Academic journal article The American Journal of Economics and Sociology

Are Reports of Discrimination Valid? Considering the Moral Hazard Effect

Academic journal article The American Journal of Economics and Sociology

Are Reports of Discrimination Valid? Considering the Moral Hazard Effect

Article excerpt

ABSTRACT. Antidiscrimination laws ate designed to prompt employers to stop excluding black workers from jobs they offer and from treating them unequally with respect to promotion and salaries once on the job. However, a moral hazard effect can arise if the existence of the laws leads black employees to bring unjustified claims of discrimination against employers. It has been argued that employers may become more reluctant to hire black workers for fear of being subjected to frivolous lawsuits.

Using the Multi-City Study of Urban Inequality (MCSUI), we find that male and female black workers ate far more likely than whites to report racial discrimination at work. This is the case even when a host of human capital and labor market factors are controlled for. Further, nearly all black workers who report they have been discriminated against on the job in the MCSUI Surveys also show statistical evidence of wage discrimination. This is not the case for white males or females. We find little evidence to support a moral hazard effect.



MORAL HAZARD, APPLIED TO employment practices, suggests an employer may be prompted by antidiscrimination laws to hire blacks but be afraid that once on the job, because of the existence of those same laws, black employees will bring unwarranted and costly discrimination charges. Therefore, the employer may resist hiring blacks because of the antidiscrimination law itself. Bolick (1996: 62) explicitly invokes this argument by charging that "the civil rights laws had the perverse effect of making the irrational more rational: hiring minority employees exposed employers to the risk of discrimination claims for termination or other grievances. That induced some employers not to hire minority employees and others to move to the suburbs." A moral hazard exists when a law, in this case antidiscrimination law, has the opposite of its intended effect. In this case, ostensibly, the law encourages employers not to hire blacks due to fears of being faced with lawsuits under that same law.

The moral hazard argument implies that the employer is not terminating employees due to racial bias or in some way treating workers unfairly because of race. If an employer discriminates against employees based on race, the employer is not exposed to moral hazard but rather the legal hazard of being sued for a violation, which is the intent of the law.

Few attempts have been made to empirically demonstrate the presence of the moral hazard effect as applied to antidiscrimination laws. In short, the question is whether firms are justified in their refusal to hire from the group of workers protected by the law due to legitimate fears of frivolous claims of discrimination. We use the Multi-City Study of Urban Inequality (MCSUI) to test these ideas. We find that although black workers report all forms of racial job discrimination at higher rates than whites, blacks on average face statistically detectable racial discrimination in employment, while whites do not. Actual discrimination cannot be eliminated as a factor in racial discrimination reports. Furthermore, we find it is invariably the case that blacks who report exposure to discrimination are also subject to measurable wage discrimination. This is not the case for whites who report having been exposed to racial discrimination. We find little evidence that employers face the moral hazard problem in hiring black workers.


The Case for Moral Hazard in the Employment of Black Workers

SCHOLARLY WORK ON MORAL HAZARD and black employment relies heavily on anecdotal examples (Epstein 1992: 70-71; Bloch 1994: 104; Bolick 1996: 62; Eastland 1997: 87). Kubler (1997) offers a theoretical study and hypothesizes that if workers are of different races, employers might use race as a low-cost screening device, engaging in statistical discrimination (Phelps 1972; Arrow 1973) to select from groups they perceive to have higher average ability. …

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