The Law and Economics of Employment Discrimination

The neo-classical economic argument against anti-discrimination laws makes the following errors:

First, the argument assumes rational decision-making.

Neo-classical economics has come under fire from the behavioral economics school for assuming that people always act rationally even though we know differently. To an economist, rational means that if you had the choice between something that gave you two points on the happiness scale and one point on the happiness scale, you will always choose the thing that makes you happier. Notably, more happiness, i.e., utility, does not always have to mean more stuff. If you had the choice between two pieces of cheesecake and one piece of cheesecake, you might choose to only have one piece because you are more concerned about fat, calories, and cholesterol than any immediate gratification you might get from the awesomeness that is cheesecake.

Even assuming that a given discriminatory hiring practice causes a proportional drop in productivity and, therefore, revenue, for the free market argument to work, we need a rational business owner to prefer revenue to discrimination. This has two problems, which cause even more problems!

First, the revenue drop must be sufficiently significant to cause an employer to change his behavior, and second, the loss of utility (or, happiness) caused by the loss of revenue must be higher than the utility the employer gains by discriminating.  I address the first below in point 2; the latter point once again assumes that an employer would act rationally when comparing utilities and ignores the special animus that one might hold toward a victimized group. That is, what if hate overpowers money? Let's say my business, Super Straight, Inc., wants to make more Very Straight Widgets, so I need to hire more people. Even though Les B. Ian can make one thousand VSWs per day, causing a 100 jump in my revenue, I would be 200 points angrier just knowing that Ms. Ian is around. A rational actor would still discriminate. But, even if the change in utilities were equal, or even reversed, a rational model assumes fungibility where some people might value their adherence to bigotry stronger than any increase in mere money.

Therefore, we can see that only certain rational actors would respond to the free market and employers that do not act rationally may never respond to it.

Second, the argument assumes that the quantity of potential gay employees can influence employer behavior.

Gay, lesbian, and bisexual employees are, on average, just as productive as their heterosexual counterparts. But, there are a lot fewer of them. This means that even assuming the veracity of the rational behavior model discussed above, discriminating against such a small minority may not have the kind of negative economic effects that would drive a discriminator to change his behavior or close up shop. In fact, in order to push a discriminator into economic ruin (or, even, a statistically significant loss of revenue or market share), the group victimized by discrimination must be large enough to have its best and brightest, a small subset, have enough of an impact. If you discriminate against women, you exclude 50 percent of your applicant pool; if you discriminate against African-Americans or Latinos, you exclude roughly 13 and 17 percent of your applicant pool, respectively. But, gays make up only about 1.7 percent of the US population. Discriminating against the 2 percent of Americans that are natural red heads is more likely to negatively impact your business than discriminating against gays.

The free market forces incentivizing nondiscrimination, therefore, do not exist with respect to small minority populations. So, even assuming the truth of the economic premise, the market fails when it comes to gays. That is the exact moment when the law should step in.

Third, the economic argument ignores the cultural and expressive power of the law. Arguing that many large, competitive companies already ban discrimination on the basis of sexual orientation is evidence that market forces are already working to end anti-gay hiring practices is a little like saying a beautiful flower is evidence of God. It is certainly possible, but there is no evidence of causation: the mere fact that American Express does not discriminate may be evidence of its economic response to an economic reality, but we know nothing more conclusive than that.

In fact, the free market hypothesis discounting the need for anti-discrimination laws ignores the cultural and expressive impact of non-discrimination laws. Before discrimination against women was taboo or before discrimination against African-Americans was taboo, it may not have occurred to businesses that women and blacks could offer them competitive advantages. That is, again even assuming the truth of the economic theory, if the zeitgeist of the time accepts discrimination, the first step toward non-discrimination may only happen at the whim of a pioneering iconoclast. Equality should not be left up to such luck.

Most laws have an expressive angle. Some are simple: a law banning murder expresses society's view that your rights to do what you want end at someone else. Some are more subtle: a progressive tax regime shows that society is interested in equality and fairness.

Employment non-discrimination laws are not exclusively about ending the trappings of insidious bias in the workplace; they also enshrine a progressive society's commitment that members of minority groups are not second-class citizens. They help change the mind of society as a whole about the value and rights of those that are different. Sure, true reform may take a generation or more; but, non-discrimination laws create a background of fairness, equality, and respect in which we raise our future business owners, future workers, and future policy makers. This long run cultural impact may qualify as what economists call "social welfare," but it is absent from the free market theory in employment discrimination.


Ari Ezra Waldman is a 2002 graduate of Harvard College and a 2005 graduate of Harvard Law School. After practicing in New York for five years and clerking at a federal appellate court in Washington, D.C., Ari is now on the faculty at California Western School of Law in San Diego, California. His research focuses on gay rights and the First Amendment. Ari will be writing weekly posts on law and various LGBT issues.

Follow Ari on Twitter at @ariezrawaldman.


  1. BABH says

    Actually, I think the number of gays and lesbians in the workforce is significant enough to affect corporate non-discrimination policies, which is why so many companies (including all of the Fortune 100) have explicit protections for sexual orientation. [Of course, there is also a cultural and expressive component to corporate policy, just as there is to law.]

    The sticking point for me is transgender protection. The transgender population is almost certainly too small to impact a discriminatory company’s bottom line, and therefore needs legislative protection. Because they are also too small a population to have much political clout, this has to be done by piggybacking off of employment non-discrimination law for gays and lesbians.

  2. Strepsi says

    @ TOWLEROAD : thank you for running Ari Waldman’s column, some of the most insightful and fact-based articles in any online media.

    @ARI EZRA WALDMAN: I always enjoy your analyses!

    I would take your first point even further: classical free market economics fails to account for possibly even MOST economic behavior. Many marketing studies have shown that emotions are far more powerful than rational thinking: market economics can not explain the popularity of trucks and SUV’s (almost any car would be more efficient and less costly getting from A to B), never mind discriminatory hiring.

    Also, as far as the “best and brightest” market argument goes, it is also negated by the fact that irrational perceptions can guide what is considered best or brightest. Look at the DADT hearings, where bigoted politicians continued to assert gay soldiers were less qualified and competent, despite NO evidence for that position and enormous evidence against it. Look at the studies in Quebec showing the last name on a resume marks its perception, even if the qualifications are greater — and equivalent studies in the US, showing a WASP name with worse qualifications will get in the door slower than a “DeFwan” with a better CV.

    Finally, ARI, there is laziness o human nature — people simply NEVER CHANGE UNLESS FORCED TO.

    In my experience as a Canadian, from anti-discrimination to smoking bans, to seat belts, to marriage equality, to recycling, people will never ever change unless FORCED, i.e. legislated — even if their behavior harms themselves!

    People are not rational.

  3. Rick says

    All very good points. And as to the first, there was an article published recently about a study that demonstrated that (surprise, surprise), most managers make promotion decisions primarily on the basis of who they like personally rather than on the basis of merit.

    Having been in the corporate world for some time, I would add a few points. First of all, corporate organizations are incredibly social and one’s ability to navigate successfully the social challenges determines more than anything whether one will be successful…..and the principal obstacle this presents if you are gay is obvious…if you come out, you are exposing yourself to all the dangers of homophobia, if you don’t come out, you usually get figured out anyway…….if nothing else, almost all men in business are married (to a woman) by age 35, so if you are not, it makes you very suspect…..especially if you do not have an obvious female love interest. Also, not being married makes it difficult for you to socialize in a world in which the couple is the standard social unit.

    Secondly, other gay people in the workplace, especially if they, themselves are closeted, not only will often not empathize with you, but will distance themselves from you and even be downright hostile to you, so let’s just acknowledge that discrimination on the part of straight people is not the whole problem.

    Thirdly, passing laws might accomplish the goal mentioned in the third point–namely, to help change the culture, but as a practical matter, they are worthless…..if an employer really wants to discriminate against you, they will find a way…..and it is almost impossible to prove discrimination on the basis of sexual orientation (much more difficult than it is to prove gender or race discrimination because sexual orientation is “invisible”) in the absence of some overt slur witnessed by many sympathetic people.

    The bottom line is that while passing anti-discrimination laws can’t hurt, they won’t help much either…….what will work is overhauling the culture and making homophobia obsolete, which will obviate the need for such laws in the first place.

  4. bluecandyboy says

    Further to this, if I may add, consider the chances of him/her getting promoted given his skills and capabilities. I, for one, was once rejected for promotion because of my sexual preference. This was in the Philippines, by the way.

  5. says

    On workplace discrimination – I think it wasn’t until 2005 that an openly gay Federal employee could be fired for being openly gay. It wasn’t likely to happen except in those very homophobic places like Kentucky and Tennessee where openly gay employees were targeted for dismissal or removal for other reasons where homophobic supervisors were involved.

    What remains prevalent in the Federal workforce today – and I know this for a fact because our long-time neighbor has worked for HUD for 29 years, and is still discriminated against and has no equal rights (gay discrimination is NOT recognized nor federally protected). He came in the door of HUD as an openly gay GS-7 Executive Secretary, has received outstanding performance ratings for the majority of those years as well as being crowned “Employee of the Year” by an outside Federal panel of executives in each of the last three decades – and yet the guy has never once been promoted. He has watched all of his peers, some of whome barely speak English and many who cannot write a simple grammatically correct letter, be promoted up the chain to GS-13s, 14s and 15s (Obama is a 16).

    It kills me because our neighbor is an incredible insightful and articulate man. Yes he is gay but that fact should never be the basis for denying anyone the ability to rise in an organization. He is now within a year or so of meeting time/age retirement but he will have to continue to work into his 70’s because his retirement pay will be far less then his now paycheck-to-paycheck salary. Sad that we would do this to anyone but even sadder if you believe your government will be there for you.

    Whenever someone gay tells me they are considering a government job I do my best to steer them away and encourage them to seek work with a corporation or company that does not discriminate against gay people.

  6. Charlie says

    Well, I am not a libertarian and I don’t subscribe to this economic model. I also think that a major reason this type of argument is put forth is that it is a smokescreen for people to hide their bigotry. Usually they try and cherry pick scientific studies or Biblical verses to justify bigotry. They want to say they are just ignorant bigots but are rather doing God’s will or they are really very smart people but that homosexuality goes against nature.

    Lots of people turn to democratic means to justify their discrimination. When legislatures pass anti-discrimination laws they say to let the people vote on the matter. This ignore the fact that democracy is not the most fundamental feature of the US constitution. It is the Bill of Rights that affords protections from the government. Even though 90% of the US citizens may like to have Chrisianity named as the official religion it is not allowed. The majority may want it but they can not have it. In this country there are limits on what government can do.

    Sadly our government often does bend to support what the people want. The US Supreme Court allowed Japanese Amricans to be interred during World War II. The Japanese were such a hated minority that the courts ignored the basic protections our constitution should have given them. And gay people may still be so hated (especially by the generation that our Supreme Court represents) that the rights that other people have won’t apply to us.

  7. Rick says

    “Whenever someone gay tells me they are considering a government job I do my best to steer them away and encourage them to seek work with a corporation or company that does not discriminate against gay people”

    You shouldn’t. There is far more discrimination in the corporate sector than in any other area of society. Don’t be fooled by “diversity statements” or other BS coming out of HR. As well-meaning as they may be, they have nothing to do with what actually happens in real life.

    The reality is that if you want to minimize the possibility of discrimination, you should try to find the least hierarchical field that you can, one in which social maneuvering and the subjective judgments of other people is at a minimum, being a doctor or a pharmacist, for example.

    I now know why so few gay men of my generation entered the corporate world (and warned me against it) and why, even today, the numbers are quite small. How a gay man managed to become CEO of a company like Apple is just mind-boggling to me.

  8. says

    @Rick – ahh but there are far more opportunities for the openly gay person in the private sector then there are within the Federal government? My first question to our neighbor was why did he stay in the Federal government. As an Executive Secretary surely his skills and knowledge could be utilized almost anywhere. He tried desparately and often to get out but the private sector wasn’t interested in him because he had no private sector experience. Government clerical employees are seen as slackers, less educated, minorities, less desirable and their work experience is not considered ‘on par’ with the standard workforce. He could move around the government easy enough but he couldn’t get a promotion because male secretaries were (obviously gay, real men would never work a predominately female position as secretary) undersirable unless you could find a female executive and that was far and few between.

    When you can’t hide being gay, like race or age, your opportunities are restricted. Once sucked into the Federal government and their (older) retirement plan (Civil Service), sick and vacation leave accrument, tenure, then walking away and starting anew in private industry is costly. If you’re pulling down over $100k a year and single you can take the hit but if your barely making it with $30k in a high geo area like SF you would have been wiser to have never entered into Federal service.

    He looks back and regrets the original choice he made – he believed in the promises the (female) Federal official who hired him enticed him with. That official moved on and he was left in the hands of the next homophobic male executive who was too embarassed to have a male assistant or secretary (but couldn’t resist the man’s skills and qualifications).

    If you’re gay my advice is to avoid the Federal Government as a place to work unless you’ve got a skill that can translate to and be accepted by private industry easily.

  9. BobN says

    “rests on an analysis of free markets”

    Oh, bull pucky. The world is full of markets far more free than those in the developed nations. Prejudice runs rampant.

  10. Jay says

    OS2Guy wrote: “What remains prevalent in the Federal workforce today – and I know this for a fact because our long-time neighbor has worked for HUD for 29 years, and is still discriminated against and has no equal rights (gay discrimination is NOT recognized nor federally protected).”

    This is simply not true. Government employees, including municipal, state, and federal employees actually have great protection against employment discrimination on the basis of sexual orientation. Courts have consistently held for the last two decades that the government cannot discriminate on the basis of sexual orientation. That does not mean that discrimination does not occur. But it does mean that someone who can offer evidence enough to convince a judge or jury can sue and recover damages for having suffered discrimination. Obviously, it is easier in the 20 states that offer explicit protection against employment discrimination, where one can obtain help from the state in fighting discrimination and even suing on one’s behalf), but federal courts have held over and over again that the government cannot discriminate in employment on the basis of sexual orientation without a compelling reason.

  11. says

    Ari, you’ve mistaken a core piece of the conservative argument, and it messes with the rest of your piece. You write:

    “When the discriminatory firm is faced with revenue loss or loss of market share or business failure, it will drop its discriminatory hiring practices in order to survive.”

    Not exactly. The second half of that sentence should read: “it will drop its discriminatory hiring practices or be run out of business by competitors that attract better talent by not discriminating.”

    That’s a crucial difference. Much of your piece explains why bigoted employers may continue to discriminate despite the economic disadvantage. But the conservative argument would reply that this is beside the point: if they continue discriminating they’ll go out of business, leaving the field to employers who don’t discriminate.

    Now, there are problems with that argument as well (e.g., what if bigoted customers are willing to put up with higher prices or poorer service in order to support a bigoted employer?), but I think you miss the mark with the argument as you’ve framed and your response.

  12. says

    @robtisinai: thank you for your comment, but your point is encapsulated by the or business failure and the sentence where i stated that the discriminators are not hiring the best and brightest. your comment certainly would make my post more clear, but i must resist your conclusion that i have left out that part of the argument entirely.

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