Markets still don't like racism

As I've written before, you'd expect competitive markets to drive out racism. If firms have "tastes" about which workers they will hire, or they value labour from some groups at less (or more) than its true product, they will be driven out of business. This is the theory—but it's also the evidence. And yet more evidence has added to that we already had.

The first paper, an NBER working paper by Nathaniel Hilger, asks why Asians have high income despite a history of intense racism directed towards them. He finds:

Asian Americans are the only non-white US racial group to experience long-term, institutional discrimination yet today exhibit high income. I reexamine this puzzle. I focus on California, where most Asians settled historically. Asians achieved extraordinary upward mobility relative to both blacks and whites for every cohort born in California since 1920. This mobility stemmed primarily from gains in earnings conditional on education, rather than unusual educational attainment. Historical test score data suggest that low initial earnings for Asians—unlike blacks—primarily reflected prejudice rather than skills. Asian history is consistent with the view that racial earnings gaps driven by contemporary prejudice do not persist in sufficiently competitive labor markets.

Asian Americans used to be paid less than their test scores would suggest, but this evened out over time as competitive markets drove out prejudice. Another paper, by Devah Pager, looks at the same question by focusing directly on bigotry and firm failure:

Economic theory has long maintained that employers pay a price for engaging in racial discrimination. According to Gary Becker’s seminal work on this topic and the rich literature that followed, racial preferences unrelated to productivity are costly and, in a competitive market, should drive discriminatory employers out of business. Though a dominant theoretical proposition in the field of economics, this argument has never before been subjected to direct empirical scrutiny. This research pairs an experimental audit study of racial discrimination in employment with an employer database capturing information on establishment survival, examining the relationship between observed discrimination and firm longevity. Results suggest that employers who engage in hiring discrimination are less likely to remain in business six years later.

Turns out markets are fairer than you might think!