How Racial Bias Hurts Business

How Racial Bias Hurts Business

Adding to an ever-expanding body of evidence that diversity and inclusion is a bottom-line issue for businesses, a new Harvard study shows that companies that display racial discrimination in hiring are more likely to fail. Maura Ewing goes into detail at Pacific Standard:

Over a six-year period, businesses that had been identified as racially discriminatory were twice as likely to fail compared to those that had not been identified as such. “The fact that so many businesses that we observed discriminating went out of business within a six-year window was quite a surprise,” says Devah Pager, a sociology professor at Harvard and lead author on the study. “This is something that economic theory has predicted, but we haven’t really had good measures of in the past.” …

To quantify racial discrimination in the early stages of hiring, in 2004 Pager and her colleagues sent out teams of three men, one white, one black, and one Latino, to apply for the same jobs. Teammates were matched on the basis of age, physical appearance, and interpersonal skills. Over 12 months, teams applied to jobs at 170 firms. This audit found that white applicants were over two times as likely to be called back for an interview than their black counterparts. The Latino applicants were called back at a rate comparable to their white teammates, 15 percent and 31 percent respectively, so for their analysis researchers compared black vs. non-black applicants. By this indicator, nearly a quarter of the businesses tested showed racial discrimination.

Six years later, Pager’s recent study shows, the businesses that discriminated against black applicants had failed at a rate twice as high as those that didn’t. Thirty-six percent of the discriminatory business had failed, a rate over twice as high as the more equitable hirers, 17 percent.

One of the reasons why these businesses might be failing is because of the tremendous buying power of multicultural consumers, who spend an estimate of $3.4 trillion dollars a year in the US. Minorities have accounted for most of the country’s population growth in the new millennium, so companies are engaging with a more diverse consumer base and labor market than ever before.

CEB’s Diversity and Inclusion Leadership Council has a tool based on our research that D&I leaders can use to make the business case for diversity at their organization. This resource presents data on why diversity and inclusion can improve an organization’s business objectives and financial performance. Members can access the tool here.