Are Firms That Discriminate More Likely to Go Out of Business?

Devah Pager

doi:10.15195/v3.a36

Abstract

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.

Highlights

Economic theory has long maintained that employers pay a price for engaging in racial discrimination
This study offers a unique window into the relationship between discrimination and firm survival, pairing an experimental audit study of racial discrimination in employment with an employer database capturing information on establishment survival
Because the initial audit study indicated no significant difference between white and Latino applicants—but significant differences between both groups compared to blacks—our key measure of discrimination focuses on this black–nonblack contrast

Summary

Introduction

Economic theory has long maintained that employers pay a price for engaging in racial discrimination. Results suggest that employers who engage in hiring discrimination are less likely to remain in business six years later. By contrast, we exploit direct measures of hiring discrimination in our analysis of firm survival, representing a significant advance over existing research.

Results

Conclusion