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Vicious and Virtuous Cycles

April 9, 2010

Kevin Burke
Vicious and Virtuous Cycles

Discrimination shouldn't happen in competitive economic markets, argued University of Chicago economist Gary Becker. A company that doesn't discriminate would hire better workers for less, and out-compete the discriminatory firms. Former Brooklyn Dodgers owner Branch Rickey is an inspiration to many for signing Jackie Robinson, Major League Baseball's first black player. But to economists, he wasn't so much of a racial pioneer as he was a smart businessman; with Robinson on the team, the Dodgers won more pennants and crushed the National League for a few years. Later Becker had to adjust his model, because the old one didn't take into account that a discriminated group can choose how much education and skills they should acquire. Let's say there are two main groups in your economy. For whatever reason, people from Group A have a high initial level of education and Group B has a low one. Let's also assume that employers are hiring for white-collar jobs, and acknowledge that they have a hard time distinguishing the future performance level of potential employees (for most people, it is; the best tests we have only predict 52% of future job performance). Thus a useful heuristic for employers to ensure the best chance of success is to hire people from Group A. If I'm in Group B, it doesn't make much sense for me to go to school and get an education because employers probably won't hire me anyway. Thus, each group invests in the amount of education; Group A continues to invest in high education, receiving high-paying jobs, while Group B doesn't see the point.

This theory can help explain some interesting phenomena. US employers are 50% more likely to call back applicants with fictitious white-sounding names than those with fictitious black-sounding names. Most schools in poor areas have high dropout rates, but some poor schools send 99% of their graduates to college by creating a separate brand and selling kids on investing in their educations.

It can also help explain why the caste system in India has been so persistent. Lower caste people struggle not only with their low initial rates of education and income, but because as a group, the returns to education are low. In his book The Elusive Quest for Growth, economist Bill Easterly describes the phenomenon in terms of virtuous circles and vicious cycles. The rich have an incentive to invest in education, because they know they can get hired and prosper; this education benefits other rich people, so it creates a virtuous cycle. But the poor look ten years down the road and see low employment or discrimination, and as a result they don't invest in their education, perpetuating the group stereotype; a vicious cycle. Discrimination is horrible, both for people in the minority groups and for the population as a whole, because it discourages a group of potentially good workers from pursuing skills and bettering society.

Before you put too much faith in claims like "a rising tide lifts all boats," make sure that everyone is on board.

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