The production effect of discrimination: A conceptual Investigation

JournaCof Economic

havior and 0rganization 8 (1987) 307-314. North-

MeMaster University, Hamilton, ht.,

Canada US4M4

ReceivedDecember1984, final version receivedApril 1986 any psychologists and sociologists argue that majoritiescan regain lost seKesteem by using minority groups as ‘negativereferencegroups’ or ‘scapegoats’in the workplace.Since workers’ self-esteem directly affects the productivity of the firm, racial prejudice can be viewed as productive.Using this argument as a point of departure,the present paper concludes that this production effect of prejudice can make integrated workforces profitable even under perfect competition.

136) argued that “it is not generally possible jobs bet.seen races without. affecting the of racial e ~li;rri~atir?rr ning and training. labor force adjustment e the inetrrciencyof process, at least in the short run, thereby imposing costs upon the employer and the society.’ ointed out an important effect of dkcrimination, ored in the economic literature. The present paper which has been w production effect, s an economic model incorporating another ty disciplines about based on widely accepted hypotheses from the causes of discrimination. witz (MM), and Levin (WE) suggest

.__

308

KS.

Chan, The production e$ect of discrimination

feeling of importance and hence helps to restore self-esteem has been demonstrated by White and Lippitt (1960, ch. 11) in a controlled experiment. Prejudice is also a method of defending self-image (status)P whereby a minority group becomes a ‘negative reference gro parison against which the majority group can be also reduces the cognitive uncertainties of the discriminatory agent providing a clear explanation of everyday experiences to the subject that may not even be true. The theory of cognitive dissonance maintains that as jong aa the cost of changing the belief is high, discriminatory agents tend to ignore contradictory evidence and stick to the belief in order to find cognitive harmony with themselves.” This is conceptually similar to the literature on signalling. Even if the signal (or racial prejudice) has nothing to do with the true case, phold itself ;rnd can satisfy the as long as it is self-confirming, it ca rice, in this sense, discriminatory cognition of the discriminatory agents. a se observations conflict with traditional economic theories. mode? of perfect competition, an integrated work force cannot be sustained when some workers or employers are prejudiced against others. Firms with integrated work forces would have to pay wages different from workers’ their chance of productivities, which means that their profits, and he owever, once the survival in a competitive market, would be lower. production effect of prejudice is considered, it is no longer true that integrated work forces yield less profit.

identify three types of ,workers: -workers, who are in the majority and’ discriminate; N-workers who are in the majority and do not discriminate; and -workers who a are being discriminated against. For the time being, ers and the employers are not prejudiced.

Adorn0et

al. (1050) reveals

that

authoritariarr

persons

WIW

firms which restricts status comparison to visible ~1041:associates within the workplace.3 The following formulation seems appropriate: ui = Ni(si9YJ9

i=n,b,d,

-(1)

4i=s(LYbiY*J)

(2) s,,=sb

=

s(y) = s,

(3)

where fi c 0, j” 1 2 0, f2c 0,fz2 z 0,f(0)> S.The numerica! Tubscripts denote partial derivatives, and the alphabetic subscripts worker types. Lb and Ld are the number of B- and D-workers in a given firm. y is the shift parameter that captures the state of nature (calamities, recession etc.). Eqs. (1) and (2) say that the restoration of self-esteem of D-workers depends on the relative economic status of the B-workers which can be indexed by the empioyment and earning ratios of the two groups (Lb/& and YbIyd).yb cannot exceed dya and Lb/& Cannot exceed the national pOpdatiOn rati Of the WO groups, 8. There must also by a minimum ratio, R >O, of B-workers present in the workplace; otherwis,p tne ‘negative reference group’ would disappear altogether. Thus, the S-functiorr must have a discontinuous drop at Lb/&= I?; below this ratio, the value of S drops to s’ because the negative reference group ceases to exist.4 Eq. (3) indicates that the self-esteem of the R-workers and IV-woCers is determined exogenously by the state of nature; As mentioned earlier, prejudice can have a disect i pact on production. A high level of frustration often damages morale of the rk force since workers resort to blame each other or themselves (the ego-defense mechanism), and tension and hostility towards each other increases (the frustration-aggressiondisplacement mechanism). Since the source of frustration often comes from the lass of self-esteem, discrimination can be employed to raise the self-cst of the discriminatory workers. This, in turn, can improve productivity. above relationship can be written as

ei= &),

i=d,b,n,

heoretical and empirical relationships between visibility and the formulation of” are summarizedin Allport( 4, pp. 224-229). ith a ak at ne can alternatively assume a

310

K.S. Ghan, The production eflect of discrimination

The production function Q can be written as a function of ‘effective’ labor, defined as the number of workers times labor efficiency of each worker Q'N

i=n,b,d.

A representative firm of the DN-type maximizes profit subject to

and eq. (2). In eqs. (6) and (7), 9f, and & are the market levels of utility received by B- and D-workers. Since .DB-firms require a LJL,, ratio less than the population average R, the B-type or N&type of firms must exist to absorb the residual B-workers. Let the wage, labor efficiency, employment and marginal product of the N-, B- or M-types of firm be p, Z, L and ‘4= j@J, respectively. The DB-firms have to compete with other firms for B-workers, hence they must pay y6=J. Since wages .must equal the value of marginal productivity for profit maximizatron, this must imply: y,,/ed= Q’= yJeb =J$? (product price is normalized to one). Two conclusions can be drawn from this: (1) Ud in DB-firms must be higher than U,. It is because the self-esteem of the D-workers is restored. This would, in turn, provide a higher income for the D-workers, drae to the improvement in their labor efficiency. Note that this improvement of the D-workers does not ‘cost’ D- or B-workers anything ceteris paribus. Therefore the resulting higher y,, should be regarded as a ‘beneficial externality’ to the D-workers. In other words, there is a certain productivity advantage to employ D-workers. Employers can raise their morale and productivity simply by employing less B-workers. And (2), the optimal level of E,IL, must be & because, at 13 the variable en reaches a maximum. ,

So far we have examine

e case where discrimination causes the

KS. Ghan, The production e$et of discrimination

a low-status member can aid the grou leader to escape the group members. The utility function of the -workers can be rewritten as Ub =

u&s,sd, yb),

311 hostility of the

(8)

where S is the self-esteem of B-workers; sa is a proxy for the scapegoating mechanism. hen it is at work, the utility of the B-worker falls (a&,/&&)). On the production side, the labor efficienciesecoand e&are affected by the scapegoating mechanism in two ways: (1) the self-esteem of D-workers rises, and (2) the productivity of B-workers improves, while that of B-workers deteriorates. The latter effects can be expressed ~3 ed= ed(sd),

e&M,

eb= ebtsdh

ei$O.

To have an integrated work-force in the DB firms (internal solution instead of corner solution), the total contribution of the scapegoating mechanin;m to profit must be positive.’ The positive contributions are (1) improvement in the productiviVj of D-workers, and (2) reduction in the firm’s wage payments to D-workers, since they already gain a higher utility from higher self-esteem. The negative contributions are (I) deciine in the productivity of the B-workers, and (2) increase in the firm’s wage payments to the B-workers who have to be compensated by a higher wage (yb>fi for the disutility of scapegoating. The value of marginal product of labor must equal the iveighted average wage payments of the D- and B-workers for profit maximization. The compensation of the B-workers, therefore, must come from the D-workers (y&b > p/6?implies y&d jj (hens, ud > ?J,). also means that ated work-force in th in the firm is very sma Therefore, an in -type is viable. fi ow suppose that the employers are discriminati

312

KS. Chan, The production eflect of discrimination

(7) have to be modified by adding another component, e&J, that captures the managerial efficiency of the employer. This eficiency is a function of managerial self-esteem, which in turn, is a function of the economic status of the B-workers. Readers can easily verify that all the main conclusions remain intact and that the discriminatory employers must enjoy higher profit rates resulting from greater managerial efficiency. This contradicts the conventional wisdom that discriminatory employers wouid earn less profit and would therefore disappear under competitive struggles. Note that in the conventional wisdom, discrimination should disappear under perfect competition except if discriminatory practices are enforced by social customs. Akerlof (1980) argues that a discriminatory-social-custom equilibrium is maintained because agents lose sufficient reputation from breaking the custom.

Our model offers two testable predictions regarding actual cases of discrimination, such as discrimination in the U.S. by whites against blacks. (I) Discriminatory white workers should earn more than nondiscriminatory white workers. Hence, as the share of discriminators among white workers increases, the variance of income of white workers should increase while the difference between the average income of blacks and whites should widen. (2) As economic opportunities diminish (y falls) in the recession phase of the business cycle, self-esteem of the workers must be low. Therefore, racial discrimination should be more severe. This prediction stands in contrast with Becker’s (1971) ‘demand side’ approach which seems to predict that in the contraction phase of the buainess cycle, where the rate of profit is generally lower than the ‘normal’ rate of profit, racial discrimination will be less severe, because discriminatory employers cannot afford to hire less productive white workers and ‘consume’ discrimination. As for the case where discriminatory practices are sustained through social customs [Akerlof (1980)], it is equally true that the erosion of these customs is more severe during recessions. This is because discriminatory employers who cannot afford to consume costly reputation at a lower income, will cheat on those customs at the margin. Chiswick (1973) found the variance of white income (within the same skill category) to increase in the U.S. with the black/white ratio in the population. On the other hand, Reich (1981) found a positive relationship between the variance of white income (in the aggregate) and the (average) income gap between whites and blar;ks. Our first testable prediction is consistent with these ermpiricai findings. The observed countercyclical movements of w discrimination discussed with our found an

KS. Ghan, The production eflect of discrimination

313

inverse relationship between the frequency with which blacks in the South were lynched and the income from Southern cotton production. Brenner (1983), LaGiumina (19’73), and Rose (1958) found that the economic depressions brought forth widespread anti-Semitism and hostility against new immigrants. An opinion survey of the Ministry of Multiculturalism in Canada (1982) confirms that racial prejudice was on the rise during the recession of 1981-1982. 5. Recapitulation The present paper analyzes the production effect of rz&l discrimination, using some established theories in psychology and sociology. Contrary to conventional results in economics, it argues that discriminatory agents can gain, even under perfect competition. Discriminatory workers typically can earn a higher wage than nondiscriminatory workers and the discriminated minority workers. In contrast to accepted wisdom, an integrated workplace is also a definite possibility: this is because discriminated minority workers in the present model serve the role of complementary inputs to the whole production process. References Adorno, Theodor W., Else FrankeS-Brunwick, Daniel J. Levinson and R. Nevitt Sanford, 1950, The authoritarian personality (Harper and Row, New York). Akerlof, George A., 1980, A theory of social custom, of which unemployment may be one consequence, Quarterly Journal of Economics 92,749777. Akerlof, George A. and William T. Dickens, 1982, The economic consequences of cognitive dissonance, American Economic Review 72,307-319. Allport, Gordon W., 1954,The nature of prejudice (Addison-Wesley, Reading, MA). Arrow, Kenneth J., 1972, Models of job discrimination, in: Anthony H. Pascal, ed., Racial discrimination in economic life (Lexington Books, Lexington, MA). Ashenfelter, Qrley, 1974, Discrimination and trade unions, in: Qrley Ashenfelter and Albert Rees, eds., Discrimination in labor markets (Princeton University Press, Princeton, NJ). Bales, Robert F., 1953, The equilibrium problem in small groups, in: Tallcott Parsons, Robert F. Bales and Edward A. Shils, eds., Working papers in the theory of action (Free Press, New York) 111-161. Becker, Gary, 1971, The economics of discrimination, 2nd ed. (University of Chicago Press, Chicago, IL). Bettelheim, Bruno and Morris Janowitz, 1964, Social change and prejudice (Free Press, New York). Brenner, Reuvea, 1983, History - The human gamble (University of Chicago Press, Chicago, IL). : An alternative to role differentiation, Sociometry, 159-168. Burke, Peter J., 1969,Scape discrimination in the labor market: A test of alternative Chiswick, Barry R., 1973, hypothesis, Journal of Political Economy g&133&-i353. Doeringer, Peter P, and Michael J. Piore, 1971, Internal labor market and manpower analysis (Heath Lexington Books, Lexington, MA). Gallagher, James E., 1972, Scapegoating in a small group (unpublished Ph.D. thesis, Indiana University, Bloomington, IN). rtession: Correlation of Hovland, Carl 11.and Robert R. Sears, 1940, Minor studies of with economic indices, Jour

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KS. Chan, The production eflect of discrimination

LaGiumina, Salvatore J., 1973,Wop (Straight Arrow, San Francisco, CA). Levin, Jack, 1975,The function of prejudice (Harper and Row, New York). Ministry of State, 1982, Multiculturalism, News release (on Gallup Omnibus Study on Relations conducted in 1981). 981, Racial inequality (Princeton University Press, Princeton, NJ). 1958,The roots of prejudice (WNESCB, New York). 1973, Market signaliug: Information transfer in hiring and related processes versity Press, Cambridge, MA). Thurow, Lester C., 1968, The economics of poverty and discrimination, (Brookings Institution, Washington, DC). White, Ralph K. and Ronald Lippitt, 1960, Autocracy and democracy: An experimental inquiry (Harper and Row, New York).