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Do markets solve the problem of discrimination?

Do markets solve the problem of discrimination?

The Prime Minister recently announced that the civil service will now introduce name-blind recruitment.  When people apply for public sector jobs, their name will not appear on the documents sent to the appointment panel.  Major companies such as HSBC, KPMG, the BBC and the NHS are following suit.  Economists have produced a substantial body of evidence which shows that some employers discriminate on the basis of the names of the applicants.

The classic paper was written as long ago as 2003 by two academics at the National Bureau of Economic Research.  The title is “Are Emily and Greg more employable than Lakisha and Jamal? A field experiment on labor market discrimination”.  The article does what it says on the tin. The answer to the question is ‘yes’.  People with names which sound white have a better chance of getting a job than those with names which are obviously black or Muslim. The results have since been replicated in numerous studies.

Perhaps David Cameron’s measures do not go far enough.  The ethnic origin of an applicant will, after all, be immediately apparent at the interview.  The job seekers should really enter the building covered by a security blanket, sit behind screens, and have their voices distorted by computer so they all sound like Stephen Hawking.

More seriously, the question of discrimination was discussed at length by Milton Friedman in his great book ‘Capitalism and Freedom’.  He pointed out that capitalism was by far the most successful form of social and economic organisation for reducing discrimination.  We can readily contrast the situation in, say, the UK or Germany with that of the treatment of so-called ‘enemies of the people’ and their families under socialism in the former Soviet Union and China, and the widespread gender, sexual and religious intolerance found in many Muslim countries.

Friedman’s argument was essentially that a market economy separates economic efficiency from irrelevant characteristics of the product or service being offered.  So when you buy a shirt, for example, you are not interested in the colour or creed of the person who made it, just in whether it is a nice shirt at the right price.

So far, so good.  But Friedman went on to much weaker ground by arguing that the very concept of discrimination did not make sense in a market economy.  In particular, employers who discriminated would be making less efficient choices and so would eventually be forced out of business by non-discriminators.

This makes logical sense.  But there is the question of the additional costs a company might incur in conducting a more extensive search process.  These have to be balanced against the potential loss of efficiency, which might be quite small.  A more fundamental point is that markets for goods and services do not usually expose inefficiencies swiftly.  Substantial differences in productivity between firms in the same industry can persist for years.

Markets are indeed much more colour, creed and gender blind than any other form of economic structure.  But they are not completely perfect, and David Cameron’s initiative is to be welcomed.

Paul Ormerod 

As published in City AM on Wednesday 4th November 2015

Image: London by Olivier Bacquet licensed under CC BY 2.0

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