The corporate gamble on wokeism

The wokeism bandwagon is now on full display in Corporate America as it attempts to convince customers that it is more concerned with social equity than the bottom line.  Skepticism is warranted.

The rationality axiom states that economic agents behave in their own self-interest.  This implies that consumers allocate their limited income to purchasing goods and services that maximize their utility or satisfaction, while businesses make decisions on pricing, investment, and hiring to maximize their profitability.  It follows that businesses expect wokeism to be profitable despite the fact that firms that discriminate by hiring less qualified minorities over more qualified non-minorities will incur higher costs.  But how can the practice of wokeism increase profitability if it raises costs?  To answer this question, it is necessary to take into account both the supply side and the demand side of the market.

The economics Nobel laureate Gary Becker posited more than 60 years ago that discrimination in hiring is unsustainable in a competitive market because businesses that discriminate do not utilize their inputs efficiently (e.g., refuse to hire more qualified blacks over less qualified whites) and therefore incur higher costs than their more fair-minded rivals.  This difference in costs is a de facto tax levied on businesses that engage in discriminatory hiring practices.  These higher costs render businesses that discriminate uncompetitive, which forces them to exit the market.  This is how a discrimination tax punishes bad actors.  Professor Becker's key policy message is that discrimination is unsustainable in competitive markets even in the absence of laws that prohibit discriminatory hiring practices.

The extant situation is the opposite of that which concerned Professor Becker.  In their quest to appear woke, employers may systematically discriminate by hiring less qualified minorities over more qualified non-minorities (with minority status defined on the basis of race, sex, or sexual orientation).  The purported justification is one of atoning for past sins, a type of reparations.  At first glance, this behavior would seem difficult to reconcile with Professor Becker's theory in that the discrimination tax may not work in reverse by penalizing employers with higher costs when they discriminate by hiring less qualified minorities over more qualified non-minorities.  Closer scrutiny reveals this not to be the case.

The Becker discrimination tax continues to be assessed on the supply side of the market.  The employer who discriminates in hiring would still be expected to incur higher costs, but there is now a demand-side factor that enters the profitability calculus.  This demand-side factor is wokeism, and its practice generates a type of favorable advertising that would be expected to increase demand for the firm's product or service at any given price.  Woke corporations are essentially betting that the higher costs they incur in discriminating in favor of less-qualified minorities will be more than offset by the increased demand they realize as a result of the net positive advertisement effect of being seen as woke.  In other words, it can be profitable for a firm to discriminate in favor of less-qualified minorities, provided that the resultant increase in costs is more than offset by a sufficiently large increase in demand.

In the corporate world of yesteryear, businesses would never tout their workforce diversity.  Religion and politics were strictly verboten.  But statements to this effect are commonplace today.  Businesses routinely express their support, financial and otherwise, for the Black Lives Matter movement and other groups that claim to further social equity objectives.  The implicit message that corporations wish to convey with these advertising and social media campaigns is that they care more about people and social equity than they do about their profitability.  But is this message credible?

The aforementioned rationality axiom counsels that corporations engage in behavior that is expected to maximize earnings.  This suggests that wokeism is properly viewed as Corporate America's sales tactic du jour.  The gamble is that wokeism sells in that it attracts far more customers than it repels.  The "bottom line" is that while corporations may care deeply about social equity they practice wokeism because they fully expect it to be profitable.  The risk that they bear is that consumer sentiments, like political winds, can shift unexpectedly.  Should this occur, the corporate gamble on wokeism can easily result in higher costs and reduced demand, which translates into decreased profitability.   

Image: Max Pixel.

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