Academic journal article Quarterly Journal of Business and Economics

The Enforcement of Equal Opportunity Laws under Imperfect Information: Affirmative Action and Alternatives

Academic journal article Quarterly Journal of Business and Economics

The Enforcement of Equal Opportunity Laws under Imperfect Information: Affirmative Action and Alternatives

Article excerpt

I. INTRODUCTION

More than twenty years have passed since the enactment of the Civil Rights Act. During that period, the enforcement of Title VII, with its broad prohibition of discrimination in employment and compensation, has proved to be both difficult and controversial. As part of any attempt to regulate economic activity, we must be able to observe violations, but "unequal treatment" in employment relationships is difficult to identify. Employers must always differentiate between individuals when making hiring and promotion decisions, since applicants possess diverse skills and abilities. This diversity creates a fundamental problem in monitoring the compliance or noncompliance of employers with equal opportunity laws.

This paper examines the enforcement of equal opportunity laws in a labor market that exhibits statistical discrimination. This type of discrimination may arise as a rational response by profit-maximizing firms to imperfect information about individual productivity. In Lundberg and Startz |1983~ an equal opportunity policy prohibiting race- or sex-specific wage schedules was shown to be an efficiency-enhancing response to statistical discrimination. Section II extends this model to allow information a role in allocating heterogeneous workers among jobs. In this environment, restricting firms' use of information through an equal opportunity policy improves workers' incentives to acquire human capital at the expense of production losses, and its net effect on efficiency becomes ambiguous.

Firms will attempt to evade an equal opportunity law, presenting the government and the courts with the task of monitoring and enforcing compliance. The regulators are likely to possess imperfect information, not only about the relationship between worker characteristics and productivity, but also about the actual personnel policies followed by firms. In Section III a simple cost-minimizing evasion policy for firms, in which other worker attributes are used as imperfect proxies for race or sex, is outlined. In the next two sections, alternative policies for enforcing compliance are investigated under differing assumptions about the regulator's ability to monitor firms' personnel policies.

The first policy is analogous to "disparate impact" judgments in which the type of information employers can use in personnel decisions is regulated. Implementation presumes that the regulator observes all relevant worker attributes and can observe or estimate the actual wage schedules offered by firms. The second is an affirmative action type policy that monitors the outcomes, rather than the process, of hiring and compensation decisions. Such a policy can be based on a restricted set of easily observed worker qualifications. Each policy is evaluated in terms of its distributional consequences, its efficacy in remedying the distortion of training incentives caused by discrimination, and its costs to private firms via misallocation of labor.

It is shown that, in general, firms should prefer an affirmative action type policy to a disparate impact judgment. This occurs because firms will in general find it optimal to continue using all available information in their personnel decisions, though in a restricted way so as to conform with the compliance standards. Production losses due to worker mismatch will be lower than they are under a disparate impact prohibition, though the social cost of education will be higher. That is, affirmative action will, in general, be less effective in insuring social efficiency in the provision of human capital, but less costly in terms of production losses than a disparate impact approach. Compliance with affirmative action can be monitored with less information, since outcomes are more easily observed than process. A final interesting result is that affirmative action rulings will tend to lead to charges of preferential treatment of minorities. In order to both comply with affirmative action goals and offer cost-minimizing wage schedules, firms will find it optimal to offer a higher return on base qualifications to minority workers. …

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