• 22 June 2009

Protect Us, Lord, from Title VII: A Response to Gelbach, Klick, and Wexler

Richard A. Epstein - New York University Law School

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In their recent article, Passive Discrimination,1 Jonah Gelbach, Jonathan Klick, and Lesley Wexler (hereafter “GKW”) offer yet another way to pile additional liabilities on hapless employers for race or sex discrimination under Title VII of the Civil Rights Act of 1964. Their article is ingenious because it identifies a mechanism—previously discussed in connection with residential sales by Lior Strahilevitz2—whereby employers might seize upon the differential preferences of individuals by sex or by race to offer bundled packages of goods that would make a facially neutral offer more attractive to members of one class than to the members of some other group. The greater rate of acceptance of the offers by members of the first group thus allows the employer to alter the mix of employees by race or sex.

In their example of how this process works, GKW rely on economic evidence indicating African-American individuals have steeper discount rates than white individuals to suggest that any offer of a salary with a fixed pension benefit will be of more value to the white applicant than to the African-American applicant,3 so that the employer can shift the distribution of his workforce in ways that advance discrimination. Armed with this knowledge, an employer could alter the racial composition of its workforce.

Assuming that this mechanism has its intended effect, it could work in both directions. An employer therefore could engage in race-based affirmative action under the radar screen by front-loading the employee’s wages and reducing their pensions in order to attract a higher fraction of African-American workers. I am not aware of any evidence that points to a conclusion that any affirmative action employer has ever engaged in this tactic, either deliberately or inadvertently. The usual way to run affirmative action programs is through aggressive recruitment, all of which takes place above the radar, given the one-sided application of Title VII: disparate impact theories are available for use by black applicants,4 while affirmative action practices are looked upon with real benevolence.5 In addition, it is instructive to note that for many jobs the pension element has little or no traction insofar as the (now discriminatory) social security system covers most of the pension obligation. Yet I hope that GKW lack the courage of their convictions and would not suggest that social security (and Medicare) be unraveled because of its implicit racial skew, or that benefits paid to African-American workers be grossed up to reflect the perceived difference in the discount rates by the median member of the respective groups.

Nor do I believe that this approach has much to commend it, even for a firm that wanted to practice race or sex discrimination under the radar. The simplest objection is that it is not likely to be effective. The initial point is that an employer would have to offer the now-suspect pension feature of the employment practice in constant proportions to all workers in order for the system to work at all. But that is not the way in which most employers want to deal with their employees. One of the most common practices for fringe benefits today is for firms to offer workers an allowance that they can use to make purchases from a menu of items, in exchange for a reduction in their base pay. This menu approach sets out an implicit indifference curve for the employer: the employee can pick any combination of items that he or she finds ideal, and thereby maximize the nonsalary portion of his or her compensation package. Single individuals do not have to buy life insurance; sicker individuals may stock up on health insurance, and so on down the line.

This ability to make the optimal choice thus counts as an implicit wage boost for all employers, regardless of race or sex. If the evidence offered in GKW is indeed correct, we should expect to find that different individuals, by race or sex, will choose different benefit packages. At that point the employer practice should be sheltered by the doctrine announced in EEOC v Sears, Roebuck & Co,6 because we have the most explicit declaration of unconstrained worker preferences that we can imagine. Commentators have, wrongly, attacked Sears on the ground that the female workers who opted for store commission jobs were conditioned wrongly by their social settings. But even if that strained interpretation made sense, it is hard to identify any external constraints on choice that fetter employee preferences in this situation. The widespread use of these menu options is not consistent with employers engaging in covert forms of discrimination. The menu strategy is an effective way to attract a diverse workforce because it does not shoehorn the benefits package into a one-size-fits-all straightjacket. GKW should praise employer ingenuity for maximizing the welfare of its employees under competition, not seek ways to expose employers to additional liabilities.

Nor is there any reason to think that GKW’s strategy for racial discrimination is likely to yield any forbidden fruits if put into play. In order for this to work, there has to be an assumption that the compensation demands across races are identical for both African-American and white workers. But suppose that they are not, and that on average the African-American workers have lower reservation wages than white workers, perhaps because of the discrimination in the general market. At this point, the pension-heavy strategy may well reduce the attractiveness of the compensation package somewhat. But that result is consistent with a loss in consumer surplus, and does not require us to assume that there will be much of a change in the rate at which African-Americans accept job offers. We know in addition that even if there is a variation in preferences across groups, there is also a variation in preferences within groups. At this point, one can ask just what the likely shift in workforce compensation is likely to be. My view is that it would be quite small, and for what end if it turns out that it makes it more difficult to recruit workers up and down the line. There does not seem to be much of a future in this practice.

There is, moreover, a real risk that the relentless effort to root out race and sex discrimination has serious adverse consequences of its own. In their article, GKW discuss briefly the Supreme Court’s most conspicuous effort into the field of sex discrimination in pensions, City of Los Angeles, Department of Water and Power v Manhart,7 where the City of Los Angeles followed standard actuarial practices by withdrawing more money from women’s salaries to cover its pension obligations than it did from men’s salaries. The statistical reason for this decision was that women lived longer than men and thus needed large amounts of money to fund their monthly payments, which were of the same magnitude as given to men. To put the point in a different fashion, the women paid into the pension plan the exact amount of money that they would have paid if there were no men at all in the employment pool. The men of course did the same.

The key point here is that the program adopted by Los Angeles should be regarded as the epitome of sound gender discrimination policy insofar as it prevented an illicit wealth transfer between the sexes. Stated otherwise, the present value of the entire benefit package was identical for men and women. Men got the additional benefit of a higher monthly payment. Women got the benefit of a longer expected life. Manhart thus showed the capacity for the employment discrimination law to disrupt the rational behavior of both public and private institutions, by using the antidiscrimination law to create an undeserved cross subsidy between men and women, which was a consequence of the rigid formalism of the United States Supreme Court.

Yet note these flexible notions of discrimination could put employers into an impossible bind. Thus, suppose that attention shifts to employer life insurance policies. Under the menu approach set out above, the correct response is to offer the best competitive rates for men and women, and these will show that women receive better offers as a consequence of their lower risk of death in any given period. But now suppose that the City of Los Angeles decided that consistency required it to use the same formal approach for life insurance that the Supreme Court in Manhart forced upon it for pensions. At this point, the women workers could rely on the theories of GKW to demonstrate that they were the victims of employer discrimination. The firm picked a mandatory insurance benefit which it then deliberately mispriced to drive women applicants from the roost. So we now have a new theory of inevitable discrimination. Women, but not men, and African-Americans, not whites, get to pick whether the economic or the formal conception of discrimination governs the case. Since every case will have either formal or impact discrimination, no employment practice is safe.

There are two conclusions that I draw from this general saga. The more modest one is that we should give new theories of employment discrimination a well-deserved vacation on the grounds that they are likely to spawn more discrimination than they prevent and to do so at a public and private cost that makes everyone worse off. My more aggressive conclusion tracks that which I have argued for since I wrote Forbidden Grounds: The Case against Employment Discrimination Laws. Just repeal the employment discrimination laws in their entirety, except as they apply to monopoly situations, of which there are virtually none in private unregulated markets.8 One of the reasons for this position is that it frees up any and all affirmative action programs from the legal limbo in which they are rightly placed under the current law. The text of Title VII is perfectly neutral on race and sex, for it applies to “any individual” as a conscious effort to introduce a color- and sex-blind regime into the law.9

The tortured interpretation of the text to allow affirmative action on the one side and to impose disparate impact liability on the other10 has had two serious dysfunctional consequences. The first is to abandon all principled rules of statutory construction in order to adopt a highly race-conscious endeavor. What could be done in the one case can be done in the next, which imposes a serious crimp on all rule-of-law values. The second is to create the need to develop some ad hoc public justification for affirmative action programs in the private and public sector, which in turn gives all institutions a strong incentive to develop narrative accounts that overstate the level of discrimination, especially in recent times, in order to lend legitimacy to these programs. In the private sector, at least, the principle of freedom of association allows the programs to go forward without needing to tarnish the reputation of other individuals. And for public institutions the correct test, I continue to believe, is to allow them in employment contexts to mirror the voluntary practices that dominate private institutions, which in turn permits the same kind of employment practices in both markets. And this freedom in labor markets comes at a much lower cost than the current suffocating regime.

And to what end? GKW do not offer any aggregate statistics that indicate that the position of African-American workers lags behind that of whites, controlling for the usual key differences in education and work experience and the like. That literature is of course enormously complex, and among its most persistent findings are that wage gaps between blacks and whites prove significant for men, but not for women.11 The explanations for that disparity are likely to prove complex, but invidious discrimination on racial grounds does not look to be one of them.

The situation on the ground, moreover, is quite different from what it was some years ago. When I started teaching in 1968, the faculties were pretty much white and male. My first Dean, Dorothy Nelson, was a real pioneer.  The composition of every university and every business has been transformed in the interim. I do not think that this is in response to legal pressures, but in response to real perceived demands inside the organizations in question. The high level of support for affirmative action cannot be squared with a covert racial or sexual animus on the part of white men who now occupy a shrinking proportion of the dominant positions. Abigail Thernstrom was quite right to attack the Attorney General, Eric Holder, for his dismal account of race relations in his February 18, 2009 speech.12 It does not help matters today to make bald assertions that “in things racial we have always been and continue to be, in too many ways, essentially a nation of cowards.”13

That broad denunciation denigrates the brave work and large sacrifices of too many honorable people. There is no reason to get smug on questions of progress on matters of race and sex, but the thought that any tightening of the anti-discrimination laws can help improve the current situation should be put firmly to one side. Yet Congress does not seem to be listening. Recently, it adopted the Lilly Ledbetter Fair Pay Act, which included an unexplained one-sentence finding about the “reality of wage discrimination” in American life.14 It is therefore not too much to note the recent statistical information that the unemployment rates for men is higher in all relevant categories than for women.15 There are doubtless many possible explanations for this turn of events. But the one point that does seem clear is that on matters of race and sex discrimination our first order of business should be to give it a rest, not to embrace new theories of liability under a statute that has already outlived its usefulness.dingbat
 

Acknowledgments:

Copyright © 2009 The University of Chicago Law Review.

Richard A. Epstein is James Parker Hall Distinguished Service Professor of Law, The University of Chicago Law School; Peter and Kirsten Bedford Senior Fellow, The Hoover Institution; and a visiting law professor at New York University Law School.

This Editorial is a Response to the following Legal Workshop Editorial: Jonah Gelbach, Jonathan Klick & Lesley Wexler, Passive Discrimination, LEGAL WORKSHOP (U. CHI. L. REV. June 22, 2009).

  1. Jonah Gelbach, Jonathan Klick, and Lesley Wexler, Passive Discrimination: When Does It Make Sense to Pay Too Little?, 76 U Chi L Rev 797.
  2. See generally Lior Jacob Strahilevitz, Exclusionary Amenities in Residential Communities, 92 Va L Rev 437 (2006).
  3. See John T. Warner and Saul Pleeter, The Personal Discount Rate: Evidence from Military Downsizing Programs, 91 Am Econ Rev 33, 37 (2001).
  4. See, for example, Griggs v Duke Power Co, 401 US 424, 431 (1971) (marking the early expansion of the antidiscrimination doctrine to disparate treatment cases). For my criticism, see Richard A. Epstein, Forbidden Grounds: The Case Against Employment Discrimination Laws 182-204 (Harvard 1992).
  5. See, for example, Grutter v Bollinger, 539 US 306, 328 (2003) (upholding a university affirmative action admissions policy).
  6. 839 F2d 302, 348-49 (7th Cir 1988) (noting that “frequently subjective and other intangible factors may influence employment decisions and that even subjective misjudgments may not necessarily be the basis for Title VII liability”), quoting Mozee v Jeffboat, Inc, 746 F2d 365, 371 (7th Cir 1984).
  7. 435 US 702 (1978).
  8. As a needed caveat, use of these rules should be allowed for conventional economic reasons in the case of monopoly employers. There are none in the private sector, except for unions, which are rightly subject to a duty of fair representation. See Steele v Louisville & Nashville Railroad Co, 323 US 192, 202-03 (1944).
  9. 42 USC § 2000e-2 (“Unlawful employment practices: (a) Employer practices. It shall be an unlawful employment practice for an employer—(1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national origin; or (2) to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual’s race, color, religion, sex, or national origin.”).
  10. See United Steelworkers of America v Weber, 443 US 193, 214-16 (1979) (upholding a private affirmative action program); id at 211 (observing the availability of a disparate impact theory to prove employment discrimination, and noting that an affirmative action program can help to refute such a claim of discrimination).
  11. See generally Arthur Sakamoto, Isao Takei, and Hyeyoung Woo, Black-White Wage Differentials among College-educated Workers: The Effects of Field of Study and Socioeconomic Background, All Academic Research (Jan 17, 2006), online at http://www.allacademic.com//meta/p_mla_apa_research_citation/1/0/3/8/0/pages103802/p103802-1.php (visited June 10, 2009).
  12. Abigail Thernstrom, A Lot Less Talk: The Last Thing America Needs Is More Obsessing about Race, National Review Online (Feb 25, 2009), online at http://article.nationalreview.com/?q=MDU2MTY5ODE4MTYxYzA5ZWE4NWZiOTA0YjRiNTY5MzQ (visited June 10, 2009).
  13. Department of Justice, Remarks as Prepared for Delivery by Attorney General Eric Holder at the Department of Justice African American History Month Program (February 18, 2009), online at http://www.usdoj.gov/ag/speeches/2009/ag-speech-090218.html (visited June 10, 2009).
  14. Lilly Ledbetter Fair Pay Act of 2009 § 2(2), Pub L No 111-2, 123 Stat 5.
  15. Floyd Norris, In This Recession, More Men Are Losing Jobs, NY Times B3 (Mar 14, 2009) (“In the 12 months through February, the latest data available, unemployment rates for men rose at a faster pace than those for women, no matter what their education or age.”).

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