How Discrimination Harms the Economy and Business
- July 15, 2020
- CBR - Economics
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.
When intolerance prevents individuals from exercising their talents, there tend to be widespread, long-lasting negative economic effects.
The aggregate effects of losing Jewish managers were large: an approximate calculation suggests that the market valuation of companies listed in Berlin fell by almost 2 percent of German gross national product. And besides being drastic, the effects were persistent: the performance of affected companies did not recover for at least 10 years, the end of our sample period. This suggests that the rise of a discriminatory ideology can lead to first-order and persistent economic losses.
Our case study involved dismissals of highly qualified senior managers who ran large, listed German companies. Hence, the discrimination we focused on was targeted at individual business leaders who were at the top of the economic pyramid. This pattern of forcing highly qualified individuals to give up important positions in the economy is all too common in history, bringing to mind the internment of Japanese Americans during World War II or the expulsion of managers who follow the cleric Fethullah Gülen from Turkish corporations in 2016.
There are important differences between the 1930s example of antisemitism in action and what many Black Americans face today. A history of slavery and racism has made it more difficult for Black Americans to reach leadership positions. But just as in Nazi Germany, these factors have an economic cost. For example, barriers such as limited access to education may have prevented an optimal allocation of talent. Some of my colleagues find that as such barriers fall, average earnings rise. (For more, read our Winter 2018/19 article “How Women and Minorities Have Driven Wage Growth.”)
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The precise dynamics of how discrimination affects an economy are different depending on the form discrimination takes. However, there appears to be a similarity in the economic outcomes. When intolerance prevents individuals from exercising their talents, there tend to be widespread, long-lasting negative economic effects. The effects we documented lasted a decade, at least, and that was from a single example of a discriminatory purge. When it comes to centuries of race-based discrimination, our findings may suggest that companies and the economy are paying a high price.
Kilian Huber is assistant professor of economics at Chicago Booth.
- Gary S. Becker, The Economics of Discrimination, Chicago: University of Chicago Press, 1957.
- Chang-Tai Hsieh, Erik Hurst, Charles I. Jones, and Peter J. Klenow, “The Allocation of Talent and US Economic Growth,” Econometrica, September 2019.
- Kilian Huber, Volker Lindenthal, and Fabian Waldinger, “Discrimination, Managers, and Firm Performance: Evidence from ‘Aryanizations’ in Nazi Germany,” CEPR discussion paper, January 2019.
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