Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 6 The Economics of Labor Markets
Chapter 19 of 36 Earnings and Discrimination
Section 13 of 17
…
What are the economic forces lying behind labor markets hiring discrimination?
If one racial group receives a lower wage than another group even after controlling for human capital and job characteristics what and who is to blame for this differential?
Some instinctively blame employers for non-economic discriminatory wage differences.
Employers make the hiring decisions that determine labor demand and wages.
If some worker groups receive lower wages than others, it seems employers are discriminating against people in that group.
…
Many economists are skeptical of this simple conclusion.
They believe competitive market economies provide a natural prevention of employer non-economic discrimination.
That prevention is the profit motive.
Consider an imaginary economy:
· workers are only differentiated by their hair color
· brunettes and blondes have the same skills, experience, and work habits
Employers prefer to hire brunettes only because of their hair color.
So, the demand for blondes is lower and the result is brunettes earn a higher wage than blondes.
…
In this economy firms can easily beat their competitors by hiring blondes.
The firms hiring blondes pay lower wages and so has lower operating costs than firms that hire only brunettes.
Over time, more firms enter the market and take advantage of lower cost blonde hires.
Because of their lower costs blondes-hiring firms can lower prices and increase their sales and profits.
The brunettes-only firms suffer sales and profits losses and are eventually forced out of business.
The entry of new blondes-hiring firms and the exit of old brunettes-only firms cause:
· demand and wages for blonde workers to increase
· demand and wages for brunette workers to decrease
· continuing until the wage differential vanishes
Product prices for the public have decreased, increasing consumer surplus.
Sales and profits for the firms have increased, increasing producer surplus.
…
Business owners who focus on making money have an advantage when competing against those who discriminate based on non-economic factors.
As a result, firms that do not discriminate based on non-economic factors over time replace those that do.
Competitive markets have a natural remedy for employer non-economic discrimination – the profit motive.

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