The price of discrimination: an economic analysis of the human rights and equal opportunity commission rulings 1985-2000

Economic Papers (Economic Society of Australia), Sept, 2004 by Robert Brooks, Sinclair Davidson, Margaret Jackson

This paper investigates the price of discrimination and the identity of discriminators in Australia, using data from the Human Rights and Equal Opportunity Commission. To the extent that Becker's (1971) theory is correct, we anticipate greater levels of discrimination in less competitive sectors of the economy. The data do not support that notion. We also investigate whether the price of discrimination varies by identity of discriminator. Overall the price of discrimination is about A $15,000.

Keywords: Human Rights, Discrimination.

JEL Codes: J15, J71

1 Introduction

In a recent speech Pru Goward, the (Australian) Federal Sex Discrimination Commissioner, indicated that discrimination is inefficient. In particular she argued that:

   Any departure from ... equality ... demeans not only women but men
   and diminishes our whole community. It also distorts the efficient
   working of the Australian economy, ... [U]tilising all human
   resources effectively, fairly and profitably for the individual
   and the organisation, makes great business sense (Goward 2001).

From an economic perspective this seems intuitively obvious: discrimination leads to misallocation of scarce resources and consequently a loss of value. What is not obvious, however, is why the Government needs to suppress discrimination. Becker (1971) has demonstrated that, in competitive markets, losses are borne by discriminators. In a competitive environment discrimination would be non-existent as self-interested discriminators would either modify their behaviour or exit the market. Public policy that promoted competition in factor markets would have the (unintended) consequence of eliminating discrimination. The survival of discrimination in a competitive market is thus surprising.

In reality, public policy does not promote competition in (all) factor markets. In particular, governments do not always promote or encourage competition in the labour market. The rationale for this is usually some other social objective. Historically, Australian governments have suppressed competition across the economy in order to preserve anti-competitive

labour markets. While many of these policies have changed over the past thirty years, anti-competitive behaviour in labour markets still persists. To the extent that competition is inhibited in labour markets, discrimination will persist and may effectively be subsidised. Governments are placed in the position where the price of the first-best solution is too high. The second-best solution then becomes to prohibit discrimination and apply sanctions to discriminators.

In this paper we investigate the price of discrimination in Australia. The data we use are accessed from the Human Rights and Equal Opportunity Commission between 1985 and 2000. This time period is chosen for practical reasons. The Sex Discrimination Act was passed in 1984 and came into effect in 1985. In 2000 the judicial authority of the Commission was transferred to the Federal Court. Our objective is to evaluate the price of discrimination, and ascertain whether that price varies across the economy and whether it varies by identity of discriminator. We adopt two approaches: first we examine the payout ordered by the Commission; and second we examine the stock market reaction to discrimination cases on the prices of listed finns. We had originally hoped to differentiate between binding and non-binding Commission rulings to discover the origin of adverse stock market reactions (if any). However, we had insufficient data for this analysis. (1)

2 Discrimination and Competition

The economic theory of discrimination was first developed by Becker (1971). (2) His treatment flows from basic microeconomic theory according to which private individuals have a preference for some particular behaviour and in a market system are required to pay for that behaviour (although not the preference) via a reduction in their wealth. The basic idea is that discriminators have fewer trading partners and so face higher prices or lower wages when transacting. To the extent that discriminators are rational (or, at least, are not stupid) their marginal reduction in wealth would be equal to their preference. In short, in a competitive market, discriminators pay for their taste for discrimination. (3) Becker's work has been criticised in recent times. This criticism, however, seems motivated by his non-judgmental approach of assuming a taste for discrimination without investigating or condemning the origins of those tastes (see Bergmann [1989], Darity and Mason [1998], and Donohue [1998]).

In Becker's theory there are private costs to discrimination (borne entirely by the discriminator) but there are no public costs. Theoretically this is entirely plausible. However, in reality it is unlikely. The origins of taste may be important. For example, the taste for discrimination may be endogenous to a particular society and consequently relatively impervious to competition. Becker's theory implicitly assumes that discriminators are themselves a minority. To the extent that they are not and are successful rent-seekers discrimination (now exogenous) may persist, despite competition. In a different context (corporate governance) Jensen (1993) has argued that reliance on product market competition is a slow, but inevitable, process. A reliance on product market competition to eliminate discrimination is not a flight of fancy. It is, however, a (very) long-run solution. Does this justify a ban on discrimination on efficiency criteria? Most (mainstream) economists argue no (see Posner [1983, 1992, 1998] for examples of mainstream arguments). Buchanan's (1994) treatise on ethics, however, provides an alternative view. He argues that all individuals should work to increase the size of the market. To the extent that discrimination reduces the size of the market for non-discriminators a private cost becomes a public cost. This may provide an efficiency rationale for a ban on discrimination.