Let’s now turn from measurement to the economic forces that lie behind discrimination in labor markets .If one group in society receives a lower wage than another group, even after controlling for human capital and job characteristics, who is to blame for this differential?

The answer is not obvious. It might seem natural to blame employers for discriminatory wage differences. After all, employers make the hiring decisions that determine labor demand and wages. If some groups of workers earn lower wages than they should, then it seems that employers are responsible.Yet many economists are skeptical of this easy answer. They believe that competitive , market economies provide a natural antidote to employer discrimination. That antidote is called the profit motive.Imagine an ‘economy in which workers are differentiated by their hair color. Blondes an d brunettes have the same skills, experience, and work ethic. Yet because of discrimination, employers prefer not to hire workers with blonde hair. Thus, the demand for blondes is lower than it otherwise would be. As a result, blondes earn a lower wage than brunettes.

How long can this wage differential persist? In this economy, there is an easy way for a firm to beat out its competitors: It can hire blonde workers. By hiring blondes, a firm pays lower wages and thus has lower costs than firms that hire brunettes. Over time, more and more “blonde” firms enter the market to take advantage of this cost advantage. The existing “brunette” firms have higher costs and, therefore, begin to lose money when faced with the new competitors. These losses induce the brunette firms to go out of business. Eventually, the entry of blonde firms and the exit of brunette firms cause the demand for blonde workers to rise and the demand for brunette workers to fall. This process continues until the wage differential disappears.

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