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Business News/ Mint-lounge / Mint-on-sunday/  The economics of discrimination and a tailor-made Hollywood script
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The economics of discrimination and a tailor-made Hollywood script

There are economic reasons why discrimination may persist even in a competitive economy

Photo: iStockPremium
Photo: iStock

“We regret to inform you that we hire only non-Muslim candidates," a human resources executive at a Mumbai-based firm wrote last week to a stunned job applicant, Zeeshan Ali Khan. Khan, who recently completed a course in business administration, had applied for a managerial position at diamond export firm Hari Krishna Exports Pvt. Ltd, only to be turned down on religious grounds.

An irate Khan’s post on the issue went viral on social networking websites, leading to widespread condemnation of the incident. The company, on its part, has claimed this was the mistake of just one new employee, and that it did not discriminate on the grounds of religion. The controversy prompted the Maharashtra government to order a probe into the matter.

The incident raises disturbing questions about hiring practices in the modern workplace. Was this an isolated incident or are hiring practices often discriminatory? If such discriminatory practices are widespread, what leads to such practices?

Our ability to answer such questions is constrained by the lack of adequate data on the Indian labour market. One of the few empirical research papers that examined this issue made use of an interesting social experiment to gauge the extent of discrimination in the corporate job market.

The economist and Ambedkarite scholar Sukhdeo Thorat, and his co-author, US-based sociologist Paul Attewell, posted dummy résumés of candidates in response to advertisements for entry-level jobs in leading newspapers in the country. For each vacancy, three résumés were sent. All the résumés were identical in almost all respects (with the same educational qualifications and suitable degrees from reputed universities) but they differed when it came to the caste and religion of the candidate. While caste and creed were not mentioned explicitly in the résumé, in each trio of résumés, one had a distinctly upper-caste surname, one a Dalit surname and one a Muslim surname.

Thorat and Attewell then analysed the response patterns from firms. Their findings, published in a 2007 Economic and Political Weekly research paper, were striking. The ones with Muslim surnames had the lowest chance of being selected for an interview, followed by those with Dalit surnames. Candidates with upper-caste surnames faced significantly brighter prospects.

Discrimination in the workplace is neither new nor a uniquely Indian phenomenon. Nor is it restricted merely to developing countries. Research by Harvard University economist Roland Fryer shows at least one-third of the black-white wage gap arises because of discrimination. Fryer won the prestigious Clarke Medal this year for his incisive research on discrimination and educational disparities between blacks and whites in the US (more on him later). The Clarke Medal is the most coveted prize for under-40 economists.

Economic discrimination is somewhat of an oxymoron because the textbook economic model suggests discriminating firms will be inefficient and competed out of markets. As such, discrimination was largely seen as an uneconomic practice (for similar reasons, even conservative economists have always tended to be social liberals).

One of the earliest economists to write on discrimination was Nobel Prize winner Gary Becker. Becker, who made pioneering efforts at extending the frontiers of economics, wrote his 1955 doctoral thesis on the economics of racial discrimination. While conventional economic theory held that the sole objective of firms was profit maximization, Becker postulated that firm owners or managers may deviate from that objective if they had a taste for discrimination (or a prejudice against hiring workers from certain communities). If such tastes are widespread, competition between firms may not be able to eliminate discriminatory hiring practices. Thus, minority workers may have to accept lower wages for the same job, or be more productive than others to compensate employers.

Another Nobel laureate, Kenneth Arrow, put forward an alternative explanation of discrimination. Arrow argued that the roots of discrimination may lie not in tastes but in information asymmetry. Since firms often do not have adequate information about how a potential recruit will perform, they may use observable characteristics such as race or gender to gauge expected productivity. If, for historical reasons, a certain minority group or gender has lower skill attainments and hence lower productivity, it is likely employers will typecast such candidates as low-performing recruits.

In either case, minority groups will have lower employment and lower wage rates although, in Arrow’s example, the firm is responding to incentives to maximize productivity and profits.

While extending Arrow’s work to explain caste-based discrimination, economist George Akerlof indicated another reason why such disparities persist—the power of social networks. In a widely cited 1976 research paper, Akerlof reasoned that in segregated or divided societies, economic transactions (such as hiring or signing a contract) with members of a minority group may invite a boycott of sorts by the majority group. In such a society, it pays to adhere to existing norms and customs. Even though a member of the majority group may benefit economically in the short run by breaking such taboos, long-run economic considerations may ensure the durability of such social customs.

The pioneering work by Becker, Arrow and Akerlof was highly influential, and convinced economists and other social scientists of the need to examine discrimination even in modern democratic societies.

Empirical evidence from two of India’s finest economists writing on caste—Thorat and Ashwini Deshpande—shows that caste disparities continue to be widespread in the Indian economy despite constitutional guarantees for lower-caste groups.

A 2013 research paper by Deshpande based on data on medium and small enterprises showed that the share of scheduled castes (SCs) and scheduled tribes (STs) in ownership of such businesses was considerably lower than their population shares across Indian states (other than those in the north-eastern part of the country). Deshpande pointed out that SC/ST enterprises tend to be smaller, more rural than urban, and have a greater share of owner-operated (single employee) units.

Enterprises owned or operated by middle or upper castes typically employed people from the same caste groups, and thus Dalit entrepreneurship could be an important tool to raise Dalit employment, Deshpande wrote.

But she pointed out that most Dalit businesses are at the lowest end of the business chain, and have low productivity levels. These businesses are largely driven by the survival instincts of Dalit families who have no other avenue for employment, rather than entrepreneurial impulses, Deshpande argued.

“The evidence suggests that entrepreneurship as a significant vehicle for social mobility for Dalits is yet to become a reality for India... Our analysis of changes in the private manufacturing sector in the era of market-led and globalized development finds that caste continues to shape virtually all aspects of production, and capital, so far, is not countering the deep-rooted inequities produced by caste," wrote Deshpande.

Deshpande offers three key arguments for affirmative action to correct historical inequities in her writings. First, labour markets are not perfectly competitive and are in fact discriminatory. Second, despite its flaws, the Indian policy of reservations for lower castes is better than doing nothing at all to correct historical inequities. Third, there is little evidence to support the claim that affirmative action reduces efficiency and productivity.

Deshpande’s research shows that reservations for SCs and STs in the Indian Railways have not impacted productivity adversely. Reservations for senior railway posts may have increased productivity, supporting the thesis that greater diversity boosts productivity, according to Deshpande.

The debate on affirmative action is as intense in the US as it is in India. And one of the most clear-headed research papers on affirmative action is by Fryer, the Clarke Medal winner, and his colleague Glenn Loury. Fryer and Loury dispel some of the most common myths about affirmative action in this 2005 National Bureau of Economic Research working paper.

Fryer and Loury challenged the argument that having affirmative-action goals is somehow better than quotas as there is not much difference in practice. If a college has a goal of recruiting a certain proportion of minority students and the administrator responsible for meeting the goal is unable to meet it and is fired, that goal is effectively a quota. If a college has a quota but makes no serious effort at filling it, it is really a flexible goal for the college.

They also argued that colour-blind affirmative-action policies are usually less efficient than colour-sighted ones. Colour-blind policies may involve letting applicants skip sending in standardized test scores, or focusing more on extra-curricular activities. But such policies may force colleges to lower their academic standards more than necessary just so that they look race-neutral.

While Fryer and Loury do not dismiss the fear that reservations may end up harming the cause of minority groups by reinforcing the stereotype of them being less meritocratic than others, they point out that the majority fear of reservations is often misplaced. They use an interesting analogy to explain why the perceived costs of race-targeted policies might exceed the actual cost.

“Suppose a single unused parking space in front of a popular restaurant is reserved for disabled drivers," wrote Fryer and Loury. “Non-disabled drivers who observe the unused space while trying to park might resent this policy, imagining that it prolongs their parking search. But when parking is tight, it is likely that, even if the disabled space were not reserved, it would already have been taken by the time a given driver comes along. When many non-disabled drivers overestimate their chance of getting the unreserved space, the perceived cost of a policy favouring the disabled could be large, despite the fact that the policy has a negligible effect on the mean duration of a parking search. So too, it would seem, with racial affirmative action in higher education."

Though Fryer acknowledges the problem of discrimination in the labour market, he uses data to show that much of the black-white wage gap reflects a difference in skill levels. In his writings, Fryer points out that it is not government policies alone that are to be blamed. An oppositional culture among blacks that sees high academic achievement as a white pursuit also discourages black children from putting in additional effort in their studies.

Using data on friendship networks, Fryer shows that while class popularity increases with grades for white students, for Hispanics and blacks, popularity declines sharply as they breach a threshold grade level. There is a sort of implicit pressure to conform to (low-level) group averages. Such resistance to acting white has severe repercussions on wages and life prospects in later life, Fryer shows.

Fryer’s research has contributed deeply to our understanding of social inequality and discrimination. Fryer’s analysis is rigorous, and his views are clear-headed, but they can also be deemed politically incorrect. But being a black economist, Fryer probably enjoys greater latitude to say things others hesitate to say, pointed out Stephen J. Dubner (of Freakonomics fame) in a riveting 2005 New York Times profile of the young economist.

Growing up in a broken family in a poor black neighbourhood, Fryer narrowly escaped getting into jail. “I always think I’m supposed to be dead, not alive, much less at Harvard," Fryer told Dubner. Rather than wallow in self-pity, Fryer has turned the disadvantage of a harrowing childhood into an advantage while studying questions of race through an economic prism.

“My father screwed me over so bad that he made my emotions like a lever," Fryer told Dubner. “I learned how to turn them off and on. And that’s what’s needed when you study race."

The dismal science of economics may have suited Fryer’s temperament and his desire for dispassionate analysis, but Fryer’s life lends itself to dramatization quite easily. From a drug gang to Harvard and onwards to win the Clarke Medal, Fryer’s journey offers the kinds of stuff Hollywood movies are made of.

Other than the late John Nash, one can think of no other economist who has had such an extraordinary journey.

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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Updated: 30 May 2015, 11:32 PM IST
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