Although the profit motive is a strong force acting to eliminate discriminatory wage differentials, there are limits to its corrective abilities. Here we consider two of the most important limits: customer preferences and government policies.

To see how customer preferences for discrimination can affect wages, consider again our imaginary economy with blondes and brunettes. Suppose that restaurant owners discriminate against blondes when hiring waiters. As a result, blonde waiters earn lower wages than brunette waiters. In this case, a restaurant could open up with blonde waiters and charge lower prices. If customers only cared about the quality and price of their meals, the discriminatory would be driven out of business, and the wage differential would disappear.

On the other hand, it is possible that customers prefer being served by brunette waiters. If this preference for discrimination is strong, the entry of blonde restaurants need not succeed in eliminating the wage differential between brunettes and blondes.that is, if customers have discriminatory preferences, a competitive market is consistent with a discriminatory wage differential.

Another way for discrimination to persist in competitive markets is for the government to mandate discriminatory practices. If, for instance, the government passed a law stating that blondes could wash dishes in restaurants but could not work as waiters, then a wage differential could persist in a competitive market. The example of segregated streetcars in the foregoing case study is one example of government man dated discrimination. More recently, before South Africa abandoned its system of apartheid, blacks were prohibited from working in some jobs. Discriminatory governments pass such laws to suppress the normal equalizing force of free and competitive markets.

To sum up: Competitive markets contain a natural remedy for employer discrimination. The entry into the market of firms that care only about profit tends to eliminate discriminatory wage differentials. These wage differentials persist in competitive markets only when customers are willing to pay to maintain the discriminatory practice or when the government mandates it.

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