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The Hidden Cost of Workplace Discrimination: A Pathway to Business Failure?

  • Publish Date: Posted about 1 month ago
  • Author:by Ryan McQuitty

​I just had a look at a 2016 study from Harvard University's Devah Pager, and it makes for an extremely interesting read. The article demonstrates how discrimination really messes not only with the ethical image of a company but with its existence.

Theoretical Background

Historically, economists have argued, based on Gary Becker’s influential work, that discrimination is not just a moral failing but also a business impediment.

Racial biases in hiring, which are unrelated to productivity, introduce unnecessary costs into an economy and are thereby predicted to ruin a business that is discriminatory in a competitive market. Though well-accepted, this theory of market ruin by the discriminatory business had not been empirically tested until now.

Research Methodology and Findings

Pager's study was unique in that it combined an experimental audit study on racial discrimination with a rich employer database that tracked business outcomes over time. This inquiry carefully paired groups of job-seekers, all armed with identical CVs/Resumes in educational achievements and work experiences, and all seeking employment in New York City.

Subsequent tracking of those businesses found that firms discriminating in their hiring were much more likely to close within six years. In a more specific example, the study found that while 17% of businesses that didn't operate with discrimination policies failed, an amazing 36% of businesses that discriminated in their practices closed. This is a really glaring difference that underlines how the possibility of economic penalties exists.

Implications to Business Strategy

This research serves as a potent reminder that beyond ethical considerations, non-discriminatory practices are required for business sustainability. It suggests that maybe discriminatory businesses are not only at a moral disadvantage but are economically less competitive. In other words, if the environment was more stable, having an inclusive culture would help the firms thrive much better in the long run.

Broader Economic and Sociological Impact

This research further indicates impacts far beyond the direct financial implications of the fines and more widely to socio-economic impacts. In line with the model of Becker, this sends the message that the very market mechanism could inherently dish out punishment on those who would engage in such economically irrational discrimination. However, the persistence of these discriminatory practices, especially given the potentially devastating impacts, calls for more inquiring into why businesses continue to discriminate and how these choices become joined with other poor business practices.


For businesses seeking longevity and great success, the philosophy of diversity and absolution from discriminative practices lies not only under ethical imperatives but also as prime strategies of running business. Pager's research threw up strong evidence that in the competitive market landscape, it could be a road to failure rather than an advantage. This article puts into perspective how much inclusive workplaces matter—not only as part of an imperative toward ethical business practice but also toward economic survival.