Investigating the link between competition and discrimination

Sandra E. Black is an economist in the Research and Market Analysis Group, Federal Reserve Bank of New York. The opinions expressed here are the author’s and do not necessarily reflect opinions of the Federal Reserve Bank of New York or the Federal Reserve System. How competition affects the ability of companies to favor particular groups is a longstanding issue in the economics literature. In a seminal work published in 1957, economist Gary Becker argued that, over the long run, product market competition would drive discrimination out of the marketplace. Becker’s model as applied to the labor market can be described in relatively general terms: employers with a “taste for discrimination” will forego profits in order to indulge their desire to employ a specific type of worker. For example, employers with a taste for discrimination against women will employ less than the profit-maximizing number of women. Instead, they will hire a greater number of equally skilled but more highly paid men. Thus, in a perfectly competitive market, nondiscriminating employers can gain a cost advantage and ultimately drive discriminating employers out of business. Becker’s model suggests that the wage gap between men and women will therefore decline as discriminators are forced to leave the market altogether. Becker goes on to say that where markets are not perfectly competitive—that is, markets in which companies face little product market competition—discriminating employers can exist in the market indefinitely. Given the lack of transparency surrounding the practice of discrimination, it has been difficult to test Becker's theory. By identifying shocks to competition in a market with limited product market competition, however, it is possible to explore some of the dynamic implications of his model. Specifically, this article looks at how intensified trade in manufacturing and deregulation in the banking industry may have reduced firms’ ability to discriminate against women.