Defining Ideas

The Ability Of Markets

Monday, September 9, 2019
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EDHAR, Shutterstock

This past week, New York Times reporter Ben Casselman wrote a powerful story with the provocative title “In a Tight Labor Market, a Disability May Not Be a Barrier.” The article praised the diversity and inclusion initiatives that are now deeply embedded in modern corporate culture. Casselman told the moving story of Kate Cosway, who obtained her master’s degree in chemistry and chemical engineering in 2014. Cosway is on the autism spectrum. Her difficulty with interviews meant her job quest had little traction until this past summer when she was taken on as an intern at Dell Technologies in the company’s audit department. She did well and earned a permanent paying position in the fall. After lauding Cosway’s rise, Casselman asks: How long will the present-day hiring party last if an economic downturn is brought about by President Donald Trump’s on-again-off-again trade war with China?

Cosway is no anomaly in today’s hot job market. Thousands of workers who were once thought marginalized and unemployable are now being pursued by employers with tempting offers: good benefits, flexible hours, and training on the job. Ex-cons, college students, retirees, and members of minority groups are all being lured into the labor market by employers faced with serious labor shortages.

Today’s labor market surge vindicates John Kennedy’s famous observation in his June 1963 address in Frankfort, Kentucky: “As they say on my own Cape Cod, a rising tide lifts all the boats.” Put otherwise, the best way to create job opportunities for any target group is to create job opportunities for everyone. That maxim stands in stark contrast with the popular condemnation of free markets as a form of “trickle-down economics”: critics argue that the lion’s share of any program of market liberalization, including tax reductions and forms of deregulation, goes first and foremost to the rich, with only a few crumbs left for everyone else.

The numerous critics of trickle-down economics have included such notable historical figures as the actor Will Rogers, who believed in “trickle-up” economics. Not to be outdone, the once famous economist John Kenneth Galbraith opined, "If you feed the horse enough oats, some will pass through to the road for the sparrows." These naysayers seek some other mechanism to reduce the levels of income inequality that markets create.

Their standard solution from the New Deal on forward has been to impose regulations that redress social inequality, such as minimum wage laws and overtime statutes, which are both predicated on the belief that these contractual interventions will induce the wealth transfers needed to overcome serious income inequality, without reducing the total level of economic goods and services. That fantasy ignores the simple truth that everyone, employers and workers included, responds to incentives. Faced with the threat of regulation, employers will resort to defensive measures to cut their losses.  Those rational responses will also leave workers worse off by offering less convenient working hours, lower wages, and fewer fringe benefits. Remember, any restriction on the ability of an employer to make offers will necessarily limit the ability of workers to accept them.

What is true for wages and hours regulation is also true with respect to the antidiscrimination laws, including the 1990 Americans with Disabilities Act (ADA), a bipartisan and comprehensive confection passed to protect disabled persons. The good news is that Casselman’s article does not contain a single reference to the ADA or to any other antidiscrimination law to explain the current labor market uptick. Sadly, as is almost always the case with ameliorative legislation, the grand aspirations of the ADA fall short, as there is one economic law that no legislature can override. Ordinary contracts of employment are positive sum games between the parties, because they will only be formed if the gains from trade are shared by both parties. Any state regulation that blocks voluntary deals always creates a negative sum: the loss of welfare to the contracting parties leads to a loss of opportunities for everyone else.

It is lose, lose, lose, all around. The ADA rules will become a powerful barrier to the entry of disabled workers into the labor markets. Under the ADA, the employer who discreetly looks the other way when a disabled worker applies for a job faces a far lower risk of legal sanction than the more enlightened employer who gambles on a disabled worker who does not work out.

Against this somber backdrop, it is useful to compare two different types of responses. The first deals with the high-minded rhetoric on behalf of the law.  The President George H. W. Bush’s 1990 signing statement compared the ADA to the Declaration of Independence. The ADA, he proclaimed, “signals the end to the unjustified segregation and exclusive of persons with disabilities from the mainstream of American life.” To this very day, the Equal Employment Opportunity Commission (EEOC), proudly proclaims: “If you have a disability and are qualified to do a job, the ADA protects you from discrimination on the basis of your disability.” Every word of this benign proposition opens a hornet’s nest of unavoidable complications that invite constant litigation.

Terms like “disability” and “qualified” purport to be hard-edged, but in practice they are inescapably vague and raise questions of degree that call for some tribunal to look to the ubiquitous  “totality of the facts and circumstances” of each individual case.  Matters get no easier when firms and courts seek to apply slippery ADA phrases like “reasonable accommodation” and “undue burden” to  a wide variety of cases.  In principle, these marginalist calculations inform every business decision in a decentralized voluntary market, where asserted errors are quickly corrected out of business necessity, just as Casselman notes. But when these same norms are incorporated into law, they confer excessive discretion on public officials that leads inevitably to uncertain and capricious behavior.

It should therefore come as no surprise that the ADA has wholly failed in its essential economic purpose. A 1998 National Bureau of Economic Research paper by Daron Acemoglu and Joshua Angrist tracked employment data between 1988 to 1997, giving a nice before-and-after contrast for the ADA, which went into effect in 1992. There are two relative measures one can use to gauge the ADA’s effectiveness. The first is wages for disabled workers. The authors found that the wages of disabled workers were 40 percent lower than those of nondisabled workers, both before and after passage of the ADA. It turns out that you cannot get employers to pay more for workers than they perceive those workers are worth.

The second is labor force participation. After the ADA went into effect, the labor force participation of disabled workers plummeted: “employment rates for disabled men in all age categories, and disabled women under the age of 40, fell sharply after the ADA,” the authors write. This result is all the more dramatic because disabled workers had improving prospects job due to improved technology before the ADA was implemented. The moral is clear: high-minded attempts to scuttle market outcomes fail, ironically putting a far higher burden on the disabled worker unable to obtain a job than on the employer who still has many options to turn to in a robust labor market.

At this point, it is possible to put some general caveats on today’s most shopworn phrase—diversity and inclusion. The hiring officials at Dell were 100 percent correct in saying that they regarded the success of their recruitment program for disabled employees as critical to the long-term prospects of the company. But it is important to know why. Dell is making a long-term investment in these workers, and those front-end costs can only be recouped if they are able to develop long-term strategies that will allow for retention. At this point, Dell and similar firms still face the regulatory risk posed by the ADA. Just think what will happen if some aggressive EEOC official in the post-Trump years decides that some aspect of Dell’s program runs afoul of the ADA. Any administrative action at all could upend the entire project and send out a strong signal that the salad days are over, returning to a regime of strict enforcement of the antidiscrimination laws while simultaneously penalizing those firms that had aggressively hired disabled workers in the preceding era.

Casselman is right that the greatest peril to disabled workers is not capricious employers, or, for the moment, the now dormant EEOC. Rather, it is the dangerous Trump protectionist trade policies that violate every sound principle of contractual freedom, such as those seen in his lax domestic policies that have helped people like Kate Cosway gain meaningful employment. Diversity and inclusion may not be for everyone, and therein lies the genius of the free market. Unlike federal and state legislation, private pursuit of these ends is both effective and does not impose a legal straightjacket on those firms that cannot or do not want to embrace a wholesale or partial policy of diversity and inclusion.


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