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EMPLOYMENT DISCRIMINATION

Stewart J. Schwab

Professor of Law

Cornell University School of Law

© Copyright 1999 Stewart J. Schwab

 

Abstract

This chapter first discusses the multiple overlapping definitions of

discrimination, including distinctions between group and individual

discrimination and between segregation and discrimination in pay. It then

summarizes the major economic models of discrimination, particularly

Becker’s taste-for-discrimination model and statistical-discrimination

models, as well as sorting and status-production models. The discussion

focuses on the conditions under which markets will tend to eliminate

discrimination, noting that this occurs in a more limited range of situations

than commonly recognized. The chapter next surveys the economic role of

anti-discrimination laws, evaluating arguments that the law speeds the

journey to a non-discriminatory equilibrium and that the law breaks social

norms perpetuating inefficient discrimination. Finally, it examines empirical

studies of employment discrimination laws, including analyses of litigation

trends and of the laws’ effects on labor markets.

JEL classification: J15, J16, J70, J71, J78

Keywords: Discrimination; Statistical Discrimination; Status-Production

Model

 

1. Scope of Law and Economics Analysis of Employment Discrimination

 

The law and economics scholarship on employment discrimination

examines the welfare consequences of the legal rules regulating employment

discrimination. While substantial overlap exists, the inquiry is distinct from

the efforts of labor economists to determine the extent of discrimination in

labor markets. For recent surveys in this vein, see Darity and Mason (1998);

Blau (1998). It is also distinct from the efforts of academic lawyers to

describe and criticize employment discrimination laws. The major task of

law and economics work surveyed here is to link the two inquiries by

studying the effects of law on the labor market. This review limits itself to

the literature on race and sex discrimination, ignoring the important areas of

age discrimination (see Posner, 1995, for an excellent overview of the

issues), and disability discrimination.

 

2. Definitions of Discrimination

 

The term ‘discrimination’ is elusive. A wine expert is admired for his

discriminating taste, but an employer with a taste for racial discrimination is

despised (see Cooter, 1994, p. 137). For an extensive discussion of various

definitions of discrimination, see Kelman (1991). An overly broad definition

would say that an employer discriminates whenever it distinguishes between

two workers because they belong to different groups. To see that the

definition is too broad, consider an employer who pays ‘highly productive’

workers more than ‘less productive’ workers. Although distinctions based on

productivity (or, more broadly, merit) violate a policy of egalitarianism, they

do not implicate traditional concerns of discrimination. One must be careful

with the meaning of ‘productivity’ as well. Aigner and Cain (1977) define

productivity in terms of physical output or actual job performance. They

recognize that discrimination against, say, blacks, can always be explained

away if their productivity includes antipathy they create in others unrelated

to their output or performance.

 

As a second attempt at definition, perhaps discrimination occurs

whenever an employer treats equally productive workers differently because

of any group characteristic other than, but perhaps related to, productivity.

As Cooter (1994, p. 137) suggests, ‘discrimination in economic life usually

consists in sorting people according to traits rather than productivity’. This

definition, at least for law, is both too broad and too narrow.

 

The definition is over broad because every distinction can be said to be

based on a group characteristic, but only some group distinctions are

discriminatory. The problem comes in separating invidious discrimination

from appropriate (or benign, or merit-based, or non-problematic)

distinctions. For example, an employer might distinguish between equally

productive college and high school graduates, or between equally productive

workers scoring 95 and 85 on a test, or between equally productive black

and white workers. Only the last distinction is generally labeled

discrimination, because it is based on a suspect or protected group.

Anti-discrimination laws have prohibited employers from making

distinctions on a number of characteristics, including race, color, sex, age,

religion, national origin, age, sexual orientation, marital status and

disability. In general, but not invariably, these are immutable characteristics

over which the person has no control. Often they are irrelevant

characteristics for proper or profit-maximizing employment decisions, but

models of statistical discrimination wrestle with situations when these

characteristics are correlated with productivity. Epstein (1992, p. 413) has

attacked as inherently arbitrary the labeling of certain distinctions as

invidious discrimination. As he puts it, a ‘central part of [my] argument

against Title VII was that there is no independent conception of which

characteristics count as meritcharacteristics and which are invidious’.

While difficult lines must be drawn (do distinctions based on beauty, obesity,

or veteran’s status count as discriminatory?), the law has singled out a few

distinctions as legally discriminatory, the most important being distinctions

based on race and sex.

 

Still, it is too narrow to define discrimination as occurring only when an

employer treats two equally productive workers differently because of a

protected characteristic. This definition matches the legal concept of

‘disparate treatment’ fairly closely. But the definition is narrower than one

that focuses on effects. A worker in a protected group could be said to be

discriminated against whenever he or she is treated differently than someone

in another group on grounds other than productivity. This definition

includes the legal concept of ‘disparate impact’. For example, employers

often distinguish between workers on the basis of non-protected

characteristics, such as education, test scores, or criminal convictions. While

the anti-discrimination laws do not protect criminals or those with low

education or test scores, the laws do forbid employers from distinguishing on

such a trait if it has a disparate impact on racial or gender lines and the

employer cannot demonstrate that the practice is job related and a business

necessity.

 

Some scholars, including Aigner and Cain (1977), have separated

individual from group discrimination. They argue that individual or

within-group discrimination is inevitable. As an example, they note that

when college graduates are paid their average productivity and high school

graduates paid their (lower) average productivity, some high-school

graduates will be paid less than their individual productivity (and others

paid more, although rarely will an individual complain about being

overpaid). But no group discrimination exists. Similarly, they note that

racial group discrimination might not occur even when black and white

individuals of the same underlying ability are not paid equally, because the

overpayment of some might cancel the underpayment of others. In their

definition, then, discrimination only occurs when groups with the same

average productivity receive different average pay. Anti-discrimination law,

however, does not separate individual and group discrimination. An

individual black who is treated worse than a white with the same

productivity has a claim under the anti-discrimination laws, regardless of

whether other blacks might be treated better than whites of corresponding

ability.

 

A final definitional complication is that some writers separate

discrimination from segregation. For example, Becker (1971, p. 57) declared

that ‘[m]any serious errors have been committed because of a failure to

recognize that market segregation and market discrimination are separate

concepts’. Racial discrimination occurs when blacks earn less than whites of

comparable productivity; racial segregation occurs when race affects job

assignments by particular firms. Segregation without discrimination can

occur when all-black firms pay workers the same as all-white firms of equal

productivity. Discrimination without segregation occurs when blacks and

whites of equal productivity work in the same firms but blacks are paid less.

Segregation and discrimination can go together. Strauss (1991, p. 1635) has

warned of the long-term dangers of ‘separate but equal’ segregation.

Anti-discrimination laws prohibit employers both from discriminating in

wages and from segregating their workforces.

 

3. Economic Models of Discrimination

 

Economists have developed two prominent models of why employers

discriminate - a taste model and a statistical discrimination model. Two

other models - a sorting model and a status-production model - have

appeared more recently.

 

3.1 Becker’s Taste for Discrimination Model

In the 1950s, Becker ([1957] 1971) introduced the ‘taste for discrimination’

model that captures the intuitive notion of invidious discrimination. An

employer has a taste for discrimination, according to Becker, when he acts

‘as if he were willing to pay something ... to be associated with some persons

instead of others’ (Becker, 1971, p. 14). This definition is general enough to

finesse the issue discussed above of which group distinctions are

discriminatory, but Becker focused on race discrimination. Assume that

group-W and group-B workers (to update Becker’s original notation of W

and N) are equally productive, and that employers are willing to pay ‘d’ not

to associate with B workers. In equilibrium, the market wage for W workers

is w, equal to the marginal revenue product of W workers. The wage of B

workers, however, is w - d. Under this model, in the short run black workers

will receive a lower wage than white workers of equal productivity, and

discriminatory firms will earn lower monetary profits than

non-discriminatory firms.

 

Becker also introduced variants of his model in which customers or

employees had a taste for discrimination, meaning that they would demand

lower prices or higher wages when associating with black employees.

Profit-maximizing firms will respond by segregating their workforces. If

enough non-discriminatory customers or employees exist, all-black or

integrated firms can pay the same wages as all-white firms. If the taste for

discrimination is pervasive, however, black workers will be segregated and

paid less.

 

Many scholars have asserted that, under Becker’s model, in the long run

competitive markets will eliminate firms with a taste for discrimination.

Posner (1987), for example, has said that discrimination can persist only

with some kind of market failure.

 

The issue is more complex, however. The basic point, not fully realized

in the literature, is that markets cater to tastes rather than drive them out.

People willing to pay for the costs of apples, or safety, or discrimination, will

have it provided to them. True, well-functioning markets confront actors

with the full costs of their actions, and so only actors who value their taste

more than it costs to produce will indulge. In this sense, markets discipline

tastes. One cannot indulge the taste for discrimination or apples on a whim,

but will have to pay for it. Further, the taste for discrimination in labor

markets is tied to another product - profits for employers, wages and other

working conditions for workers, and the physical product or service for

customers. Markets will confront actors with the costs of tying.

Discrimination will be tied to the product only for actors willing to pay for

the joint good. But it seems wrong to say, in general, that competitive

markets will drive out a taste. Rather, markets drive out tastes that people

are not willing to pay for, and markets sustain tastes where value exceeds

cost.

 

The taste for discrimination differs from the taste for apples in one

respect, in that it directly affects other market actors. A customer’s

preference for red over green apples lowers the relative price of green

apples, but the green apples do not care. A customer’s preference for white

over black workers lowers the wage of black workers, and the black workers

suffer lower utility. It may seem that a discriminatory taste imposes an

externality on black workers. But this is not so. Externalities occur when the

full costs of a market transaction are not borne by the decision makers. Here,

however, the discriminatory customer faces higher prices passed on by the

employer who hires a more expensive white workforce.

 

Becker himself was more cautious, and claimed only that ‘under certain

conditions’ would competitive markets eliminate discriminatory employers

(1971, p. 45). A number of points - some pointing to market failure but

others not - can be made that suggest that a taste for discrimination is

consistent with competitive markets in the long run.

 

First, production technology matters. If constant-returns-to-scale

technology exists, so that one firm can expand indefinitely without

increasing its average costs, then a single non-discriminating firm can

undersell all others and produce the entire industry output (Becker, 1971, p.

44). But if costs rise with output, more than one firm is required to eliminate

discrimination. If employer discrimination is pervasive, there may not be

enough non-discriminating firms to hire all the minority workers and

eliminate the wage differential. Becker (1968, p. 210) has suggested that a

shortage of entrepreneurial skill may prevent firms from fully eliminating

discrimination, and thereby declared that ‘discrimination exists, and at times

even flourishes, in competitive economies’. Donohue (1997, p. 180) is

unconvinced by the shortage-of-entrepreneurs explanation. It did not take

special skill to know that hiring low-wage black workers in the textile

industry would be profitable - unless, as Donohue puts it, ‘the scarce skill

was knowing how to do this without having one’s mill burned down by the

Ku Klux Klan’.

 

Second, a firm with a taste for nepotism, as Becker called it, will thrive

in a competitive market. A nepotistic employer gains utility from hiring

whites, as distinct from a discriminatory firm that loses utility from hiring

blacks. An all-white nepotistic employer, then, has a (subjective) cost

advantage over both non-discriminatory and discriminatory employers and

thus could produce the entire output, assuming constant returns to scale (see

Becker, 1971, p. 44 n.4; Goldberg, 1982). Donohue (1986, p. 1422) finds the

nepotism theory unimportant, arguing that the basic assumption that

favoritism rather than animus drives discrimination is ‘arbitrary and

unrealistic’.

 

Third, as mentioned above, employers willing to pay for their taste in

discrimination with lower profits can remain competitive indefinitely. Two

scenarios are imaginable here, the closely-held firm and the joint-stock

company. An entrepreneur who works alongside his employees may dislike

working with blacks, and thus prefer an 8 percent monetary return with an

all-white workforce to a 10 percent monetary return with an integrated or

all-black workforce. He will stay in business if he is willing to reject offers

from non-discriminatory entrepreneurs willing to pay the full monetary

value (10 percent return) for the firm. If only a few entrepreneurs with his

discriminatory tastes exist, these few firms will be segregated with no

market discrimination. If enough discriminatory entrepreneurs exist,

discrimination against blacks as well as segregation will occur. The capital

market will pressure discriminatory entrepreneurs to sell out, thereby

capturing the high monetary return, and retire or go into another business

that does not require association with blacks to make high profits. But this

repeats the point that if entrepreneurs are willing to pay for their taste in

discrimination, the market allows them to do so. The alternate scenario

involves dispersed shareholders who do not physically associate with the

firm. Some investors might willingly accept lower monetary returns in order

to indulge in their taste for investing in discriminatory firms, increasing

their overall return as they see it. This is the flip side to the South Africa

divestiture movement of the 1980s, where investors willingly accepted lower

returns by refusing to invest in firms involved in South African apartheid. If

only a small number of investors act this way, segregation may occur

without discrimination. If enough discriminatory investors are willing to

accept lower monetary returns, they can permanently lower black wages.

 

Perhaps a more important explanation for long-run discrimination is that

profit-maximizing employers in competitive markets will cater to the

discriminatory tastes of employees or customers. If some customers will pay

less for a product or service from a black employee, or some employees

demand hire wages to work with blacks, black employees become less

valuable. As Strauss (1991) has ably recounted, the result could be

segregation or discrimination. The issue is analogous to the debate whether

domestic labor standards are ineffective in the face of foreign competition.

There, the assertion is that workers in developing countries willing to work

in unsafe conditions or forego other benefits will undercut domestic workers

with a taste for safety. While it is far from clear that cheap foreign labor

even sets overall levels of compensation domestically (see Freeman, 1995),

profit-maximizing domestic employers will provide benefits that workers are

willing to pay for with reduced wages, even in the face of foreign workers

with no taste for benefits. Analogously, workers with no taste for

discrimination will not undercut workers willing to pay for their taste for

discrimination.

 

Other scholars point to market imperfections to explain the persistence of

discrimination. Epstein (1992) blames governmental Jim Crow laws for

maintaining discrimination. Like other governmental regulation that

interferes with labor markets, these laws mandating segregation perpetuated

discrimination. Critics of Epstein have noted that Jim Crow laws, while

mandating segregated schools, busses, and marriages, almost never

regulated labor markets (see Verkerke, 1992). Labor market impediments

were far broader than mere governmental restrictions. Indeed, a debate in

the literature is the degree to which discriminatory social norms can persist

without government involvement.

 

Becker (1971, pp. 46-47) pointed to monopolies as a market

imperfection. He emphasized that one of the fruits of a product monopoly is

the ability to indulge in a taste for discrimination in the labor market

without suffering competitive harm. The firm will earn lower profits than if

it hired the cheapest possible labor of a given quality, but can still earn

above-average profits. Still, if the monopoly is transferable, a discriminating

monopolist has pressure to sell out to those without a taste for

discrimination. In other words, competitive capital markets as well as

competitive product markets put pressure on discriminatory employers.

 

In a somewhat different vein, Akerlof (1985) shows that discrimination

can persist in competitive markets with transaction costs. Suppose some

traders have a taste for discrimination against blacks while others do not,

and that it takes time or money to distinguish discriminators from others.

Firms with black employees will miss out on some trades and be under a

perpetual cost disadvantage.

 

3.2 Statistical Discrimination

In Becker’s employer-taste-for-discrimination model, employers lose profits

by discriminating, even if they gain in utility. The deviation from the

profit-maximizing assumption was troubling. This deviation meant that

competitive pressures might reduce or eliminate discrimination, although as

discussed above, more or less ad hoc or secondary assumptions can explain

the persistence of discrimination within the taste-for-discrimination model.

As an empirical fact, the seeming persistence of discrimination cast doubt on

Becker’s model. As Arrow (1972, p. 192) observed, only a poor model

‘predicts the absence of the phenomenon it was designed to explain’. Still,

as Samuelson (1951, p. 323) put it in discussing labor market models, ‘In

economics it takes a theory to kill a theory; facts can only dent the theorist’s

hide’.

 

In response to the shortcomings of the taste model, economists developed

models of statistical discrimination as an application of the growing insights

from limited-information theories (see Phelps, 1972; Arrow, 1973; Aigner

and Cain, 1977). These models assume no prejudice or invidious motive by

employers. Rather, employers use group characteristics as a cost-effective

way of predicting individual worker attributes in a world of limited

information. A profit-maximizing employer wants to hire the worker with

the highest expected productivity for the going wage. But gathering

information to predict individual productivity is costly. Rather than

undertake an expensive inquiry into the quality of the high schools attended

by job applicants, the employer might assume that on average blacks attend

lower-quality high schools than do whites. Or, rather than undertake a

lengthy interview, the employer might assume that a woman job applicant is

more likely to quit than an otherwise similar man, or is likely to put a

greater drain on the pension fund by living longer in retirement. These

stereotypes are merely statistical correlations, hence the term statistical

discrimination. Employers that rely on false stereotypes will face a

competitive disadvantage similar to employers acting on a taste for

discrimination, because they are not hiring the most productive workers. But

some stereotypes are true, in the sense that the average differs by group even

though the generalization does not apply to many members of the group.

Profit-maximizing employers will statistically discriminate whenever the net

gains from using the cheap but often-inaccurate proxy outweighs the net

gains of more accurate but more costly individualized information.

 

Statistical discrimination models, while differing in their precise

formulations, show how individuals from disfavored groups can receive less

pay than individuals with identical ability but from favored groups. The

stereotypes can arise from ‘innate’ differences between the groups

(differences in longevity being one of the less controversial examples here,

although even here some argue that women live longer than men because

they have been excluded from high-stress jobs), stereotypes can also arise

from invidious discrimination outside labor markets (for example, in

education), or from the effects of prior labor market discrimination. In

Aigner and Cain’s prominent early model, the group differences arose

because an individual productivity test predicted white performance more

accurately than black performance. Statistical discrimination can persist

over time, for it is engaged in by profit-maximizing employers.

Nevertheless, pressures exist to reduce statistical discrimination. Money can

be made through developing low-cost tests and other methods of predicting

individual worker ability that reduce the gains from blunt stereotyping.

 

It might seem that statistical discrimination increases overall efficiency

by allowing individual employers to maximize their individual profits. In a

world of imperfect information, statistical discrimination indeed helps place

workers in jobs where their expected productivity is most valued. But

statistical discrimination, by tying individuals to group averages beyond

their control, creates an externality that can thwart overall efficiency.

Statistical discrimination uses average valuations, rather than marginal

valuations which are necessary for efficient resource allocation. Individual

incentives can be dulled. For example, in the Aigner-Cain model workers

are paid a weighted average of their individual predicted productivity and

their group average productivity. Workers in such a model invest too little in

training, because they are not completely compensated for individual

increases in productivity. As Lundberg and Startz (1983) show, statistical

discrimination can exacerbate the distortions. While white workers with

statistical discrimination will be encouraged to receive more training, this

can be more than offset by the discouragement of blacks to receive training.

One empirical problem with the Lundberg-Startz model is that the returns to

education are higher for blacks than white, at least in recent years (see

Donohue and Heckman, 1991b; Sunstein, 1991, pp. 29-30), contrary to the

prediction that statistical discrimination will discourage blacks to acquire

human capital.

 

Statistical discrimination might also exacerbate labor-supply distortions,

as shown by Schwab (1986). In his model, workers can work in an

individualized market that recognizes individual productivity

(self-employment being an obvious example) or in a ‘factory’ that recognizes

only average worker ability. Suppose the more-productive workers in the

individualized market are also more productive in the factory market. If so,

some workers will inefficiently choose the individualized market even

though they would produce more in the factory market, because they would

receive only the average factory wage. Now suppose factory employers learn

one more thing about their workers, which is their group status, and

productivity varies by group. Favored-group workers are encouraged to work

more in the productive factory market, but disfavored-group workers are

discouraged. Under plausible scenarios, the discouraged workers can

outweigh the encouraged workers, reducing overall efficiency. For example,

suppose employers statistically discriminate against women because of their

greater average quit rate. This may inefficiently divert women toward selfor

home-employment. If men are likely to remain employees in the outside

labor market regardless of statistical discrimination (that is, men have a

more inelastic labor supply), the discouragement of women will outweigh

the encouragement of men.

 

3.3 Sorting Model

In his important book advocating a repeal of employment discrimination

laws, Epstein (1992) introduces a sorting and searching model that blends

aspects of the statistical and taste models. For a sympathetic review, see

Crespi (1992). Epstein argues that decentralized markets provide substantial

protection against discrimination. Epstein contrasts the victims of violence

and the victims of discrimination. Without strong laws against violence,

people have to be on guard against violent people. That is why we lock our

house even when 99 percent of our neighbors are friendly. Even if one pays

off one violent person, others will arise. Once laws against violence are

enforced, people can concentrate on finding people who make good offers.

Even if 90 percent of the people refuse to deal with someone because of his

race, he can concentrate on doing business with the remaining 10 percent.

The bigots are powerless to block their mutually beneficial deals.

 

Epstein recognizes, however, that competitive forces will not totally

eliminate discrimination. Much of the remaining discrimination is an

efficient response by firms to sorting problems. To have smooth workplace

arrangements, firms must solve many collective goods problems. What type

of firm atmosphere will exist, from type of piped-in-music to work intensity

to degree of office talk? When workers have very different tastes, a firm has

difficulty making a decision that will not anger many. ‘To the extent that

individual tastes are grouped by sex, by age, by national origin - and to some

extent they are’ says Epstein, smooth operation of the firm may call for

sorting on these groups. Epstein recognizes that diversity, say in a sales

staff, has benefits as well. Some profit-maximizing firms will opt for

diversity, but others for homogeneity. For a related argument, see Cooter

(1994, pp. 141-44).

 

3.4 Status-Production Model of Discrimination

Becker’s taste model assumed rather simplistically that individual

discriminators wanted to avoid associating with people with certain

characteristics, and were willing to pay to indulge in this taste. The model

ignored the fact that discriminatory whites were often willing to closely

associate with blacks, so long as the relationship maintained hierarchy. A

prime example was the common practice of whites employing black

domestic workers in their homes. More importantly, the taste model gives no

importance to group status. McAdams (1995) has developed a quite different

model, which he labels a status-production model. The key element is that

whites form a socially connected group that invests in elevating its

self-esteem by subordinating blacks. The importance of group solidarity

explains why whites will not deviate from the social norm by hiring blacks

into important positions. Building on Akerlof’s (1985) model, McAdams

posits that the deviator loses intra-group status, and that the group develops

a secondary norm of shunning or otherwise punishing the deviator. Thus,

the profit-maximizing entrepreneur calculates that he loses more than he

gains by hiring the shunned but cheap blacks.

 

The status-production model captures the virulent aspects of racism. Its

vision of discrimination is more brutal than the prissier taste model, which

seems to apply more ‘to a kind of tea party discrimination than to the blood

and steel of the southern racial scene’ (Higgs, 1977, p. 9). As McAdams

(1995, p. 1063) emphasizes, the model predicts that discrimination ‘will

persist in the face of market competition’. It also explains why lower-class

whites are most likely to discriminate, because they are least able to produce

status in other ways.

 

The status-discrimination model may well explain the Jim Crow South.

More open to question is whether it captures the central features of

discrimination today, particularly discrimination based on sex, age, or

disability. Epstein (1995) has termed the status-production model a

sideshow, applicable to government-sponsored discrimination of the Jim

Crow South but little else. He suggests that the enforcement of

discriminatory norms is impossible without violence. As he puts it,

‘[c]oercion is always the main event; status production is the side show’.

 

4. The Economic Role of Anti-Discrimination Laws

 

One’s views on the need for and effectiveness of law depends greatly on

one’s model of discrimination. The taste-for-discrimination model sees little

need for law. Starting with the premise that markets would root out

taste-based discrimination, early law and economics writers urged civil

rights advocates to rely on markets rather than laws (see Friedman, 1962;

Demsetz, 1965). An exception to this early writing is Landes (1968). He

posits that fair employment laws raise the cost of discrimination and thus, at

the margin, will discourage employers from discriminating and will raise the

black-white wage ratio.

 

Posner (1987) complains that the anti-discrimination laws are often

counter-productive. Profit-maximizing employers break down discriminatory

barriers by hiring qualified blacks at their lower market wage rate, thereby

obtaining a cost advantage over discriminatory employers. But the

anti-discrimination laws prohibit an employer from paying unequal wages

for equal work (indeed, a separate Equal Pay Act prohibits wage

discrimination against women, in addition to the general anti-discrimination

prohibition of Title VII). Anti-discrimination laws are less effective at

finding employers liable when they refuse to hire minority workers at all.

Thus, the laws penalize profit-maximizing employers who pay low wages to

blacks, but in practice condone employers who refuse to hire blacks.

Posner’s argument assumes that wage discrimination occurs within a firm,

but this rarely happens. As Wright (1986) has shown, throughout this

century employers rarely paid blacks less than whites for identical work

within a firm, even when it was legal to do so. Rather, blacks were excluded

from many high-paying jobs and industries.

 

Even law and economics scholars more sympathetic to the basic thrust of

anti-discrimination laws have worried about some of its perverse incentives.

For example, Ayres and Siegelman (1996) warn that disparate impact

litigation might induce employers to discriminate against minorities in

hiring. Their conclusion runs counter to the usual assertion that disparate

impact litigation (which focuses on the relative numbers of minority and

majority workers) leads to hiring quotas by employers. But Ayres and

Siegelman show that, in recent years, most disparate impact opinions

involve firing cases rather than hiring cases. A firing disparate impact case

is easier to show because the relevant pools exist within the firm (a greater

fraction of black than white employees were terminated), whereas in a hiring

case great debate concerns the appropriate pool to compare racial hiring

patterns with (all workers? all skilled workers? all suburban workers?). The

danger to employers, then, is that hiring large numbers of minorities opens

them up to a disparate impact firing suit. For a related argument that

anti-discrimination laws do not lead to quota hiring, see Issacharoff (1992,

pp. 1238-1239).

 

Other scholars looked with more sympathy on the efficiency justifications

for anti-discrimination laws, even within the taste-based model. Donohue

(1986) has argued that the laws speed up the market’s push towards

non-discrimination. Employers with a taste for discrimination have higher

costs than non-discriminatory employers. Anti-discrimination laws, to the

extent they are effective, impose additional costs on employers who

discriminate and thus drive them from the market more rapidly. Posner

(1987) criticized Donohue for ignoring the costs of government

enforcement, arguing that government intervention could make the

transition to non-discriminatory markets inefficiently quickly, just as a

government mandate that shippers adopt a new, fuel-efficient technology

would wastefully cause old ships to be scrapped too quickly. The market is

best, asserted Posner, at both eradicating discrimination and determining the

optimal timing in which to eradicate discriminate. Posner’s basic objection

to Donohue’s argument was that Donohue argued that government

intervention was efficient without pointing to some market failure, such as

externalities, monopoly, or high information costs, that casts doubt on the

market solution. Donohue, in response, rejected Posner’s analogy to

shippers, because it implicitly assumed that shipping was in equilibrium

when a new technology was discovered, while the existence of

discriminatory employers shows that labor markets were not in equilibrium

under the Becker model. Companies with outmoded machines cannot be

suddenly made efficient by changing ownership, but companies with a taste

for discrimination can be suddenly made more efficient by switching

ownership, because the psychic costs of discrimination immediately

disappear.

 

Later, taking up more directly Posner’s challenge to point to the market

failure, Donohue (1992) pointed to third-party moralists who abhor

discrimination directed against others. Their preferences are not considered

in the contracts between employers and black and white employees. Even if

discriminating employers are willing to pay for their taste for discrimination

in reduced profits, the outcome is not efficient because employers are

ignoring the external harm their discrimination causes these moralists.

Conducting a ‘thought experiment’, Donohue argued that if the average

adult American were willing to pay $100 per year to keep Title VII, the

resulting $17.5 billion benefits would outweigh a ‘middle-case’ estimate of

its administrative and incentive costs. Donohue (1997, p. 28) has

acknowledged that economists generally try not to rely on altruism or the

preferences of moralists in making efficiency arguments.

 

The status-discrimination model makes the sharpest efficiency

justification for the anti-discrimination laws. In that model, employers are

trapped by the fear of white stigma from integrating their workforces. As

Lessig (1995) has put it, hiring blacks would mark an employer as having

either a special greed for money or affection for blacks. The

anti-discrimination laws put an important ambiguity in the decision; perhaps

the employer hiring a black merely wants to obey the law. By altering the

social meaning of discrimination, the anti-discrimination laws can break the

cartel-like solidarity among whites, just as anti-dueling laws ended an

inefficient social practice in the previous century (see also McAdams, 1995).

 

Even Epstein has recognized the usefulness of the anti-discrimination

laws in ending rigidities in southern labor markets. As he puts it, ‘Title VII

was heaven-sent’ (Epstein, 1992, p. 251). Epstein emphasizes that Title VII

destroyed the web of indirect legal sanctions against firms trying to exploit

the profit potential in discrimination, rather than merely alter private

behavior. As he explains, in the pre-Title VII south it was all to easy for an

all-white town board to lose a building application, or postpone a meeting to

approve the sewage connection, of a firm that violated the segregation norms

of the era. Epstein’s major point, however, is that much contemporary

discrimination is efficient, as indicated in his sorting model and in some

statistical discrimination models. He therefore concludes that continuance of

the anti-discrimination laws imposes heavy costs that are no longer worth

the gains.

 

Other law and economics scholars have questioned the means rather than

ends of anti-discrimination law. Cooter (1994), for example, has argued that

the absolute regulatory prohibition against discrimination is an inefficient

method of controlling discrimination. Cooter’s premise is that some

discrimination is efficient and thus should not be prohibited, but that market

imperfections may allow too much discrimination and perhaps justify

intervention. Analogizing to the use of taxes or tradeable permits to control

pollution, Cooter suggests that anti-discrimination laws should tax

employers who employ too few blacks or women, or give employers

tradeable rights, rather than prohibit discrimination altogether. A tax or

tradeable rights regime can reach equivalent levels of discrimination,

differing only in whether government officials adjust prices or quantities.

Either method can enforce discrimination laws at lower cost than a flat

prohibition, in part by allowing firms with especially high costs of

complying (for example, few qualified minorities are in their particular pool)

to hire fewer minorities. Strauss (1991) makes a similar argument, phrasing

it as a preference for disparate impact analysis than disparate treatment

analysis. Current disparate-treatment law prohibits firms from ever

considering race in a decision. Strauss argues that this is costly to enforce

because it requires extensive case-specific findings. Many cases of invidious

discrimination go unchecked, while some cases of efficient discrimination

(particularly efficient statistical discrimination) are banned. Far better,

Strauss says, would be to require employers to pay a fine if they do not hire

proportionately to the nationwide labor force. If a firm has correct

bottom-line numbers, it can then make individual decisions to hire or fire

without scrutiny by the anti-discrimination laws. In making this argument,

Strauss uses an unconventional conception of disparate impact, because he

would not require the government to point to a specific employment

practice, such as a test, that caused the firm to hire fewer blacks. In a similar

vein, Mashaw (1991) has argued for racial quotas, with firms with a small

percentage of blacks in their workforce being allowed to buy permits from

firms with large black workforces. One problem with such tax, fine, or

tradeable rights schemes is that the government needs detailed information

to set the optimal tax rate. Enormous wasteful lobbying would occur by

rent-seeking advocates seeking higher or lower rates or special exemptions.

A greater problem is the symbolism of allowing trade in rights to

discriminate, although this symbolism has been overcome in allowing

tradeable pollution rights. Bell (1992, pp. 47-64) has savagely satirized the

concept of tradeable rights. Bell calls his hypothetical Racial Preferencing

Licensing Act a ‘legalized reincarnation of Jim Crow’.

 

McCaffery (1993) has likewise advocated tax reform as a solution to sex

discrimination. McCaffery sees extensive market failures that create

disparities between men and women, including search costs and incomplete

markets, but he emphasizes the failures from tax policy. The result of these

market failures, he suggests, is that women have been given a stark choice:

act like men and become highly committed to the paid labor force, or get

out. The market has been dictating choices rather than accommodating

them, as Epstein would see it. McCaffery advocates higher taxes on primary

workers, typically married men, and lower taxes on secondary workers,

typically married women. These changes could unravel the dynamic that

leads to polarized options for women.

 

5. Empirical Studies of Employment Discrimination Law

 

Unlike law and economics scholarship in many other areas, the scholarship

in employment discrimination has gone beyond model building and has

taken a serious empirical look at discrimination litigation and the effects of

anti-discrimination law. The amount of employment discrimination

litigation has exploded in the last quarter century. Between 1970 and 1989,

employment discrimination case filings rose by 2,166 percent, compared to a

rise of only 125 percent in the overall civil docket (Donohue and Siegelman,

1991). By 1995, employment cases (about 80 percent of which are

discrimination cases) comprised 6.8 percent of the federal civil docket

(Eisenberg and Clermont, 1995). Employment cases are less likely than

other cases to privately settle out of court. Employees win only 26 percent of

cases going to trial, significantly less than the 45 percent overall win rate by

plaintiffs in federal civil litigation (Eisenberg and Clermont, 1995).

 

Most employment-discrimination cases protest firings, not refusals to

hire. The common image of discrimination is that employers reject black or

women job applicants or pay black or women workers less for the same

work. Indeed, in the early years of Title VII litigation, most cases were

hiring cases. By the 1980s, however, firing cases were six times more

common than firing cases. Donohue and Siegelman (1991, p. 1015). An

employer is thus far more likely to be sued when it terminates a minority

worker than when it refuses to hire minority job applicants. This makes

employers more reluctant to hire minorities in the first place.

 

Paradoxically, societal success in overcoming discriminatory barriers

may explain much of the rise in discrimination litigation (see Donohue and

Siegelman, 1991, pp. 1006-1015). A worker is more likely to sue when

rejected from a high-paying job than a low-paying job, because the payoff of

a successful lawsuit increases while the costs of litigation vary little with

pay. Further, lawsuits protesting discrimination are more likely as the

workforce becomes more integrated, because it becomes easier to show that

the rejected black or woman was treated less favorably than a white male.

Thus, as women and blacks enter high-paying, integrated jobs, the number

of discrimination lawsuits rises.

 

In addition to long-term trends, discrimination lawsuits respond to

business cycles. The number of lawsuits increases during recessions,

damages for successful suits rise, but win rates fall (Donohue and

Siegelman, 1993). The key link is that victims of discrimination receive

higher damages the longer they are out of work.

 

Moving beyond empirical studies of the litigation process, several studies

have examined whether the anti-discrimination laws have improved black

earnings. Such studies are notoriously tricky. Essentially, the researcher is

trying to examine changes after a nationwide law goes into effect, when

many other changes in society occur as well. In the case of the

anti-discrimination laws, Title VII became effective in 1965, coinciding with

important executive orders requiring affirmation action by government

contractors, a new Voting Rights Act, continuation of the civil rights

movement, and general social unrest. Smith and Welch (1989) have argued

that federal anti-discrimination laws had little effect on black economic

progress, because black/white earnings ratios had been steadily increasing

since the 1940s.

 

Better black education and migration from the south to higher-paying

jobs in the north are the most important explanations for black economic

progress, they suggest, neither of which is directly attributable to law.

Donohue and Heckman (1991a) have contested this conclusion. As the title

of their review article indicates, they find black economic progress to be

episodic rather than continuous. The first period of progress occurred around

World War II. The second critical episode was the period from 1964 to

1975, when the black/white earnings ratio increased from 0.62 to 0.72, with

most of the progress coming in the South (Donohue and Heckman, 1991a, p.

1607). Black outflow from the south had slowed dramatically by 1965, and

improvements in amount and quality of black schooling explain only part of

the post-1965 jump in black earnings. Donohue and Heckman conclude that

Title VII, along with other civil rights legislation of the period, had a

positive impact on black/white earnings by shaking the economic and social

taboos of the south that had prevented employers from hiring black workers.

A particularly important example comes from the textile industry in South

Carolina, as examined by Heckman and Payner (1989). Prior to 1965, few

blacks were employed in the South Carolina textile industry, when black

employment levels and wages suddenly rose. Shifts from agriculture and

improved black education cannot explain the timing. The mid-1960s saw a

tight labor market, making the underemployment of blacks particularly

costly to employers. Heckman and Payner find quite plausible the story that

in 1965 entrepreneurs ‘seized on the new federal legislation and decrees’

and began hiring black workers as they had wanted to do. Epstein (1992, p.

245) attributes the surge of black employment to the federal government’s

attack on Jim Crow regulation, pointing out that South Carolina had a 1915

statute, not formally repealed until 1972, mandating segregation in textile

factories. Verkerke (1992, p. 2091) responds that nearby southern states also

had highly segregated textile factories but no express segregation law.

 

Some intriguing studies have exploited changes in coverage of Title VII

to measure its effectiveness. In 1972 Congress expanded the coverage of

Title VII from employers with 25 employees to employers with 15. Chay

(1998) has found that relative black employment and earnings rose in

industries in the South with a high percentage of small employers,

suggesting that the statute increased the relative demand for blacks. Bloch

(1994) has also emphasized differences in coverage, noting that the most

intensive enforcement of anti-discrimination policy is for federal contractors,

followed by employers with 100 or more employees required to file detailed

EEO-1 reports on their hiring practices, followed by employers with 15 or

more employees who are subject to Title VII. While significant data

problems exist, he shows that minorities appear to have greater

representation in more-regulated firms. Welch (1989), as reported in

Donohue (1989), likewise has found that employment of blacks and women

has increased between 1966 and 1980 for EEO-1 reporting firms. Bloch

warns, however, that this pattern does not necessarily show any aggregate

increase in black employment or wages, and may represent only a shift in

black employment from the uncovered to the covered sector.

 

Most analysts agree that, after the 1965-75 surge, blacks have made far

less economic progress since then, and that black earnings remain

substantially less than for whites, even after adjusting for education and

other productivity factors. The anti-discrimination laws seem to have had

little effect in the last twenty years (although it is always hard to disprove

the negative assertion that the laws prevented a decline). Whether more

vigorous enforcement of the anti-discriminations would help, or whether

they have run their course and further progress must come in other

directions, is unclear.

 

6. Special Issues in Sex Discrimination Laws

 

Much of the general law and economics approach to employment

discrimination applies equally to sex and age discrimination as well as race

discrimination. Sex discrimination raises a number of special issues,

however, and as Epstein (1992) has emphasized, the parallels between race

and sex discrimination are imperfect at best. As Wasserstrom (1977) has

ably explained, color-blindness is the eventual goal of the

anti-discrimination laws, but sex-blindness is not. No employer could

provide separate but equal bathrooms for blacks, but all large employers

provide separate bathrooms for women. In addition, pregnancy and

childbirth uniquely affect women workers.

 

The economic models fit differently for race and sex discrimination.

Becker’s taste for discrimination model is formulated generally enough to

accommodate a preference against associating with women or blacks. It

seems to fit well enough the fact that many bosses, co-workers, or customers

prefer dealing with men (and, in other situations, dealing with women).

Perhaps men gain status by maintaining group solidarity against women, but

McAdams’s status-production model seems somewhat hollow when applied

to sex discrimination. Statistical discrimination models, by contrast, often

apply well to sex stereotypes. Epstein (1992, p. 65) has applied his sorting

model to sex discrimination, emphasizing the divisions within the firm that

can arise when women want part-time status. In Posner’s (1989) view, the

economics of sex discrimination is distinctive because of the

interdependence in utilities of men and women. Married couples have joint

consumption and often act altruistically towards each other. Thus, for

example, married women indirectly benefit if labor market discrimination

increases husbands’ pay. Because racial intermarriage remains rare, blacks

do not indirectly benefit when whites are favored.

 

Anti-discrimination law has recognized differences between race and sex

discrimination. Most important is the bona fide occupational qualification

(bfoq) under Title VII, which applies to sex but not race distinctions. Title

VII prohibits employers in any context from using race to sort workers, but

allows employers to sort by sex if sex is a bona fide occupational

qualification (bfoq). Thus, employers can have separate but equal bathrooms

or grooming standards for men and women, but not for race.

 

Women tend to live longer than men. Many employers acted on this ‘true

stereotype’ in constructing pension plans, using sex-based annuity tables

that required women to make higher contributions for equivalent monthly

pensions, or receive lower monthly pensions for equivalent contributions.

The practice is a paradigmatic example of statistical discrimination. No

malicious discrimination was intended, but employers were explicitly using

sex as a proxy to predict longevity. Nevertheless, it is illegal. In two cases,

Los Angeles Department of Water and Power v. Manhart and Arizona

Governing Committee v. Norris, the Supreme Court prohibited employers

from using sex-based tables in calculating individual contributions or

benefits (although the Court allowed employers to consider the overall

percentage of women in calculating whether overall contributions match

benefits). The Court reasoned that the anti-discrimination laws demand

fairness toward individuals before fairness to groups, and the sex-based

classification involved group generalizations rather than ‘thoughtful scrutiny

of individuals’. In short, the Court prohibited statistical discrimination even

when ‘true’.

 

An extensive law and economics commentary has criticized the pension

decisions, arguing that employers should be allowed to consider sex in

calculating pension contributions or benefits (see Kimball, 1979; Freed and

Polsby, 1981; Benston, 1982; Epstein, 1992). They see employers or their

insurance companies using sex classifications to solve an adverse selection

problem. With unisex tables, women covered by a pension plan will receive

six to twelve percent more than they contribute to the plan (Epstein, 1992, p.

323, citing Benston, 1982, p. 515). These distributional consequences reduce

overall welfare, as plan participants begin ‘gaming’ the system. As Epstein

points out, strategic considerations become largest when a husband and wife

are each entitled to pension benefits. With unisex tables, the couple has an

incentive to shift their benefits towards the wife by having the husband take

a self-and-survivor annuity and the wife take an annuity for her life alone.

Employers have an incentive against hiring women or toward dropping

life-time pension benefits.

 

Similar controversy arose over the issue of whether employers violated

anti-discrimination laws by excluding pregnancy from health-insurance

benefits or pregnancy leave from disability benefits. Epstein (1992, p. 32)

emphasizes that pregnancy is a poor candidate for insurance, because it is

largely a controlled event and thus a moral hazard problem is created by

insuring its costs - women are more likely to become pregnant. Many

European countries, concerned with low birth rates, regard this as a

favorable aspect of insurance, and provide for pregnancy health costs

(generally as part of national health insurance) and paid maternity leave

with government programs. Indeed, whether childbirth benefits should be

provided through government programs or employer mandates is a good

example of the tradeoffs articulated by Summers (1989). In a thoughtful

article, Issacharoff and Rosenblum (1994) contrast the extensive European

government benefits toward pregnancy with the limited employer mandates

in the United States - essentially a non-discrimination command and an

employee’s right to twelve weeks’ unpaid leave for childbirth. They propose

a more extensive set of benefits modeled after unemployment insurance.

 

In the early US pregnancy cases, the Supreme Court upheld employer

benefit plans that excluded pregnancy. The Court reasoned that a

classification between pregnant persons and other persons was not explicitly

sex-based and therefore was not disparate treatment; and because the costs of

providing health insurance was as great for women (even without pregnancy

coverage) as for men, no disparate impact claim was made. Congress

promptly reversed this holding with the Pregnancy Discrimination Act

amending Title VII. Employers must treat pregnancy like any other

disability. Posner (1989) notes that this compels employers to ignore the

higher average cost of employing women, who are more likely to leave the

workforce to have children. The consequence of ignoring these differences,

Posner argues, is inefficient and may not benefit women as a whole. Women

directly lose because employers have an incentive not to hire them. Applying

his interdependence analysis, Posner argues that women as wives indirectly

lose. The biggest losers are married but childless working women, because

the wife and husband have lower wages than if employers could consider

pregnancy and she will not gain from the higher fringe benefits.

 

Donohue (1989) challenges Posner’s argument that statistical

discrimination against women is socially efficient. Following the approach

of Lundberg and Startz (1983) and Schwab (1986) discussed above,

Donohue reiterates that while acting on statistical averages may maximize

firm profits, it creates dynamic distortions. For example, if employers are

reluctant to train women for top corporate positions because they tend to quit

to have children, even women who plan to stay in the labor market have

reduced incentives to invest in human capital. Donohue also more broadly

challenges Posner’s interdependency thesis. Even if consumption is joint and

women are altruistic, Donohue says, women may have different preferences

and may want altruistically to spend more on their children than their

husbands would wish. If sex discrimination lowers the economic power of

women, their bargaining within a marriage is probably weakened.

 

Sexual harassment continues to be a major issue in employment

discrimination law, and the law and economics literature helps frame the

issues. Hadfield (1995) has used an avowedly economic approach to define

sexual harassment. Harassment occurs, under her test, whenever a woman is

subjected to actions that a man is not that would cause the woman to alter

her behavior to avoid the actions if she could do so without cost. Hadfield

emphasizes that many women are trapped (not at the margin) and thus must

endure the harassment, but otherwise might refuse night shifts, overtime or

travel assignments where harassment is likely. Whatever the definition,

Posner (1989) notes that sexual harassment is not in the employer’s self

interest, but often the costs of prevention are high. Just as other antisocial

workplace behavior, such as embezzlement, is subject to public enforcement,

so too should sexual harassment be - depending on the relative costs of

public and private enforcement. Epstein (1992) agrees that prohibitions on

sexual harassment are perhaps the easiest anti-discrimination prohibitions to

justify, at least if the claims stay close to their tort roots. Verkerke (1995)

has explored the standards upon which employers should be liable for sexual

harassment by its employees. He argues first that employer liability for

creating a sexually hostile environment should not differ from employer

liability for other forms of discrimination, but rather should depend on

creating the proper incentives for employers to acquire information about

harassment. Conditional notice liability, whereby employers are not liable if

they have ‘experimented’ in creating notice procedures and have not been

notified of the harassment, may be most appropriate. But Verkerke

emphasizes that the choices of liability standard require data currently not

available.

 


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