Wednesday, 30 October 2019

How competition deals to wage discrimination

"Increased competition in the business marketplace", I wrote in a post last year ('How competition benefits women's pay'), "is one of those ideas that neatly hit both equity and efficiency objectives. The equity outcome is obvious: the efficiency payback is that output rises as the previously underutilised female workforce gets to pull its proper weight. And what's true of women is very likely also true of other groups that would otherwise face relatively uphill going in the labour market".

And as it happens, along comes a bit of evidence that my supposition about "other groups" is indeed correct, and it comes from four researchers in Belgium. Their 'Wage Discrimination Based on the Country of Birth: Do Tenure and Product Market Competition Matter?' examined wage discrimination in Belgium against immigrants, and was able to use a bunch of linked employer-employee datasets to uncover what was going on. Among other things they looked at whether the degree of competition in the markets Belgian businesses operate in made any difference to the degree of wage discrimination immigrants face.

Overall, after controlling for a whole battery of firm and employee characteristics, immigrants in Belgium earn 6.1% less than EU-15 natives (the EU-15 is the old core EU before Austria, Finland, Sweden and, later, a swathe of largely eastern European countries joined). Asians (which in this context means, I think, the likes of Indians and Pakistanis) fare worst, with wages 17.5% lower than natives, and east Europeans do badly, too, with wages 12.0% lower.

But what happens if you look at the degree of competition the employing businesses face? In theory, or at least in the well-known theory associated with Gary Becker, discriminating employers don't get to indulge their prejudices in strongly competitive markets. If they try, they'll get eaten by the more efficient companies who hire solely on productivity.

The researchers tried four different measures of competition, and compared wage differentials in the most competitive top-third on each measure versus the wage differentials in the medium to low competition businesses. The result?
the magnitude of wage discrimination against migrant workers decreases and becomes generally non-significant when firms operate in highly competitive product market environments. These findings are robust to the use of four different product market competition indicators and are in line with Becker’s theory, according to which discrimination is present only in firms operating in lower product market competition environments (p20)
Apparently, there isn't a lot of other research knocking around about the beneficial impact of strong product market competition on employers' ability to wage discriminate, but what there is points the same way as this Belgian study. As the researchers put it
Peoples and Saunders (1993) and Peoples and Talley (2001) have studied the impact of the deregulation of the trucking market and of the public-transit bus sector privatization, respectively, on wage discrimination against black truck/bus drivers in the US. They concluded that the increased competition resulting from market deregulation and privatization significantly lowered the wage gap between white and black truck/bus drivers. More recently, Ohlert et al. (2016) studied wage discrimination against migrants in Germany in relation to the level of competition in the product market ... the authors found that increased competition in the product market is likely to decrease the unexplained wage differentials between native and migrant workers (p7)
It is understandable that people concerned about wage discrimination might see markets as the unregulated problem, rather than the efficient answer. But in this case a competitive market is your friend. The more employers are forced by vigorous product competition between them to hire as efficiently as the other guys, the more the profit motive of the employers gets the result you want: their own self-interest will lead them to hire on ability, not on surface attributes.

Rings a bell, doesn't it*.

*"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages". 

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