We thank Richard Epstein for commenting on our online Article. He brings a unique perspective to the field of employment discrimination and pushes other scholars to think carefully about their additions and amendments to the existing regulatory landscape. We have some fundamental disagreements with Epstein, but a careful reading of our full Article easily addresses most of his criticisms. By way of quick summary, let us remind the reader of our original premise:

What we term “passive discrimination” involves the employer’s use of wage and benefits packages that exploit observed, systematic group-level preference heterogeneity to induce workers to sort themselves ex ante such that members of a disfavored group view the job opportunity as being less attractive than members of other groups. . . . We note that some employers hold a discriminatory intent when designing such terms and conditions, while others might be simply unaware or neutral as to when their design of such packages will induce segregation based on membership in a disfavored group.¹

While we three disagree as to Title VII’s ultimate desirability and utility, Epstein unfairly characterizes our original Article as unabashed Title VII expansionism. A look at the Article shows our careful acknowledgement of Title VII’s limitations and our embrace of creative, nonregulatory solutions to the problem of passive discrimination.

I.
Protecting Choice while Avoiding Liability

Epstein’s hostility to our Article’s recommendations is misplaced. He mistakenly contends that we discourage menu options and argues,

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 ability to make the optimal choice thus counts as an implicit wage boost for all employers, regardless of race or sex. . . . [T]he employer practice should be sheltered by the doctrine announced in EEOC v Sears, Roebuck & Co, because we have the most explicit declaration of unconstrained worker preferences that we can imagine. . . . 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 their employees under competition, not seek ways to expose them to additional liabilities.³ For instance, we state, “For most of the problems identified in this Article, figuring out ways to enhance employee choice should help reduce benefits discrimination for those with atypical preferences. . . . Such choice allows employees to select a package that best matches their expectations and preferences.”⁴ We affirmatively encourage specific possibilities as compensation menus for sales positions as well as urge the EEOC to develop gold standard programs to get employers to think creatively about the provision of equally valued fringe-benefit packages.⁵ An employer who provides such choice in fringe benefits or compensation packages would most assuredly not be subject to liability under even our most far-reaching proposals to amend Title VII. Thus, Epstein is clearly mistaken in his assertion that “every case will have either formal or impact discrimination.”⁶ Though a firm that “picked a mandatory insurance benefit which it then deliberately mispriced to drive women applicants from the roost”⁷ would be held liable under our expanded notion of Title VII, a firm that offers a variety of health insurance policies, only some of which are priced to account for women’s lower risks of death, would not face liability.

Similarly, we think Epstein misunderstands our argument when he notes, “The widespread use of [ ] menu options is not consistent with employers engaging in covert forms of discrimination,” and that we “should praise employer ingenuity for maximizing the welfare of its employees under competition, not seek ways to expose employers to additional liabilities.”⁸ As we explain more fully below, a firm offering compensation menus, where each item on the menu imposes the same cost on the firm, cannot be engaging in passive discrimination. Allowing workers to choose compensation form vitiates any screening function of compensation packages. Thus, when Epstein writes that “[t]he widespread use of these menu options is not consistent with employers engaging in covert forms of discrimination,” he has our—and our model’s—full-throated agreement. Rather than disproving our argument, this admonition of Epstein’s is one of our model’s primary conclusions. We are thus pleased to agree with Epstein on this crucial point of ours.

II.
Passive Discrimination: Pervasive or Possible?

While Epstein suggests that most employers avoid passive discrimination by offering menus, we make no claim that intentional or even unintentional passive discrimination is widespread. Epstein further notes that he is “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.” We are also unaware of any intentional affirmative action passive discrimination,⁹ which is consistent with his point that aggressive recruitment of minorities is unlikely to be punished by Title VII and thus minority-seeking employers need not pursue such a strategy. Stipulating for discussion’s sake only that courts treat affirmative action benevolently, Epstein’s argument proves too much: passive discrimination is likely to be a one-way ratchet for animus-based discriminators. This observation, if true, is consistent with what we argue in our original Article that “recent class actions suggest much of legal academia and the public underestimate the prevalence of basic animus- or stereotype-driven discrimination,” and thus, it “should be unsurprising if litigation-savvy employers might deliberately craft compensation structures and packages to exclude certain types of workers.”¹⁰ In other words, academics like Epstein may be too sanguine about the existence of animus- and stereotype-based discrimination. Passive discrimination is just one particularly litigation-savvy strategy of many possible options to discourage disfavored individuals from joining or staying in a particular workplace.

While we are not aware of sufficiently detailed publicly available datasets that would allow us to test for the existence of passive discrimination, ¹¹ we do think that our model provides insight into the selection effects (by race, gender, and so on) that exist across industries that have been consistently documented in the labor economics literature.  While labor economists generally take these selection effects as given, our framework holds the promise of explaining why such selection effects arise.

We do not definitively identify any examples of intentional passive discrimination, because without conducting a rigorous case study, we cannot confidently distinguish between intentional and unintentional passive discrimination. Of course, as we note in our Article, this difficulty is part of the problem. Without a smoking gun, scholars and courts will find differentiating between intentional and unintentional passive discrimination quite cumbersome. Yet our Article identifies several examples that likely support our hypothesis. For instance, one example we describe in the Article is Chick-fil-A and its Sundays-off policies. Chick-fil-A may have multiple motives for its Sundays-off policies, but given its frequent embroilment in Title VII suits for religious discrimination,¹² we would be unsurprised if it used its Sundays-off policies as part of a larger strategy to screen out non-Christian franchise owners and employees. Other Chick-fil-A hiring practices, such as a year-long vetting process with multiple interviews for key positions, support this hypothesis.¹³ says the company works hard to select people like Yokum, who “fit.” “We want operators who support the values here,” [he] says. Emily Schmall, The Cult of Chick-fil-A (cited in note 15).]

II.
Theoretical and Empirical Economic Issues

We also wish to address a variety of economic points that Epstein raises. These include Epstein’s discussion of pensions and social security, his recommendation to repeal employment discrimination laws but for a very narrow monopoly exception,¹⁴ust 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.” Epstein, Protect Us, Lord, from Title VII (cited in note 3).] and the contention that the economic viability of passive discrimination requires identical compensation demands across races and homogeneous preferences within race.¹⁵ We also seek to deal with his related claims that we fail to provide evidence suggesting “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,”¹⁶ and Epstein’s contention about the “persistent finding[] [ ] that wage gaps between blacks and whites prove significant for men, but not for women.”¹⁷ Epstein claims that “[t]he explanations for that disparity are likely to prove complex, but invidious discrimination on racial grounds does not look to be one of them.”¹⁸

Before we address these issues specifically, we will review some basic methodological facts concerning the theoretical stability of labor market discrimination. Consider first the case of an employer operating in a perfectly competitive labor market and a perfectly competitive output market with free entry. Perfect competition in the labor market means that workers must be paid at least their marginal revenue products—the sales value to employers of the output that workers produce. An employer who wishes to ensure that she can hire only favored types of workers will have to pay a premium, marking up the favored employees’ wages above marginal revenue product. In a competitive output market, such an employer will necessarily lose money and ultimately go out of business.¹⁹ This is the standard economic argument against the long-run necessity of antidiscrimination laws: competitive markets chase out bigots.

Traditionally, economists have recognized three important counterexamples in which discrimination in long run equilibrium is possible given laissez faire policies. In these cases, antidiscrimination laws might be necessary to eliminate discrimination. Epstein himself raises the first case, one in which employers have labor market power that is somehow protected from another employer’s entry into the labor market. In this case, employers can pick and choose the workers they want, at least up to a point. In such monopsony cases, workers’ marginal revenue product is above the wage.²⁰ Moreover, workers’ only recourse against a monopsonist who refuses to hire them is to work in some other industry, which presumably entails a loss of welfare. Even when the monopsonist must sell on a competitive output market, it earns economic rents from its labor market power. One way to spend some of those rents is to discriminate in choosing workers, and no amount of output-side competition will eliminate this option.

The second case in which equilibrium discrimination is possible under laissez faire occurs when employers have pricing power on their output markets, regardless of whether they have pricing power in the labor market. If entry is limited, then economic rents will not be totally competed away. Once again, the employer can spend some of her economic rents on wage premia that induce the favored mix of workers.

The third case in which equilibrium discrimination is possible under laissez faire involves not market power, but consumer preferences. Suppose consumers prefer to buy from firms that discriminate against disfavored workers. Given equal marginal productivity of workers, any firm that employs disfavored workers must operate at a competitive disadvantage vis-à-vis firms that do not. As a result, nondiscriminating firms will go broke, and only discriminating employers will remain in business. If consumers are willing to pay to avoid disfavored workers, no purely competitive mechanism exists to stop them from doing so.

Our model’s methodological contribution is to establish a fourth counterexample. We show that discrimination is possible, in the form of workplace segregation, when (a) all markets are perfectly competitive, and (b) consumer preferences are nondiscriminatory. What drives our result is the correlation between worker type and worker preferences for amenities. This correlation allows firms to design limited compensation packages that will lead to equilibrium segregation of the workplace, and this is the practice that we have termed passive discrimination. Our main economic methodological contribution is thus to point out a gap in the previous understanding of the conditions that allow persistence of employment discrimination.

A.     Pensions and Social Security

Epstein suggests that pension systems are unlikely to function as screening devices, since “for many jobs the pension element has little or no traction insofar as the . . . social security system covers most of the pension obligation.”²¹ This is an unusual characterization of Social Security’s role—one we believe contradicts decades of public policy. Consider this discussion, from the Social Security Administration Historian’s Office:²³ ruling that an employer may not deduct more from women’s pay to cover their pensions even though, as an actuarial matter, women as a class are likely to draw on pension benefits longer. We do not disagree with Epstein’s argument that women’s longer longevity makes such practices economically reasonable. But we also do not see the relevance of this conclusion, either to the possible existence of passive discrimination or to our policy suggestions.

B.     Epstein’s market Power Point Proves Too Much

Epstein supports antidiscrimination employment laws only when perfect monopsony power exists. As our discussion above suggests, the obvious economic justification for this position is that no competitive forces will prevent a perfect monopsonist from sustained use of discrimination. The discussion above notes that equilibrium discrimination can occur when there is output market monopoly, or competitive markets with bigoted consumers. The economic argument behind our model shows that the combination of bigoted employers and type-correlated worker preferences is a fourth case allowing equilibrium discrimination, even in competitive markets. Epstein’s position that only the first of these four cases justifies antidiscrimination laws cannot be supported on economic grounds. If antidiscrimination laws make sense for any of these cases, we believe they make sense for the others.²⁴

C.     Epstein Contradicts Himself on Reservation Wages

Epstein also contends that intentional and unintentional passive discrimination will not appear if disfavored groups such as African-Americans have lower reservation wages. But for employers operating as price takers on both the labor and output markets, nothing substantive in our conclusions hinges on this question. Epstein’s suggestion to the contrary relies on the surprising, if implicit, assumption that the labor market does not operate to drive wages toward marginal revenue product. Epstein writes:

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 rate at which African-Americans accept job offers.²⁵

Epstein’s suggestion here is that lower reservation wages among African-Americans will prevent firms from screening them out by converting some cash compensation to fringe benefits that African-Americans value less than whites. On this argument, the effect of such screening would be to reduce the surplus received by African-American workers, but not to change the mix of employees hired.

But Epstein’s argument hinges critically on the implicit assumption that competition in the labor market will fail to show up for work. According to the basic logic of competition, any employer who pays African-Americans in a way that does not, as Epstein phrases it, “maximiz[e] the welfare of its employees under competition,”²⁶ will soon be searching for a new employee willing to forgo welfare maximization. A worker paid less than the value of her marginal product by her present employer will make an attractive hire from some other firm’s perspective. Therefore, her wage will be bid up to her marginal revenue product.²⁷ Nowhere in this discussion do reservation wages play a role, except insofar as they are so high that a worker would choose to exit employment altogether—and that is the opposite of Epstein’s hypothesis.

Thus, Epstein’s point requires one to suspend belief in the forces of market competition. This is a curious position, given Epstein’s reliance on the beneficial forces of market competition in his campaign to “repeal the employment discrimination laws in their entirety, except as they apply to monopoly situations.”
²⁸ In sum, Epstein’s suggestion that anything important hinges on the question of whether African-Americans have lower reservation wages appears to stand in significant tension with his later suggestion that buyer-side labor market power is nonexistent in private, unregulated labor markets.

Epstein also emphasizes preference variation within worker type: “We know in addition that even if there is a variation in preferences across groups, there is also a variation in preferences within groups.”²⁹ While this statement is surely correct, it is just as surely beside the point. All that is required for the economic viability of passive discrimination is that amenity preferences be correlated with worker type—not that they be uniform within type. At the cost of much more notation and more equations, we could easily have written up a much more general version of our model that allows for any finite number of groups, each having its own nondegenerate preference distribution. Within-group preference uniformity is simply a modeling assumption that keeps the analysis wieldy, which is good practice in economic exposition.

D.     Empirical Evidence on the Black-White Gap in Labor Market Positions

Epstein criticizes us on the grounds that we

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. The explanations for that disparity are likely to prove complex, but invidious discrimination on racial grounds does not look to be one of them.³⁰

Leaving aside the problems with the study Epstein cites,³¹ he rightly notes that we did not offer detailed empirical evidence on the relative position of black and white workers. Of course, such evidence was neither the focus of our argument, nor necessary to any of our conclusions. However, we now happily take this opportunity to briefly discuss some interesting evidence from this literature.

The econometric study likely most friendly to Epstein’s conclusion argues emphatically against controlling for what Epstein calls “key differences in education and work experience and the like.” In that study,³² Derek Neal and William Johnson use a sample of blacks and whites born between 1957 and 1964. They find that essentially all of the black-white wage gap among women, and about 70 percent of the gap among men, disappears when one (a) controls for scores achieved on a test administered before most sample members had entered the labor market, but (b) does not control for Epstein’s “key differences in education and work experience and the like.”³³

While Neal and Johnson offer an economic argument in favor of this approach to estimating the black-white wage gap, labor economists disagree on this point. For example, after extensive theoretical and empirical investigation, including a reanalysis of Neal and Johnson’s data, Kevin Lang and Michael Manove³⁴ conclude that “there are good grounds for believing that at least some of the black-white wage differential reflects differential treatment in the labor market.”³⁵ Consider also Joseph G. Altonji and Rebecca M. Blank’s widely cited Handbook of Labor Economics chapter.³⁶ Among their “key conclusions” concerning differentials in wages and labor force participation, Altonji and Blank offer that

[e]ven controlling for occupation, industry, and job characteristics, there remain significant differentials between white males and other workers. Some of this may be due to incompletely specified models. . . . Some of it almost surely represents ongoing constraints in the labor market for women and minorities.³⁷

Having discussed such evidence, we note two reasons why Epstein’s concentration on wage gaps seems misplaced. First, in our model’s segregated equilibria, favored workers receive some of their compensation in the form of fringe benefits, whereas disfavored workers receive all of their compensation in cash. Competition forces firms to spend the same amount to employ each type of worker. It follows that disfavored workers will be paid more in cash than equally productive favored workers. A more powerful empirical critique of our model than Epstein’s would thus seem to be that in the real world, employers generally do not pay African-Americans more cash compensation than they pay whites. However, a valid empirical test of our model would require overcoming two empirical hurdles: getting data on worker-specific marginal productivity; and dealing appropriately with difficult econometric issues related to workers’ job choices, which is the key mechanism through which passive discrimination would operate. We leave the interesting problem of solving these nontrivial econometric problems for future research.

More important for our Article, Epstein’s focus on wage gaps is misplaced, as our primary focus is on workplace segregation, not on wage discrimination. For evidence on workplace segregation, consider recent research by Judith Hellerstein and David Neumark,³⁸ who study “segregation in the labor market—that is, the extent to which members of different groups tend to work with coworkers who are more like themselves than would be predicted by random allocation of workers to establishments.”³⁹ Hellerstein and Neumark write that available empirical evidence prior to their study suggests the presence of systematic job segregation along the lines of sex, race, and ethnicity. One study finds that “job cell segregation by race accounts for about half of the black-white wage gap.”⁴⁰ This finding suggests there is ample room for passive discrimination to operate, though certainly specific evidence would be necessary to conclude that it does in fact operate.

Using high-quality, restricted-use, matched employer-employee data from the 1990 US Census, Hellerstein and Neumark write that “[o]ur results point to workplace segregation by education and race. . . . We find, however, that education plays very little role in generating workplace segregation by race.”⁴¹ This result suggests that at least one of Epstein’s “key differences” likely has little to do with racial job segregation, whatever association it has with racial wage gaps. Hellerstein and Neumark’s is of course just one study, and to our knowledge, an empirical study of the kind of segregation to be expected from passive discrimination has not been done. Nevertheless, we do not believe the possibility of workplace segregation as induced by passive discrimination is far-fetched.

As a final source of empirical evidence, consider a recent audit study conducted by Marianne Bertrand and Sendhil Mullainathan,⁴² who sent fake resumes to real employers who advertised jobs for new employees. Pairs of resumes were identical except for one feature: the authors “experimentally manipulate perception of race via the name of the fictitious job applicant . . . [by] randomly assign[ing] very White-sounding names . . . to half the resumes and very African-American-sounding names . . . to the other half.”⁴³ They found “large racial differences in callback rates.”⁴⁴ They note white-named applicants need to send about ten resumes per callback, whereas African-American-named applicants must send about fifteen resumes. They conclude, “This 50-percent gap in callback is statistically significant. A White name yields as many more callbacks as an additional eight years of experience on a resume. Since applicants’ names are randomly assigned, this gap can only be attributed to the name manipulation.”⁴⁵ In sum, we believe the empirical evidence on racial gaps in the labor market points to a less sanguine conclusion than Epstein’s. We agree with him that explanations for racial “disparity are likely to prove complex,” but we do not believe that the available evidence supports his blanket claim that “invidious discrimination on racial grounds does not look to be one of them.”
⁴⁶

Conclusion

In conclusion, while we are grateful to Professor Epstein for taking the time to comment on our Article, we will have to agree to disagree about a number of the premises upon which many of his arguments are based. As for Epstein’s larger complaints about the existence and effects of Title VII, for brevity’s sake, we defer to the wider employment discrimination literature which we feel adequately addresses these claims.

Acknowledgments:

Copyright © 2010 University of Chicago Law Review.

Jonah Gelbach is Associate Professor of Economics at the University of Arizona.
Jonathan Klick is a Professor of Law at the University of Pennsylvania Law School.
Lesley Wexler is an Assistant Professor at Florida State University School of Law.

To be sure, the government and the public share a substantial interest in the government’s own speech. Government speech valuably furthers citizens’ capacity to participate in democratic self-governance by enabling them to identify and assess their government’s priorities and performance. Consider, for example, the insights into government policymaking provided to the public during the Vietnam War by the Pentagon Papers and, more recently, by the Department of Justice’s legal memoranda outlining the Bush administration’s views on the scope of executive power in the war on terrorism. Government expression thus carries great instrumental value because of what it offers its audience: information that furthers the public’s ability to evaluate its government.

Because government speech is so important to a thriving democracy, the constitutional standards for evaluating government’s control of its own speech differ dramatically from those that apply to government regulation of private expression. On one hand, government cannot discriminate on the basis of viewpoint when regulating private speech unless its action satisfies strict scrutiny. On the other, government’s own expression is exempt from free speech clause scrutiny, leaving the government generally free to adopt and deliver whatever message it chooses when it speaks on its own behalf. Those unhappy with their government’s expressive choices can seek recourse through political accountability measures like lobbying or voting, rather than through First Amendment litigation.

Focusing on the purposes underlying the government speech doctrine, however, reveals that courts too often permit government to claim control over employee speech that does not actually undermine its own expression. Courts’ deference in this area effectively works as a bludgeon against public employee speech when a scalpel offers a better tool for parsing government’s legitimate expressive interests. More careful attention to what it is that government actually seeks to express can help accommodate those interests while providing greater protection for workers’ own free speech rights and the public’s interest in transparent government.

I.
Matching First Amendment Doctrine to Government’s Expressive Interest in Its Workers’ On-Duty Speech

Once one recognizes the value of government speech that facilitates citizens’ ability to evaluate their government and its priorities, one should understand the First Amendment to permit government to claim and control only the speech of those public employees that it has specifically hired to deliver a particular government viewpoint. This is the case, for example, when a health department hires an employee to implement an antismoking campaign, when a school board hires an antivoucher lobbyist, or when a mayor commissions a muralist to create patriotic art. These are examples of government speech that expose the government’s expressive choices, thus enabling the public to take any accountability measures they desire. And because that speech is valuable to the public, the First Amendment should permit government to protect that viewpoint from being garbled—for example, by disciplining an employee who was hired to deliver the government’s views but who nevertheless speaks in a way that undermines that message.

This approach, however, describes a much smaller slice of public employee speech than does the test recently established by the Supreme Court in Garcetti v. Ceballos. Garcetti involved a First Amendment challenge by a prosecutor disciplined for his internal memorandum criticizing a police department affidavit as including serious misrepresentations. The Court held that the First Amendment does not protect public employees’ speech made “pursuant to their official duties,” concluding that a government employer should remain free to “exercise . . . employer control over what the employer itself has commissioned or created.” The Court thus created a bright-line rule that treats public employees’ speech delivered pursuant to their official duties as the government’s own speech for which it paid—in other words, speech that the government may control free from First Amendment scrutiny.

The Court’s decision characterizes any speech pursuant to a public employee’s official duties as the government’s own speech. This distorted understanding of government speech overstates government’s communicative claims to its employees’ on-duty speech while undermining the public interest in speech that facilitates voters’ ability to evaluate their government. To be sure, the public’s interest in what the prosecutor in Garcetti had to say did not diminish because he uttered certain views pursuant to his official duties. Indeed, public entities frequently hire workers not to deliver a particular government message but to flag dangerous or illegal conditions—yet Garcetti empowers the government to punish them for delivering just “what the employer itself has commissioned.” Lower courts now routinely apply Garcetti to dispose of First Amendment claims of police officers, teachers, health care workers, and other public employees punished for making accurate, on-the-job reports of safety hazards, ethical improprieties, and illegal behavior. In short, rather than identifying a theoretically principled approach for capturing the value created by empowering government to control its own speech, Garcetti instead formalistically imposed a bright-line rule that avoids the often-challenging but entirely commonplace task of balancing constitutional interests.

II.
Matching First Amendment Doctrine to Government’s Expressive Interest in Its Workers’ Off-Duty Speech

Courts also increasingly consider government employees to be speaking as employees even when away from work. Examples include firefighters discharged for participating in a holiday parade that featured mocking racist stereotypes, a university vice president disciplined for writing a newspaper column questioning gay rights, and police officers fired for their involvement with sexually explicit websites. In these cases, the government argued neither that the off-duty speech occurred pursuant to the plaintiff’s official duties and is thus unprotected under Garcetti nor that the off-duty speech harmed that employee’s own job performance. Instead, courts increasingly defer to government’s assertion that its association with employees who engage in certain off-duty expression undermines its ability to communicate its own views.

To be sure, government’s expressive interests in at least some of these cases are substantial—such as police departments’ interest in credibly communicating their commitment to evenhanded law enforcement regardless of race. Yet courts’ unconstrained deference to these contentions would permit government agencies to fire workers for any off-duty speech to which the public might object. Indeed, absent any limiting principles, certain individuals may be unemployable for many government jobs purely because of their unpopular or controversial off-duty expression—for example, marching in a gay pride parade or blogging for or against abortion rights or immigration reform. Although there may well be times when government should be permitted to control the off-duty speech of its workers, such as when that speech imperils its own expression, attention to First Amendment values suggests that these circumstances should be rare and well examined. Less deferential approaches that identify with greater precision those threats to government’s expressive interests that are sufficiently strong to justify controlling public employees’ off-duty speech are preferable.

A categorical approach would permit the government to claim as its own—and thus control exempt from free speech clause scrutiny—only the speech of those government workers who serve as the voice or the face of the government such that even their off-duty speech cannot be dissociated from that of their employer. This test treats workers in certain positions as so identified with the government that they can never escape their governmental role to speak purely as private citizens even when technically off the job. To be sure, this is—or should be—a relatively small number of government jobs. Examples might include the off-duty speech of employees in certain political positions who are hired to represent the views of legislators or other officials. Law enforcement officers also likely fall into a category of “quintessential public servants” because their agencies depend so heavily on public trust and cooperation for their effectiveness.

The advantages and disadvantages of this approach include those of any bright-line rule. On one hand, it is relatively predictable and easy to apply, and thus communicates clear expectations to employers and employees alike. For example, law enforcement agencies could simply control the off-duty speech of police officers across the board; police officers would then know to adjust their expression accordingly. The off-duty speech of employees who do not fall in the category of inescapably public servants, in contrast, would remain protected.

On the other hand, the predictability and comparative administrative ease offered by a bright-line approach must be weighed against its rigidity:  we must have confidence that we have identified the right categories of employees to be treated as unable to escape their roles as government employees for First Amendment purposes. A categorical rule, moreover, gives employers a great deal of control over the employees who fall within that category—control that may be unwise and unfair. Indeed, under this rule, often-underpaid police officers would face greater speech restrictions than other public employees.

Another possibility is a more flexible contextual approach that recognizes that employees’ off-duty speech occurs in a wide range of situations that vary in their capacity to threaten government’s expressive interests. Rather than assuming that the off-duty speech of employees in certain jobs—but only in those jobs—necessarily undermines government’s own expression, a contextual standard would instead require the government to prove such a threat on a case-by-case basis.

Among the strongest factors to be considered in this inquiry should be a government worker’s deliberate choice to link employment to off-duty speech, thus leading the public to make this association as well. This was the case, for example, in San Diego v. Roe, a recent Supreme Court case in which a police officer was fired for his sexually explicit website that included a video of himself stripping off a police uniform and masturbating. Government’s fears that the public will associate the worker’s off-duty expression with the government are especially reasonable in these cases because the employee has made that association explicit. An employee’s off-duty speech that does not explicitly refer to a government employer, in contrast, would be less likely to undermine the government’s expressive interests.

Observers may similarly be less likely to attribute the speech of employees whose positions do not require policymaking or extensive public interaction to the agency that employs them. Government’s showing would be considerably stronger—although perhaps not dispositive—when the plaintiff is in a leadership position or a position that requires significant public trust and interaction such that the public may reasonably believe that the employee represents the government’s views. Also relevant to this inquiry is the content of the contested speech and whether it conflicts with the government’s transparently claimed views. Attention to these factors recognizes that certain combinations of an employee’s position and her expression’s content pose greater expressive threats to government than others. A police department seeking to communicate that “We enforce the law without regard to race” may be considerably less believable when it employs officers who march in Klan parades. But not all controversial messages delivered by off-duty officers pose that sort of threat to the agency’s own transparently articulated views. Applying this principle, for example, a court might well permit a police department to punish an officer’s off-duty participation in a Klan parade but not in a Martin Luther King, Jr. Day celebration (or a peace rally or gay pride parade) because of the different threats this speech poses to the government’s communication of its own views.

But drawing these distinctions requires that one be particularly confident of government’s and courts’ ability to sort the damaging effects of speech by content—an inquiry that can be difficult and uncomfortable. The flexibility of a multifactor contextual standard inevitably invites charges that it is too difficult to apply and will generate unacceptably unpredictable results.

For an illustration of how the choice between a categorical and contextual approach may lead to different outcomes, consider the differing opinions in Pappas v. Giuliani. There, the plaintiff police officer brought a First Amendment challenge to his discharge for mailing anonymous racist materials to nonprofit organizations that had sent him fundraising solicitations. The Second Circuit majority essentially adopted what I have called a categorical approach, characterizing the police officer’s speech as inevitably associated with the views of his department, regardless of context:

For a New York City police officer to disseminate leaflets that trumpet bigoted messages expressing hostility to Jews, ridiculing African Americans and attributing to them a criminal disposition to rape, robbery, and murder, tends to promote the view among New York’s citizenry that those are the opinions of New York’s police officers. The capacity of such statements to damage the effectiveness of the police department in the community is immense.

Then-Judge Sotomayor’s dissent, in contrast, focused on the specific factual context of the officer’s speech, noting that his job at a computer station involved neither policymaking nor public contact, that his speech made no reference to his employment in law enforcement, and indeed that his speech was intended to be private and anonymous. Under those circumstances, she found no legitimate threat to the department’s public image or to its credibility in communicating a commitment to racial evenhandedness.

Although there may be no completely satisfying solution, I find both the categorical approach and the flexible contextual approach to be preferable to the status quo, which is far too deferential to government’s claimed expressive interests. On balance, the contextual approach better comports with my sense that the threat posed to government’s expressive interests varies significantly with the context of an employee’s off-duty speech even within certain categories of employees closely identified with their governmental roles. To be sure, a contextual approach still makes for hard cases. But one of my hopes is that courts will understand these as hard cases, rather than creating bright-line rules that obviate the need to engage in the challenging task of attending to multiple, and sometimes competing, interests. By paying more careful attention to whether public employees’ speech actually threatens the government’s legitimate expressive interests, those interests may be accommodated while providing greater protection to the public’s interest in transparent government and government workers’ free speech rights.

Acknowledgments:

Copyright © 2009 Duke Law Journal.

Helen Norton is Associate Professor at University of Colorado School of Law.

This Legal Workshop Editorial is based on the following full-length Article: Helen Norton, Constraining Public Employee Speech: Government’s Control of Its Workers’ Speech to Protect Its Own Expression, 59 DUKE L.J. 1 (2009).

We first discuss some basic background details of the model, focusing on the production technology, competitive labor and goods markets, and the (assumed) systematic differences in preferences of two worker types: Deltas and Omegas. Then we introduce the possibility of compensation plans that involve both cash wages and fringe benefits, considering first the case where firms face the same amenity price as do their workers. In such cases, a no-fringe-benefits equilibrium exists. This equilibrium is integrated. However, at least one cash-and-fringe compensation plan¹ allows prejudiced firms to hire only Deltas in equilibrium. The resulting equilibrium is segregated, in the sense that at least some firms may (a) deliberately avoid hiring Omegas, and (b) stay in business. Interestingly, the Omegas’ utility is no lower in this equilibrium than it would be in the cash wage-only equilibrium. This result follows because of the competitive nature of the labor market, which ensures that other firms will hire Omegas and pay them their marginal product.² If discrimination is regarded as socially or individually harmful in ways that do not show up in consumption-based utility, then Omegas may still be worse off in a segregated equilibrium.

We also consider the case where firms have a price advantage in purchasing amenities, perhaps because of economies of scale. In this case, no integrated equilibrium exists. Any equilibrium necessarily involves cash-and-fringe compensation plans used to pay Deltas and a cash-only plan used to pay Omegas. Banning fringe benefits would (a) eliminate segregation, (b) reduce Deltas’ utility compared to the segregated equilibrium, and (c) have no impact on the Omegas’ utility compared to the segregated equilibrium. We note that this condition for equilibrium would hold even when employers harbor no animus toward Omegas. If discrimination is regarded as socially or individually harmful in ways that do not show up in consumption-based utility, then Omegas’ welfare may be improved by a policy of banning fringe benefits.

 
I.
Model Details

Suppose two types of workers, Deltas and Omegas, exist. Every member of each group is identical to all other members of that group in terms of tastes. Preferences of Deltas and Omegas are given by

(1) U_Δ = x^α b^1-α – c × W                                                    

(2) U_Ω = x – c × W

where x is the number of units of a generic consumption good a person consumes, b is the number of units of an amenity good (mnemonically, think of this good as “beer”), c is the disutility of working, W equals one if the person works for pay and zero otherwise, and α is a preference parameter for Deltas and lies between zero and one.³

            We assume that all jobs in the economy involve the same type of labor, all workers have one unit of labor to offer, and all workers are equally productive. Firms can hire as many workers as they like. If hired by a firm, each worker can produce Q units of the generic good with her one unit of labor. We normalize the price of a unit of the generic consumption good to be one,⁴ and we assume that the price of the amenity good is fixed at level p_b.

 
A.     Optimal Consumption and Labor Supply Decisions

Let Y_Δ be the income a Delta worker receives if she works; assuming for simplicity that she has zero income otherwise, her income equals W × Y_Δ. Her utility-maximizing choice of consumption in terms of x and b will then be given by whatever choice of (x, b) maximizes U_Δ subject to the constraint that

(3) x + p_b × b = W × Y_Δ

Equation (3) is known as the budget constraint. Each unit of x costs one unit of income, and each unit of b costs p_b, so altogether the Delta’s total expenditure is x plus p_b × b. In our static, one-period model, individuals lack a reason to save any income, and thus people will want to spend all their income. Similarly, individuals lack an opportunity to borrow, so people’s spending will be limited to their income.

The form of preferences we have assumed for Deltas implies that their optimal consumption choice is to spend the fraction α of income on the generic consumption good and the remainder on the amenity. Thus, optimal consumption levels for a Delta are given by

(4) x* = α × Y_Δ     and      b* = (1 – α) × Y_Δ / p_b

if she works for pay, and zero otherwise.⁵ If the Delta works, then her utility will be

(5) U_Δ,work = [α^α(1 - α)^1-αp_b^α-1] × Y_Δ – c

(6) = v_α(p_b) × Y_Δ - c

where the first term on the right hand side of (5) is the result of plugging in the optimal consumption levels in (4) to the utility function in (1). The function v_α(p_b) collects the part of U_Δ,work that varies with the preference parameter and the amenity price. The important thing to notice is that this function, and thus the highest possible value of utility, U_Δ,work, is a decreasing function of the amenity price.

The above assumptions imply that if a Delta forgoes work, then her utility will be zero.⁶ Thus, she will work for pay if and only if the right-hand side of (6) is non-negative. In other words, inducing Deltas to work requires that firms pay them at least enough income, Y_Δ, to allow them to realize c units of consumption utility.

Next, consider the simpler case of Omegas. Let Y_Ω be an Omega’s income if she works for pay, and again assume zero income for nonworkers. Omegas have very simple consumption plans based on (2): they consume all their income by purchasing the generic good and spend nothing on the amenity good. Since each unit of the generic good costs one unit of income, this means that Omegas will consume Y_Ω units of the generic good. Utility for working Omegas is thus

(7) U_Ω,work = Y_Ω – c

As with Deltas, Omegas will work if and only if this utility level is at least zero, since that is their utility if they do not work. Thus, an Omega worker will be willing to work if and only if she is paid at least Y_Ω. We assume that each worker’s productivity, Q, is greater than the maximum of (Y_Ω – c) and (v_α(p_b)× Y_Δ – c). This assumption ensures that the labor market equilibria described below exist.

 
B.     Labor Market Equilibrium with Fringe Benefits

We allow for firms to pay both fringe benefits and cash wages. Firms will provide compensation by giving fringe-receiving workers some number of units of the amenity good. We assume that workers cannot resell these fringe benefits.⁷ Since Omegas place no value on the amenity good, intuition suggests that employers should be able to design a combination of wages and amenities compensation that will (a) attract Deltas, and (b) repel Omegas. This intuition is correct, as we now show.

1.   Firms Face Amenity Price p_b

Consider a firm that wishes to hire only Deltas. Suppose this firm offers a cash-wage amount, Y_f, less than the labor disutility, c, together with some positive number, b_f, of units of the amenity good. We refer to this compensation plan as F = (Y_f, b_f). Omegas place no value on the amenity goods, and we have assumed away the possibility of resale. Therefore, the value of this compensation to an Omega is simply the Y_f units of the generic good that the Omega can purchase with the cash wage. Since Y_f  < c by assumption, an Omega would rather have zero income than work for this compensation plan.

Will compensation plan F attract Deltas? Suppose that b_f  = b* from equation (4). This will cost the firm p_b × b* = (1 – α) × Q. Suppose the firm combines this fringe-benefit level with the cash wage Y_f = α × Q. This compensation plan costs the firm exactly Q dollars, which is the break-even worker cost that allows firms to produce in competitive equilibrium as explained above. Thus, this compensation plan is feasible from the firm’s point of view. The compensation plan also allows a Delta to attain exactly the consumption bundle she would have chosen for herself had she been paid Q dollars in cash and nothing in fringe benefits. Since we assumed previously that α and the amenity price p_b were such that Deltas would choose to work when offered the wage Q, they will also choose to work when offered the compensation plan F just described.

We conclude that there exists a segregated equilibrium in which some firms—those that screen out Omegas, which we call screening firms—offer compensation plan F only, and other firms offer a cash wage of Q together with no fringe benefits. In this equilibrium: (a) only Deltas work for the screening firms, (b) Omegas work only for cash-only firms, and (c) some Deltas may work for cash-only firms.⁸ In fact, when Deltas strictly prefer to work when offered a no-fringe wage of Q, firms can design a variety of compensation plans that generate segregated equilibria with fringe benefits.⁹ It can be shown that all equilibria require that the cost of a screening firm’s compensation plan equal Q. Any firm that pays less than that will face competition for its workers, as before. Finally, we note when no prejudiced firm owners exist, both the segregated and the integrated equilibria described above continue to exist, with firm owners being indifferent between them. We have thus shown that when firms face the same amenity price as consumers, they can design a compensation plan that both repels Omegas and attracts Deltas and allows the firm to stay in business in competitive equilibrium.

2.   Firms Face Amenity Price p_bf < p_b

Next, we consider the case when firms have a price advantage relative to consumers in purchasing the amenity, so that the per-unit price for the amenity that firms must pay is p_bf  < p_b. An example is group purchase of insurance plans, but many other examples exist. In equilibrium, this price advantage means that Deltas must always be paid a compensation plan that involves fringe benefits. The reason is simple: any firm that pays a Delta only in cash is providing less than the maximum possible utility that can be provided at that cost. Another firm could come along and offer to pay the Delta slightly less in cash together with some fringe benefits. Because firms acquire the fringe benefits more cheaply than Deltas, the second firm could provide greater utility to the Delta than the first, while paying less to do so. The Delta would switch jobs and the second firm would earn a greater profit than the first. Thus no competitive equilibrium exists in which any Delta is paid only in cash.

In fact, firms’ advantage in purchasing the amenity means that Deltas will want their employers to purchase all units of the amenity that the Deltas consume. As in the models above, equilibrium requires that firms pay Q for each worker, whether Delta or Omega; if a firm paid less than that, our familiar compensation-competition story would apply. Thus, Deltas will be paid a cash-and-fringe compensation plan that costs Q dollars, while Omegas will once again be paid Q dollars in cash. To find the utility level for Deltas in equilibrium, we need only act as if the Deltas themselves faced the firms’ amenity price, p_bf, rather than the higher price of p_b. Thus, we simply plug p_bf into equation (6) above, yielding

(8) U_Δ,f = v_α(p_bf) × Q – c

Now, it is easy to show that when p_bf  < p_b, it must be true that

(9) v_α(p_bf) > v_α(p_b)

and this implies that

(10) U_Δ,f > U_{Δ,cash only} = v_α(p_b) × Q – c

We have thus shown that when firms have an amenity-price advantage relative to consumers, Deltas’ utility is strictly greater in the with-fringe equilibrium than it would be if fringe benefits were banned. This equilibrium, which is unique under the argument above, is segregated. However, since Omegas continue to receive cash compensation in the amount of Q dollars, their equilibrium utility is unaffected by the existence of fringe compensation: banning fringe compensation plans would not increase Omegas’ utility. A fringe ban in the presence of an amenity-price advantage on the part of firms would simply cause deadweight loss by forcing Deltas to purchase amenities at an unnecessarily high price, while giving nothing extra to Omegas. Notice that if firms must provide only one compensation plan, workers will be segregated in equilibrium even if no employers harbor animus toward Omegas: the fact that employers have a cost advantage in providing the amenity, while worker type is perfectly correlated with amenity preference, ensures full separation of workers. If firms can offer compensation menus, however, then unprejudiced employers can avoid segregation by offering workers their choice of plan F or all-cash compensation of Q dollars.

 
II.
Conclusion and Extensions

When firms possess no cost advantages for amenities, multiple equilibria exist, including a nonsegregated one in which employers pay every worker in wages only. When firms possess an amenity cost advantage and cannot offer workers a choice between compensation plans, a unique equilibrium exists, and it is segregated. Interestingly, Omegas are just as well-off economically; they would not benefit economically from eliminating fringe-induced segregation. However, Deltas are strictly better off in the segregated equilibrium than in the no-fringe equilibrium when firms have a cost advantage. Hence, banning segregation-inducing fringe compensation would (a) eliminate segregation, (b) not improve the economic welfare of Omegas, and (c) economically harm Deltas.

Some firms may possess market power in either the labor or product markets, which would allow economically harmful discrimination to persist. Fringe-generated segregation might be especially troublesome in such market-power cases because employers could use it to skirt easily monitored disparate-treatment proscriptions. Banning fringe benefits would still harm Deltas if firms have an amenity-price advantage, though with market power, such a ban could also help Omegas. Fringe-based discrimination could be prevented in this model without harming Deltas by mandating that firms offering fringe benefits also offer a cash-only compensation plan whose wage/salary equals the cost to the firm of the cash-and-fringe compensation plan.¹⁰

It is, of course, also possible that segregation is undesirable in its own right because stereotypes break down in integrated workplaces, because individuals incur psychic costs in experiencing discrimination even if they voluntarily sort themselves into segregated workplaces, or because the individuals that do not sort themselves out may incur psychic costs in a segregated workplace.¹¹ In such situations, reducing the net pecuniary compensation received by Deltas might be worthwhile in order to bring about an integrated economy. Dealing with either of these extensions would markedly change the welfare implications of the segregated result, and we do not mean to discount the relevance of either case. However, in terms of consumption utility, segregation induced by fringe compensation does not harm the group that is “segregated against,” given perfect competition.

Acknowledgments:

Copyright © 2009 University of Chicago Law Review.

Jonah Gelbach is Associate Professor of Economics at University of Arizona.
Jonathan Klick is Professor of Law at University of Pennsylvania Law School.
Lesley Wexler is Assistant Professor of Law at Florida State University College of Law.

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

The following is a Response by Richard Epstein to this series of Editorials: Richard A. Epstein, Protect Us, Lord, from Title VII: A Response to Gelbach, Klick, and Wexler, LEGAL WORKSHOP (U. CHI. L. REV., June 22, 2009).

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.
 

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).

By way of illustration, imagine that individuals from two groups, Deltas and Omegas, comprise the labor pool from which employees may be hired.  While their work productivity is drawn from the same distribution, a given employer dislikes Omegas for reasons unrelated to their job qualifications.  Because Omegas have suffered discrimination historically, legislation explicitly protects Omegas from employment discrimination.  Further, while Deltas and Omegas have similar reservation wages,¹ Deltas, on average, more highly value some nontransferable good that the employer can procure (or produce) at a cost equal to or lower than the Deltas’ average valuation of the good.  To make the illustration more concrete, assume the employer is a brewery and offers free beer at lunchtime.

While the employer prefers to hire only Deltas, federal legislation limits the employer’s ability to do so. Yet we contend that employers may advertise the job broadly and make hiring decisions in a seemingly nondiscriminatory fashion, avoiding lawsuits, and still achieve an ultimate workforce that is predominantly (if not exclusively) composed of Deltas.  Specifically, if the employer offers a compensation package composed of a submarket wage as well as access to free lunchtime beer, Omegas will find such a job unattractive, while Deltas will still gladly accept the job offers.  Ultimately, according to the firm, due to no misconduct on its part, Omegas lacked interest in working for the brewery.

While scholars have touched on this phenomenon,² no one has examined these employment practices in a systematic way.³ Such discrimination is presented as an ancillary effect of employment policies or conditions. Yet recent class actions suggest that basic animus- or stereotype-driven discrimination is still quite prevalent. So it should be unsurprising that litigation-savvy employers might deliberately craft compensation structures to exclude certain types of workers.

In this online Article, we provide an illustration of group-level preference heterogeneity that could generate passive discrimination in an occupational setting. We next discuss how current antidiscrimination law applies and conclude with a brief discussion of how we might better address passive discrimination.

I.
Illustration

In this Part, we first describe the conditions necessary to create the segregated equilibria described above. We then provide an example where these conditions may apply. In the case of intentional passive discrimination, the employer must be able to identify a good that satisfies two conditions: (1) the disfavored group values the good on average less than the average valuation placed on the good by other groups of potential employees, and the employer knows this; and (2) the good is nontransferable. A third condition under which the employer can ensure that she attracts the favored type of employee is satisfied when the employer can provide the good for a cost below that paid by workers outside of the employment relationship.

While we have focused on intentional passive discrimination, the phenomenon could also arise as an accidental byproduct.  For example, a brewery whose owners are indifferent regarding employing Deltas and Omegas might still offer free beer during lunch because it believes doing so promotes product knowledge.  In such a case, even if the brewery starts out offering this benefit plus a market wage, Deltas who do not secure positions will offer to work for a lower wage given their valuation of the free beer.  Eventually, this group valuation will lead to a workforce composed of Deltas, to the exclusion of Omegas.

One example of potentially discriminatory screening practices relates to subjective discount rates and pay structures that include a deferred compensation component, such as a pension.⁴ To begin with, a person’s subjective discount rate captures her willingness to delay current consumption for the prospect of increased future consumption.  While everyone exhibits some positive subjective discount rate, individual-to-individual heterogeneity exists in those subjective discount rates.⁵

While individual-level heterogeneity is prevalent, labor economists have noted that systematic differences in individual discount rates across racial groups may also exist.⁶ A natural experiment provides the most interesting supporting evidence in the finding of large inter-race heterogeneity in discount rates.⁷ Specifically, conditional on a large number of other effects,⁸ black military enlistees and officers exhibited significantly higher subjective discount rates than other minorities and whites.⁹ This result is robust with blacks exhibiting, on average, discount rates on the order of five to nine times as great as whites.

Assuming this empirical regularity holds,¹⁰ an employer wishing to passively exclude blacks could offer a low current wage coupled with generous deferred compensation benefits, such as a large pension. Such a package would attract individuals with relatively low subjective discount rates and repel those with higher subjective discount rates. Note further that this could also represent a situation in which a nondiscriminatory employer might engage in unintentional passive discrimination, as employers may possess numerous other reasons to include a generous retirement component in its compensation package.

II.
Applying Title VII

In determining the legality of passive discrimination, we begin with Title VII. Congress enacted this statute “to assure equality of employment opportunities and to eliminate those discriminatory practices and devices which have fostered [ ] stratified job environments to the disadvantage of minority [or other protected] citizens.”¹¹ Congress did not ban all forms of workplace segregation, but rather forecasted that integration would be a beneficial byproduct of ending active discrimination. Thus, Title VII makes it an unlawful employment practice for an employer to “fail or refuse to hire . . . 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.”¹²

A.     Disparate Treatment

Title VII jurisprudence allows plaintiffs to choose among disparate treatment and disparate impact claims. Under disparate treatment, an employer treats some individuals worse than others because of a protected characteristic. “Proof of discriminatory motive is critical, although it can . . . be inferred from the mere fact of differences in treatment.”¹³ In individual disparate treatment claims, each plaintiff must prove that she was treated less favorably than others similarly situated and that this disparate treatment was “because of” the plaintiff’s race, color, sex, national origin, or religion. The plaintiff must provide either direct or circumstantial evidence to demonstrate the employer’s discriminatory intent. While these claims may evidence a concern about segregation, courts link this concern to the elimination of discriminatory practices which deprive individuals of employment opportunities.¹⁴

In pattern or practice cases, another type of disparate treatment claim, the plaintiff can satisfy the prima facie case with “statistical evidence demonstrating substantial disparities in the application of employment actions as to minorities and the unprotected group.”¹⁵ These plaintiffs need not present individual victim testimony to support a finding of intentional discrimination—courts may rely purely on evidence of gross statistical disparity,¹⁶ which raises an inference of discriminatory intent.

Under disparate treatment claims, Title VII prohibits the employer from using group-based characteristics, preferences, or stereotypes to treat individuals differently even if such stereotypes are largely accurate. In City of Los Angeles, Department of Water and Power v Manhart,¹⁷ the Supreme Court ruled that an employer may not deduct more from women’s pay to cover their pensions even though as an actuarial matter, women as a class are likely to draw more pension benefits.¹⁸ The Supreme Court reasoned that any individual woman may not draw benefits longer than any individual man, her employers may not condition her pay on her sex.¹⁹

Easy disparate treatment cases include those instances in which an employee offers a potential plaintiff a facially different wage than others similarly situated. For example, an employer may not offer Caucasian bus drivers comprehensive health insurance and fail to offer African-American drivers the same insurance package. If, on the other hand, the employer offers all bus drivers lower wages and higher pension benefits than other area employers, individual employees cannot successfully lodge a disparate treatment claim. Even if empirical evidence indicates that, as a group, African-American drivers have a higher discount rate and place a lower value on such pensions, the employer has treated each individual African-American driver the same as all its other drivers. So we contend no individual disparate treatment claim could succeed.

Under pattern-and-practice claims, however, if employers devised a very successful sorting mechanism, plaintiffs might be able to satisfy the prima facie showing of gross statistical disparity. For instance, in International Brotherhood of Teamsters v United States,²⁰ the Court suggested that the complete, or very nearly complete, absence of members of a protected class in a particular job can compel an inference of discrimination.²¹ So if the high pension, low wage strategy resulted in a workforce with no or very few African-American drivers, employers could face a Title VII problem. Yet plaintiffs rarely prevail in such cases without testimony about individual acts of disparate treatment.²²

Only if the employer foolishly allowed the discovery of direct evidence of discriminatory intent would the employer face real difficulty in providing nondiscriminatory explanations for the disparity. Even then, the plaintiffs might not prevail. Such a memorandum would reveal an intent to achieve a segregated workplace, but a plaintiff would still bear the burden of proving the occurrence of discrimination as defined by Title VII. Here, the employer has relied on preferences that tend to be correlated with protected characteristics, but has offered each individual the same package.

Title VII clearly prohibits employers from treating individuals differently because of discriminatory animus or outmoded stereotypes or even seemingly rational group-based stereotypes. Yet, as currently conceived, disparate treatment claims seemingly do not prohibit the employer from using group-based characteristics, preferences, or stereotypes to treat individuals similarly in hopes that such treatment will encourage applicants from disfavored groups to sort themselves out of a job based on their own preferences. As any individual applicant may defy the stereotype and elect into the job, no disparate treatment has occurred even if an employer succeeds in achieving a segregated workplace.

B.     Disparate Impact

Disparate impact claims allow plaintiffs to prevail if they identify a particular employment practice with a significant adverse impact on a protected class, and the defendant fails to demonstrate that the challenged employment practice is “job related  . . .  and consistent with business necessity.”²³ If the challenged practice significantly serves the employer’s legitimate employment goals,²⁴ the plaintiff can still prevail if she proves that a less discriminatory alternative employment practice equally serves the defendant’s goals.²⁵

Passive discrimination seemingly fits better under this analysis, as employers devise facially neutral compensation packages that may result in only a few individuals from a disfavored group in their workplace. Yet the Supreme Court has cast doubt as to whether fringe benefits and compensation packages are subject to disparate impact analysis.²⁶ In Manhart, described above, the Court stated in dicta:

Even under Title VII itself—assuming disparate-impact analysis applies to fringe benefits—the male employees would not prevail. Even a completely neutral practice will inevitably have some disproportionate impact on one group or another. [Griggs v Duke Power Co, 401 US 424 (1971)] does not imply, and this Court has never held, that discrimination must always be inferred from such consequences.²⁷

Likely as a result of this language, few cases have grappled with compensation and fringe benefits under disparate impact analysis. In Finnegan v Trans World Airlines, Inc,²⁸ the Seventh Circuit held that across-the-board cuts in fringe benefits were not eligible for disparate impact analysis under the Age Discrimination in Employment Act.²⁹ Judge Richard Posner rejected even a prima facie case of disparate impact for such cuts, as the focus of disparate impact should be on the exclusion of individuals from certain opportunities.³⁰ But passive discrimination does not exclude anyone from an opportunity; it just makes the opportunity less desirable.

C.     Lack of Interest

The so-called “lack of interest defense,”³¹ available in both disparate treatment³² and disparate impact cases, is particularly relevant to the causation questions raised by passive discrimination. Lack of interest is a nondiscriminatory explanation for statistical disparities,³³ and rebuts the plaintiff’s prima facie case.³⁴ Under this “defense,” employers dispute the causal chain by showing that employees’ voluntary choice, rather than a particular employment practice, causes workplace inequality or segregation.³⁵ If the employer succeeds in showing that individual preferences cause a disparate impact, then it need not reach the question of whether the practice is job related and consistent with business necessity.³⁶

This Article suggests that labor market conditions that shape individuals’ interest in particular jobs may include more than the substance of the job, but also the terms, conditions, and privileges of employment, such as the compensation structure. Yet employers and courts seem to view these packages as mostly within the employers’ discretion to design and the employees’ discretion to take or leave. Passive discrimination suggests that courts’ acceptance of such preferences under the lack of interest doctrine may allow employers to use such preferences with impunity.

III.
Conclusion

This Article fits within a larger debate about the appropriate framework from which to address workplace discrimination and segregation. If one were concerned about workplace segregation or the effect that group-based preferences have on individuals, some judicial and legislative actions might be taken.³⁷ Title VII reform provides one obvious approach. Courts could apply disparate impact doctrine to the structure of compensation and to the provision of fringe benefits. Interest groups may push for stand-alone legislation to address particular mechanisms of passive discrimination. Independent legislation may bypass litigation hurdles associated with Title VII if it does not rely on individual claimants. More innovative approaches include standalone legislation, education initiatives, and incentivized employer restructuring through an enhanced range of employee choice in compensation options, which are more fully fleshed out in our full article.
 

Acknowledgments:

Copyright © 2009 The University of Chicago Law Review.

Jonah Gelbach is Associate Professor of Economics, University of Arizona; Jonathan Klick is Professor of Law, University of Pennsylvania Law School; and Lesley Wexler is Assistant Professor of Law, Florida State University College of Law.

The following is a companion to this Editorial: Jonah Gelbach, Jonathan Klick & Lesley Wexler, A Formal Model of Passive Discrimination, LEGAL WORKSHOP (U. CHI. L. REV. Aug. 10, 2009).

The following is a Response by Richard Epstein to this series of Editorials: Richard A. Epstein, Protect Us, Lord, from Title VII: A Response to Gelbach, Klick, and Wexler, LEGAL WORKSHOP (U. CHI. L. REV., June 22, 2009).

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