American labor markets are in horrible shape. The slowdown that began in the subprime mortgage market has mushroomed into a full-scale job crash that made the economy shed more than 500,000 jobs last December, with more to come. At the abstract level, the Obama administration has made job creation its first priority. At the concrete level, job destruction will be its first tangible achievement, with its effort to ratchet up government regulation of labor markets.
Exhibit A of this exercise in economic self-destruction is the Lilly Ledbetter Fair Pay Act of 2009, which on January 29 became the first bill that the new president signed into law. In effect it guts the statute of limitations in employment discrimination cases by the simple expedient of saying that each time "wages, benefits, or other compensation" are paid, an employee may sue for discrimination if that current decision rested in whole or in part on some act of discrimination that occurred years before. Why? Because the Supreme Court’s 2007 decision in Ledbetter v. Goodyear Tire & Rubber ignores the "reality" of labor discrimination that is inconsistent with the "robust" application of the civil rights laws.
The implicit narrative behind the new bill is that discrimination is so woven into the fabric of the employment relationship that, once injected, it can never be excised. Labor markets are thus deemed incapable of selfcorrection because of their ponderous lockstep operation year in and year out. It is as if personnel officials never sought to sort out productive from nonproductive employees. Annual reviews, promotions, demotions, and reassignments are viewed as extraordinary events that only rarely alter the original wage path.
In the original Ledbetter case, in which the plaintiff complained, at the end of her nineteen-year career with Goodyear, that she had been paid less than her male colleagues, no one sifted through the underlying record because the only issue before the court was whether the statute of limitations barred the claim. The justices ruled that it did. But now that the statute of limitations has been neutered, litigation on allegedly tainted employment decisions will necessarily allow and oblige employers to contest every claim that earlier personnel decisions controlled later ones. Factual disputes will generate convoluted legal standards; damage calculations on the residual harm from earlier discrimination will generate large verdicts resting on obscure formulas.
Worse, the passage of this law will doubtless lead many employers to initiate expensive programs to re-evaluate individual workers to head off the inevitable litigation—at the risk of inviting still more needless litigation. But the Democratic sponsors of the legislation never once asked these simple questions: How serious is the problem of discrimination that generated the cause célèbre? Is the fuss and bother of additional litigation worth it when stale evidence leads to higher error rates?
But when civil rights are on the table, who needs evidence? To their sorrow, the Democrats will discover that every dollar spent in litigating the past is one less dollar for hiring new workers. Even if this new law helps people like Lilly Ledbetter (who conveniently bring their discrimination claims only after retiring), the law will force employers to incur higher costs to minimize potential liabilities that can never be removed from their balance sheets. Remember, every person who quits is offered a clear road map for future litigation.
The Ledbetter saga offers a small window onto the larger inadequacy of the entire structure of employment discrimination law. Do these laws make sense in good economic times as well as bad? The short, if unfashionable, answer is no. The best legal regime for labor relations rests on freedom of contract, where the protection afforded individual workers rests in their ability to go elsewhere if they don’t like their current job. Think, therefore, of any employment discrimination law as a tax on the employment relationship that reduces the gains from exchange to both sides. Let that tax increase exceed the total gains generated by the employment contract, and the job is lost, no matter what law Congress passes.
So understood, the Lilly Ledbetter Fair Pay Act has nothing to do with fairness and everything to do with economic waste perpetrated in the name of social justice. Unfortunately, social justice doesn’t operate in one dimension and economic productivity in a second—which Congress will discover when this latest self-inflicted wound helps undo the possible good that a government stimulus program might provide. This libertarian says it is a sad day when the new United States Congress is hell-bent on regulating battered labor markets into further submission.