How Discrimination Harms the Economy and Business

Racism, xenophobia, and other forms of discrimination against minorities are, sadly, common phenomena—throughout history and in the current moment. In the United States, the Black Lives Matter movement and the protests that followed the murder of George Floyd in Minneapolis highlight that many Americans consider discrimination a serious problem in the country today.

In recent research, my coresearchers—Volker Lindenthal and Fabian Waldinger, both at the University of Munich—and I consider how discrimination affects a country’s economy. Discrimination is extremely hurtful to individuals from targeted minorities. But, as we demonstrate, the effects of excluding talented individuals from economic opportunities tend to go further: when a society discriminates against a specific group, its entire economy can suffer.

The case we analyzed involves discrimination against Jews in Nazi Germany. We looked at the period after the Nazis gained power, on January 30, 1933, when discrimination against Jews quickly became commonplace in Germany. Many Jews were forced out of their jobs. By 1938, individuals with Jewish ancestry had effectively been excluded from the German economy.

The key idea in our study is that whenever discrimination interferes with the optimal allocation of talent, the economy suffers. This idea has its origins in formative work from the 1950s by the late University of Chicago economist and Nobel laureate Gary S. Becker, who argued that employers who are biased against hiring minorities harm themselves by missing out on talented individuals. We developed a technique to estimate how large and persistent the effects of such a loss of talent can be. And in our example, we find those effects are sizeable and long-lasting.

In 1932, Jews held about 15 percent of senior management positions in German companies listed on the Berlin Stock Exchange. When these top managers were kicked out, the companies were unable to replace them adequately. New senior management teams at affected companies were less connected to other companies, less educated, and had less managerial experience. The stock prices and profitability of the affected companies declined sharply after 1933, relative to unaffected companies. These effects were distinct from other shocks hitting German companies after 1933, for example, policies by the Nazi government or changes in demand for companies’ products.