Research Highlights Article

June 29, 2018

Putting a price on prejudice

Workplace discrimination is expensive. When does it become too costly for the discriminator?

Chris Fleisher

A study in the January issue of AEJ: Applied puts a price on ethnic discrimination.

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Workplace discrimination is a costly business.

Personal biases against someone’s ethnicity, age, gender, or other differences can shape hiring decisions and workplace relationships, even if it means working with someone who is less productive.

And yet, these damaging prejudices persist.

But to what extent do our discriminatory actions harm our economic self-interest? And at what point do we decide the price we pay for our prejudice is too high?

A recent paper in the American Economic Journal: Applied Economics puts a price on ethnic prejudice and finds that discriminators are willing to forego 8 percent of their earnings to avoid working with someone of a different ethnicity. And it wasn’t just majorities discriminating against minorities: minorities paid a premium to avoid working with a majority person.

In some sense, this is good news because it gives you an instrument to clamp down on this discrimination.

Jean-Robert Tyran

The paper introduces a novel way to measure the price-sensitivity of workplace discrimination and offers potential lessons for employers that want to address it.

“There is quite a strong reaction to this price (of discrimination),” said Jean-Robert Tyran, a professor of economics and director of the Vienna Center for Experimental Economics, in an interview with the AEA. “In some sense, this is good news because it gives you an instrument to clamp down on this discrimination.”

Researchers have used field experiments to study the causes of discrimination for 40 years. One common approach has been to send hypothetical resumes to employers, measuring their reactions to qualified applicants of different backgrounds, inferred by ethnic-sounding names.

But those experiments didn’t reveal why employers were choosing one group over another or how they would react differently if they were penalized for that discrimination. After all, choosing a majority candidate over a minority didn’t harm the company if, by all appearances, they were equally productive workers.

Tyran and his co-author Morten Størling Hedegaard designed an experiment to address these limitations. They recruited 162 teenagers in Denmark to stuff envelopes for a large mailing, bringing them in for work twice a week in two consecutive weeks. The first week they worked alone, which allowed the researchers to measure their productivity. Before they returned for the second week, some of the kids were allowed to choose a partner to work with. They would be paid based on their productivity as a team. Some of those teens were then given information about the individual productivity of potential partners.

They were also shown their names: some had Danish-sounding names and others had Muslim-sounding names. If a Dane picked a less productive partner who also had a Danish-sounding name, then they were willing to discriminate knowingly and deliberately. They literally paid a price through lost wages.

The authors estimated that discriminators were willing to forego 8 percent of their earnings to avoid a coworker of a different ethnicity. Also, it worked both ways. Muslim workers paid about the same price to avoid working with coworkers of a Danish-sounding name.

Still, there was a point at which their prejudice brought too high of a cost. The authors say that the probability to discriminate falls by about 9 percent if the price of discrimination goes up by 10 percent.

“In a sense, the bad news is that the dislike is mutual and strong. We were surprised about that,” Tyran said. “Another, positive aspect of the study, in some sense, was that the people in the aggregate react strongly to the price difference. As it becomes more expensive to discriminate, they said, ‘Well, I will work with this guy because I don’t want to forego too much money.’”

It’s difficult to know whether these reactions would have been different if the workers in the study were older and perhaps more entrenched in their biases. Also, the response may have been different in another country like the United States, which is more demographically diverse.

Tyran said, however, that he hopes this paper will provide a starting point for measuring workplace discrimination in other contexts and perhaps help shape policies aimed at limiting its damaging effects.

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"The Price of Prejudice" appears in the January issue of the American Economic Journal: Applied Economics