California’s “Big Brother” Labor Regulations Will Harm Those Whom It Intends To Help

Tuesday, February 12, 2019
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According to employment law attorneys, California has the strictest regulations regarding women’s earnings and employment in the country. Unfortunately, recently enacted and proposed legislation that is intended to advance women’s earnings and opportunities have significant, unintended negative effects that will indirectly hurt women, particularly those from minority groups or with fewer skills. Men will also be affected negatively, as extreme and expensive regulations will drive even more businesses from the state and reduce opportunities for all workers.

The negative effects of California’s new, proposed gender-parity legislation go beyond employment opportunities and earnings and approach “Big Brother” levels of government intrusiveness. If this proposed legislation passes, it could open the door to the government substantially affecting the employment terms between a firm and its workers.

Since 1949, California’s Equal Pay Act has prohibited gender-based pay discrimination by requiring that workers in the same establishment and performing equal work should be paid the same wage. But that rule changed substantially with the California Fair Pay Act, which took effect in 2016. It is important to understand the change in the language in the titles of the two Acts. The 1949 Act was titled “equal pay”, which was intended to prevent discrimination. The new act, which mandates “fair pay,” extends beyond discrimination and is intended to directly engineer higher pay by government fiat.

The Fair Pay Act prohibits an employer from paying any employee a wage that is less than those paid to employees of the opposite sex for “substantially similar work” when viewed as a composite of “skill, effort, and responsibility.” The act eliminates the “same establishment” clause, so that the wages of employees working at different establishments can be compared. Most important, the Fair Pay Act places the burden of proof on the employer to show that a wage differential between employees is economically justified. But the act significantly limits the reasons an employer can use to justify a wage differential and also requires that the employer’s explanation for wage differences must account entirely for the wage differential, or else the complaining employee prevails.

The Fair Pay Act is badly designed economic policy because it distorts the normal economic forces of supply and demand that lead to successful economic outcomes for both employers and employees. For example, an employee working in San Francisco will earn a higher wage than an employee in Fresno because of cost-of-living differences, which would be reflected in the market price of workers in these two different locations. But the Fair Pay Act requires that both of these employees receive the same wage, which makes no economic sense. Note also that the most important determinant of worker compensation—worker productivity—is not even listed in the language of the act. Moreover, the language of the Fair Pay Act is vague, as there is no precise definition of the terms “substantially similar work,” “skill,” “effort,” or “responsibility.”

State senator Hannah Beth Jackson, a co-author of the legislation, stated that the Fair Pay Act is needed because “many women still earn less money than men doing the same or similar work.  The stratification and the pay disparities . . . are something that really eats away at our whole society.”

But Senator Jackson’s views about pay discrimination are not supported by recent studies that examine this issue. In fact, several studies show that the gender pay gap has virtually nothing to do with discrimination. Rather, individual worker choices account for most and perhaps all of the pay differences between men and women. Specifically, women tend to earn less than men because they choose to work far fewer overtime hours, take more unpaid leave, and choose work schedules that have more flexibility than men.

These findings indicate that family roles involving responsibilities such as child care fundamentally determine women’s pay differences. But these private household issues lie far outside the scope of government regulations.

It is no surprise that wage discrimination is unimportant in these statistical analyses. In today’s highly competitive US economy, discrimination becomes far too expensive to sustain. That is, if women, or any other demographic group, were significantly underpaid, then the demand for these workers would rise, and so would their wages.  

The Fair Pay Act dramatically lowers the bar for an equal-pay lawsuit against an employer and thus raises the expected cost of hiring women. Ironically, the legislation that is intended to raise women’s pay depresses the chance that a woman will be hired in the first place.

New legislation by Senator Jackson goes beyond the Fair Pay Act and approaches an almost Orwellian level of government intrusiveness. Jackson’s SB 171 would require businesses with at least one hundred employees to file a detailed annual report to the state’s Department of Industrial Relations explaining the compensation and the number of hours of work of their employees based on gender, ethnicity, and race. The purpose of these annual reports would be to allow state agencies to identify “wage disparities” and to better enforce wage-discrimination laws. The government claims that the data would be protected and seen only be state agency employees.  

But the most disturbing aspect of this legislation is Senator Jackson’s view that “many employers are unaware of their own disparities in pay. This bill will give employers an opportunity to examine their practices and make necessary adjustments to ensure that all employees are earning what they deserve.”

Let’s parse this. Labor costs are the most important cost for almost all employers. If a business doesn’t get this right, then they won’t survive. Human resource departments exist to make sure that businesses efficiently recruit and retain the workers they want, as well as comply with state and federal employment law. And if the human resources department isn’t doing its job, then the market will let a business know this when workers leave for better jobs. But even as businesses periodically review their human-resources practices, why should we think that a government agency would know more about the reasonable compensation of a business’s workers than the business itself?

You can see why this is politically popular in California, where many legislators have little trust in a free marketplace. This legislation has the potential to create an Orwellian level of government intrusion. Under SB 171, the state government will know the pay and the number of hours worked by your employees, and they will have this information by gender, age, and ethnicity.

How far of a leap is there between a government that collects data on earnings and hours by demographic groups and a government that uses this data to advise your business that you are not paying workers “fairly”?  

California is ranked among the worst states for regulations. If this proposed labor legislation passes, it will become even worse than it already is. There are better ways to support women’s employment opportunities, and these will be discussed in a future California on Your Mind column.