Discrimination Litigation Attacks Freedom

Economies tank for big reasons and small, but usually both. The current stagnation was prompted by investment imbalances created in the late 1990s that needed to be liquidated. But it is being made worse by a thousand bad policies, some of which are being added by those seeking to "stimulate the economy," but not knowing how; others have long been on the books.

Consider: the government reports that job discrimination complaints against private employers increased 4 percent in 2002, to a total of 84,442, the highest level in seven years. Those filing complaints took in $310.5 million in monetary benefits. The main complaint involves race, followed by sex, but the big increase came with allegations involving religion, age, and national origin. The trend represents a huge diversion from the main goal of restoring economic growth.

The numbers themselves come nowhere near capturing the colossal costs associated with the laws that make this litigation possible. Every employer must constantly prepare and organize to diminish the likelihood that a complaint will be filed. In doing so, they take steps that lead to inefficiencies or avoid steps that might improve efficiency. Also, consider the costs imposed by those who threatened to file and did not because the issue was settled informally. Then consider the vast drain in human energy spent actually litigating these complaints (the typical case takes half a year to settle).

Hardly anyone is willing to talk about what these numbers really symbolize: a massive attack on freedom and free enterprise. The preeminent issue is property rights, the foundation of liberty and prosperity. The employee has no legitimate ownership over the property seized in the course of a complaint. His only legitimate ownership is over the contractually agreed-upon wage or income stream due him in the course of providing agreed-upon labor services. To the extent an employee grabs more than that, it is nothing more than theft under the cover of law.

In practice, discrimination law limits the freedom of property owners to use their money as they see fit. To understand this, we need to conceive of the employment contract as an exchange like any other. One person agrees to perform certain service and the party with whom he is making an exchange agrees to surrender a certain amount of his property in exchange for such services.

The contractual nature of the exchange is no different from a consumer’s purchase of a gallon of milk from the store. The parties to the exchange agree on a voluntary basis to certain terms. To file a discrimination complaint is like going back to the store with a dagger (symbolizing the labor regulators at the EEOC) and demanding a retroactive price cut. Imagine if every store owner saw every customer as a person who has the potential of doing this legally, and you begin to understand how antidiscrimination law rattles the labor market.

The implied assumption behind all these laws is the idea that judges and bureaucrats can discover the real motivation behind every hiring, firing, or labor-management decision. It further assumes that the basis of all decisions taken in the workplace can be reduced to a simple form such as: I will not promote this person because she is a woman, too old, too non-religious, etc.

Everyone knows that decisions concerning the labor force seldom work this way. It’s possible, of course, that a manager has a bias of a certain kind, but the nature of the marketplace is precisely to punish irrational biases with losses and reward objective decision-making with profits. It is for this reason that in a free market in the long run, good workers of any race, age, sex, or religion are rewarded for their virtues, while bad workers of all kinds are punished.

In practice, of course, bureaucrats do not actually feel the need to demonstrate that they have discovered the secrets of the human heart. What they do is assume certain motivations based on looking at overall patterns within the workplace. If women are generally earning less than men, for whatever reason (and there can be a million reasons unrelated to irrational bias), the burden of proof is on the employer to show that sex is not a consideration.

Ironically, the best way to demonstrate this is to adopt an opposite bias in favor of the criterion in question where necessary, and otherwise avoid, when possible, people who might file a successful complaint. For this reason, a law that forbids, say, race discrimination yields perverse results. People already hired from the known class of racial victims are likely to earn more than they otherwise would, even as new members of that group are less likely to be hired in the first place, precisely because they are more expensive than their expected labor inputs can justify.

Through this complicated economic, legal, and sociological process, we get de facto quotas, subsidized wages, gaps of unemployment, and a huge range of odd labor-market distortions. Such distortions can be absorbed in boom times, but they can make the difference between profits and bankruptcy in recessionary times like our own.

That is why the practices symbolized by the EEOC numbers hinder our prospects for recovery. Like protectionism, high taxes, deficits, massive government spending, and every other form of intervention in the free market, antidiscrimination law impedes the recovery that we desperately need. Business needs the freedom to manage its labor force according to its own lights right now. It does not need to spend its time and money dealing with DC discrimination bureaucrats.

In 1917, at the turn of the century, hotel entrepreneur Ellsworth M. Statler issued an instruction to his managers. It said:

"From this date you are instructed to employ only good-natured people, cheerful and pleasant, who smile easily and often. This ought to go for every job in the house… If it’s necessary to clean house, do it. Don’t protest. Get rid of the grouches, and the people that can’t keep their tempers, and the people who act as if they were always under a burden of trouble and feeling sorry for themselves. You can’t make that sort of a person over; you can’t do anything with them profitably, but get rid of him."

The man built a great business. That ethic created a great America. Today, he would be in big trouble, just like the hotel business, just like the economy.

February 21, 2003

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