for nonwhites in the South, the un-
employment figures seem contradictory,
showing considerably lower unemployment
differentials in the South than elsewhere,
which is somewhat of a surprise. Hopefully
what follows will shed light on this para-
dox.
A proper evaluation of the significance
of the economic impact of discrimination
requires an understanding of the role of the
capitalist system in generating the wage
and employment differentials just dis-
cussed. Is capitalism somehow the cause of
market discrimination or is it simply the
conduit through which tastes for discrimi-
nation are transmitted and transformed in-
to observable consequences? If the latter,
how is this transformation influenced by
the capitalist system? Does it make the life
65
of discriminators and discriminated against
easier or more difficult? The answers to
such questions should importantly influence
our attitudes towards capitalism as a system
to which minorities can turn in their search
for economic progress.
Gary Becker has provided a framework
in which such questions can be answered.
A man who discriminates racially can ef-
fectuate his tastes (or prejudices if you pre-
fer) only by restricting his options. If he
prefers not to work with blacks, the number
of jobs open to him will be smaller than
otherwise. As put by Becker, he indulges
his tastes only at the expense of reduced in-
come to himself. Employers who prefer not
to hire blacks likewise thereby reduce the
supply of labor available to themselves
which will generally increase the average
cost of that labor. Indulging ones tastes
for racial discrimination incurs personal
costs just as indulging any other tastes in-
curs costs.
It does not follow, however, that all of
the costs of racial discrimination fall on the
discriminator. If large enough numbers de-
cide not to buy Frank Sinatras records, his
income will suffer. So also, if large enough
numbers decide that they prefer not to
work with blacks or other minority groups
or women, these groups incomes will suf-
fer.
Discrimination against blacks means that
the demand for their services will be lower
than otherwise. With an unchanged supply
of black workers the lower demand means
that blacks can only be fully employed at
lower wages than whites. Lower wages are,
in fact, the markets way of compensating
for and overcoming white resistance to
working with blacks. Racial discrimination
in a free enterprise economy will lead to
lower wages for nonwhites but will not gen-
erally affect their employment.
However, in competitive free markets
even discriminations dampening effect on
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nonwhite wages will tend to be small. Em-
ployers whose tastes for discrimination are
weaker than the community average or who
even prefer to hire blacks will enjoy a com-
petitive advantage. They will tend to hire
all blacks because they are relatively
cheaper and will find that they can more
successfully undercut their competitors
prices. This will expand their share of the
market relative to those who discriminate,
which also expands the demand for non-
white labor, thus reducing the tendency for
discrimination to depress nonwhite (or fe-
male) wages.
I1
So FAR I have discussed racial discrimina-
tion of the sort consisting of firmly held un-
shakable preferences of association. This
is the sort of behavior economists are in-
clined to call irrational, meaning simply
that such behavior cannot be explained by
profit-maximizing economic motivations,
but then that is true of all tastes. The point
is important, however, because it empha-
sizes that racial discrimination is not the
result of capitalism but rather of the tastes
of men. Furthermore the capitalist system
can be seen to minimize the economic con-
sequences of these unfortunate tastes. The
clear implication is that those discriminated
against have an interest in strengthening
the freedom of competitive markets.
There is another reason for lower Negro
and female wages for equally productive
workers which may be more important than
the ones discussed so far. Information is it-
self a scarce commodity; information is not
free. A woman or a Negro may be viewed
as a more risky prospect than a male cau-
casian. A wage differential would have to
emerge to compensate the employer for this
greater risk if women or blacks are to re-
ceive an equal chance at jobs.
More specifically, assume that of those
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workers possessing a particular skill, we
somehow know that female applicants are
on average just as productive in every rele-
vant sense as are male applicants. However,
assume also that the performance of any in-
dividual woman is less reliable in the sense
that the dispersion (variance) of female
performance around their average is wider
than for men. Some women will be far
more productive than the average while
others will be far below it due to, say, less
regular working habits (because of sickly
children or other domestic obligations, time
off for pregnancy, having to move away to
follow a husbands career etc.). Other
things equal an employer will then find a
female applicant a more risky proposition
and at the same wage (if the employer is
risk averse) will prefer a man. This will
tend to depress the wages of women relative
to men, even for the same work. Once
again, however, the wage differential for
women (or blacks) will compensate the em-
ployer for the extra risk, making women
f d y competitive with men.
In this case, however, the wage differen-
tial tends to be temporary. The lower wage
will enable a woman to get the job in the
first place and on-the-job experience will
provide the employer with the information
of whether this particular woman is above
or below the average. If she is equal to or
above the average the employer will then
be willing to pay her more to keep her in
his employ. Her pay will tend to rise.
In these cases the wage differential is
perfectly rational, profit-maximizing behav-
ior for the firm and serves the very useful
function of allowing the employer to ac-
quire the information needed to ultimately
increase the wage. The initial wage differ-
ential does not reflect any taste for dis-
crimination on the part of the firm. How-
ever, such differentials may reflect preju-
dice in the sense of initially faulty informa-
tion on the part of the firm about the pro-
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ductive potential of a given class of
workers; but once again the wage differen-
tial allows the on-the-job exposure which
will ultimately overcome and correct the
faulty information.
Clearly then Fair Employment Legisla-
tion and particularly equal pay for equal
work movements (by womens liberation
and civil rights groups) are very harmful
for minority and female employment and
economic advancement. Their chief effect
is to convert the impact of discrimination
and imperfect market information from
creating wage differentials to creating un-
employment differentials for these groups.
As observed by Gilman:
Given a preference for discrimination,
the greater the pressure in an occupation
or region for nonwhite-white wage
equality, the greater will be the gap be-
tween equilibrium and actual wages,
and the greater will be the reduction in
employment opportunities for nonwhites
relative to white w0rkers.O
It is not a very pleasant fact that blacks
can only be fully employed at lower relative
wages, but of course neither is the existence
of the discrimination which is responsible.
If I were a young black being asked to ac-
cept a lower wage for the same work I
would not expect myself to be very patient
with such a state of affairs. Yet I believe
that it is critically important, given the
existence of prejudice, to choose lower rela-
tive wages and fuller employment rather
than the reverse. Among the many impor-
tant virtues of holding a job is the pos-
sibility that on-the-job contact and exposure
will reduce racial prejudice-especially
where it is the result of faulty information.
According to Gilman :
there has been a secular increase in the
activities of organizations dedicated to
the elimination of discrimination. If
such activities do not parallel changes
67
 in tastes for discrimination, they will
tend to make market adjustments more
di6cult; they may thus limit rather
than increase the employment opportu-
nities of nonwhites. Increased effective-
ness or coverage of minimum wages or
unions would tend to have the same ef-
fect.1
Following Gilmans suggestion, minimum
wages and unions may be important in un-
derstanding the wage and employment fig-
ures cited earlier. Employers will not hire
workers whose wages exceed their produc-
tive contribution to the firm. Minimum
wage laws therefore prevent firms from
employing those low skilled persons whose
productive abilities are below the mini-
mum. As pointed out by George Stigler,
one of the principle effects of minimum
wages is to injure some of the lowest paid
workers by forcing them into even lower-
paid occupations exempt from the act, one
of which is unemployment.11 But as noted
before, since nonwhites and females are
over-represented among the least skilled
workers they bear a disproportionate share
of the harm from such laws. Specifically the
minimum wage tends to force Negro rela-
tive wages still lower for those who can find
employment uncovered by the law, while
increasing Negro unemployment by making
some unemployable.
In addition to the increasingly compre-
hensive federal minimum wage law, over
half of the individual states have broad-
ened the covered areas still further with
minimum wage laws of their own. Colin
and Rosemary Campbell, among others,
have conducted a careful study of the ef-
fects of these state laws on state unemploy-
ment rates. They found that from 1950 to
1965, the rate of unemployment in major
labor market areas with state minimum
wage laws was on the average about 0.6
percentage points above that in areas with-
out such laws.2 Specifically the average
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unemployment rate for states with such
laws was 5.2 percent while 4.6 percent for
those states without a minimum wage law.I8
Although a part of this unemployment dif-
ferential was explained by greater unioni-
zation in minimum wage states, not all of
the difference could be explained that way
and seemed instead to result from the law
itself .I4
Edward Banfield in his book, The Un-
heavenly City, suggests that several addi-
tional factors aggravate the tendency of
minimum wage laws to create unemploy-
ment rather than lower wages in uncovered
employment. First, affecting the demand
for labor, he cites the general tendency to
over-price labor even in areas not covered
by the law. This appears in the form of a
general social concensus about what the
lowest respectable wage ought to be, creat-
ing an informal minimum wage constraint.
Contributing to this problem is the pressure
on government agencies a t all levels to set
an example of enlightened wage policy,
that is, to pay labor more than it is
worth.15
Second, affecting the supply of labor,
Banfield cites the tendency of many lower
class workers with exaggerated expectations
to scoff at working for peanuts opting in-
stead for unemployment and social workers.
This problem is particularly prevalent
among teenaged males.B
Gary Beckers analysis of discrimination
in the market place also suggests that the
economic consequences of discrimination
are potentially worse in monopolized sec-
tors of the economy. The potentially is
added because this result is contingent on
monopolists having a taste for discrimina-
tion. Some labor unions are among the
most monopolized sectors of the economy,
although the general importance of unions
can be easily overstated. Those unions that
succeed in increasing wages for their mem-
bers do so by making the supply of that
Winter 1974
type of labor artificially scarce. The
workers thereby displaced swell the ranks
of nonunion labor driving those wages
down relative to union wages. More impor-
tantly, however, this means that unions by
their very nature must discriminate. The
union replaces the markets impartial d o -
cation of jobs and workers with its own se-
lection of which workers will get the artifi-
cially scarce jobs. Naturally this discrimi-
nation frequently takes a racial or sexual
form.
Among the other factors contributing to
the wage and employment differentials
cited, a relatively lower average wage level
for women is no doubt a result of excluding
women from many types of jobs thus swell-
ing their supply to the jobs they are allowed
to hold. This situation is aggravated by un-
ions. Happily some womens liberation or-
ganizations are asking for the repeal of re-
strictive labor practices laws (Le. fair la-
bor practices laws) which have arbitrarily
restricted the job opportunities of women,
such as the 40 hour week maximum prohi-
bition against night work, limits on weights
lifted etc. Practically everything the gov-
ernment has done to regulate behavior in
labor markets, such as occupational licen-
sure and the entire Fair Employment Prac-
tices Act, Civil Rights Acts etc. has in fact
restricted competition in such markets and
made nonwhites and women economically
worse off. The womens Equal Rights
Amendment is a welcomed step in the other
directiop.
I11
RETURNINGto the earlier paradox of
Southern wage and employment differen-
tials, we can now see why nonwhite relative
wages are lower in the South, where dis-
crimination is greater, while nonwhite to
white unemployment differentials are
greater in the non-South. The reason is that
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the employment compensating effects of
lower wages for nonwhites is allowed to
work more freely in the South than else-
where. Union strength is weaker in the
South, few Southern states have state mini-
mum wage laws and a large fraction of pro-
duction in the South is carried on in firms
uncovered by the Federal minimum wage
law.
Most important, however, may be the
fact that social pressures for equal pay
for equal work, in the context of the
white-nonwhite comparison, are less
great in the South than in the non-
South. All of the above-named factors
suggest a greater ability to discriminate
on the wage side in the South than else-
where. ... The lower wage ratios
(NW/W) in the South are probably
due to a regional difference in the pres-
sure toward nonwhite-white wage equal-
ity. Thus, smaller unemployment-rate
differentials in the South than non-
South are consistent with the popular
concept of greater discrimination in the
South if the differences between equi-
librium and actual wage ratios (NW/
W) are smaller there than in the non-
So~th?~
There would be great benefit in remov-
ing the governments perverse influence
and increasing the employment of those
with very low skills even if at very low
wages. According to Banfield :
The main beneficiaries, however, would
be the workers themselves. A job can be
much more than a source of income. It
can be an opportunity to learn things,
to test ones ability to stand up to
strains, to get out of the house and away
from home, and to feel that one is a
part, however small, of a worthwhile
undertaking. Especially for a male, the
job (along with other things) helps es-
tablish ones identity and supports ones
self-respect?8
If for some workers such wages yield in-
69
adequate incomes, that problem should be
handled in a way that does not interfere
with the wage and price structure, for ex-
ample with a negative income tax.
Economic discrimination against blacks
undeniably influences their incomes and
economic status, but due to our competitive
enterprise system the market consequences
of that discrimination are modest. Black in-
comes tend to be lower on average because
blacks have less on average to offer an em-
ployer. To improve economically blacks
must increase their skills and improve their
work habits. Governments many attempts
to help with training programs, wars on
poverty, and protective laws have more of-
ten failed or hindered. Governments great-
est contribution would be to remove itself
The Economics of Discrimination, University
of Chicago Press, 1957, p. 6.
Victor Fuchs, Differentials in Hourly Earn-
ings by Region and City Size, 1959, N.B.E.R.
Occasional Paper 101, 1967, p. 3.
Ibid., p. 7.
Ibid., p. 20.
Sbid., p. 20, Table 11.
Harry Gilman, Economic Discrimination and
Unemployment,American Economic Review, Dec.
1965, pp. 1077-1096.
Ibid., p. 1085.
Becker, The Economics of Discrimination, Chi-
cago, 1957, Chapters 7-8.
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from the picture. Although other types of
racial discrimination surely share much of
the blame for the lower level of Negro skills
and although an increasing social con-
sciousness of the immorality of racial dis-
crimination must be encouraged and al-
lowed to erode the remaining areas of dis-
crimination, I do not believe that the
Negros greatest hope lies in any of these.
In my judgment, economic equality for our
black brothers will come only when they
themselves acquire those middle class
American values of self-determination and
self-reliance, stop pointing at and to others
as their oppressors and/or saviors and step
out on their own to learn and work and
save, and when the government steps out
of the way and lets them do it.
uGilman, op. cit., p. 1091.
lbid., p. 1093.
llQuoted in Edward Banfields The Unheavenly
City, p. 96.
C. D. and R. G. Campbell, State Minimum
Wage Laws as a Cause of Unemployment, South.
ern Economic Journal, April, 1969, pp. 331332.
lbid., p. 326.
YW., p. 331.
-Banfield, p. 99.
Edwin Harwood, Youth Unemployment-A
Tale of Two Ghettos, The Public Interest, Fall,
1969, p. 87.
Gilman, op. cit., p. 1092 and 1093.
-Banfield, op. cit., p. 103.
Winter 1974