Affirmative action and unemployment

European Journal of Political Economy, Vol. 4, No. 4 (1988), 479--490 © Transfer Verlag, Regensburg, FIIG

Affirmative Action and Unemployment Mwangi S. Kimenyi, William F. Shnghart II* and Robert D. Tollison** L Introduction

Since at least the end of World War II, unemployment rates among black and other racial minorities have consistently exceeded those of whites by about a factor of two. These unemployment rate differentials, which are even larger for teenagers and other subgroups of the minority population, have been attributed to a variety of causes, including discriminatory hiring practices, fewer educational and on-the-job training opportunities for minorities, and higher job turnover rates among these labor force participants (Barrett and Morgenstern 1974, Bergm~nn 1980). As a result, a large number of social programs have been put in place that are designed either to reduce minority unemployment or to raise the incomes of those so disadvantaged, or both. For example, public policy in this area now includes such measures as direct income transfers, guaranteed minimum wages, and comprehensive employment and training assistance, to name a few. The origins of the present equal employment opportunity laws can be traced back to 1941 when President Roosevelt issued Executive Order 8802, which required that a clause be inserted in all defense contracts barring employment discrimination by the contractors on the basis of race, creed, color, or national origin. Although the term "affirmative action" was first introduced in 1961 by President Kennedy's Executive Order 10925, whicti set out specific sanctions for noncompliance, the concept remained undefined throughout a series of executive orders and other federal initiatives that followed duringthe remainder of the 1960's. 1 These included President Johnson's Executive Order 11246 (1965), which retained the affirmative action obligations and nondis~ crimination language of Executive Order 10925 and transferred administrative responsibility for the program from the Office of the

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Affirmative Action and Unemployment

Vice President to the Secretary of Labor, the Secretary's delegation of these duties to the new Office of Federal Contract Compliance in 1966, and the addition of sex to the pro~bited categories ofdiserimination by Executive Order 11375 (1967). Thus, the early concept of affirmative action was not very different from the antidisCrimination requirements set out under Title VII of the 1964 Civil Rights Act. An explicit definition of affirmative action was first given in 1970 when the Office of Federal Contract Compliance issued its Order No. 4. This order required government contractors and other employers receiving public funds to establish plans setting forth goals and timetables for increasing minority employment in their firms. However, affirmative action had not yet become official policy. That egan with passage of the Equal Employment Opportunity Act EEOA) in 1972, which extended the affirmative action principle to 1 firms employing 15 or more workers as well as to the employees of state and local governments and educational institutions, and gave specific enforcement authority to the EquM Employment Opportunity Commission (EEOC) (Murray 1984, p. 93). Using various data sets covering a variety of time periods, past research on the relationship between affirmative action and the employment of minorities has generated mixed results. The weight of the evidence seems to suggest either that affirmative action has increased minority employment opportunities or, at worst, has been ineffective in lowering minority unemployment. Virtually no contribution to the debate has found affirmative action to have hurt minorities. 2 (For a survey of some of this literature, see Leonard 1984.) In this paper we investigate the effects of affirmative action on unemployment in the aggregate. Our hypothesis is quite simple. Compared with laissez faire, the introduction of affirmative action requirements raised the cost of hiring labor relative to the cost of hiring capital. Because firms operate on many margins in seeking the lowest--cost combination of inputs, it follows that employers would respond to affirmative action by substituting away from the more expensive input. Accordingly, affirmative action is predicted to have had effects opposite of those intended by its supporters, namely, to redu~ employment opportunities for all workers, including minorities. (The relative impact of affirmative action on minority and white employees is an empirical question.) In tests of our hypothesis using •data covering the years from 1948 through 1982, we find positive and statistically significant ceteris parib~ relationships between the onset of affirmative action and the unemployment rates of both minorities and whites. Moreover, the empirical evidence suggests that the adverse effects of affirmative action requirements on employment have been shared equally by minority and white workers. Taken

Alternative Action and Unemployment

481

together, the results imply not only that affirmative action has hurt the members of the population it was intended to help, but that the main beneficiaries of affirmative action have been the owners of capital. The paper is organized as follows. Section II provides a brief summary of affirmative action and discusses the effects of the pro-a m on job seekers. The empirical evidence is reported in Section , and Section IV contains some concluding remarks.

II. The Costs of Complying With Affirmative Action The central goal of the various employment policies and practices required by af~rmative action is to identify and correct those instances in which minority workers are "underrepresented." To meet this goal, employers subject to the law must first determine the extent of minority underutilization in their firms, if any, and then take positive steps to remove the imbalance.S Both of these requirements impose costs on employers which we outline below. Minorities are considered to be underrepresented in a particular firm or within a particular job category if the current proportion of minority employees falls short of the proportion of such employees available in the local labor force. Initially,employers must therefore devote resources to the gathering and processing of employment data for the purpose of identifying areas of minority underutilization and, on the basis of these analyses, to develop plans and timetables for increasing minority employment in their firms. The results of all of these efforts are to be reported to the EEOC, which evaluates the employer's affirmative action program and subsequently monitors each firm's progress toward meeting its goals. These start-up costs and a portion of the recurring expenses associated with affirmative action make it more costly for the firm to hire anyone. The whole process of advertising job openings, screening applicants, and selecting candidates becomes slower, more laborious, and more costly as firms seek to provide evidence of good faith in their efforts to increase minority employment (Sowell 1975, p. 38). For example, vacancy announcements receive wider distribution than otherwise, including to places where the prospects of contacting qualified individuals is low, so as to generate as many inquiries from minority applicants as possible. Job positions axe held open longer, more interviews are scheduled, and the dossiers of applicants are scrutinized more closely. All of these efforts go toward justifying in the eyes of rejected candidates and those of the E E O C the decision

482

Affirmative Action and

Unemployment

to hire a particular individual, especially when the new employee chosen is a white male. Furthermore, the Supreme Court held in Gr/g#s that minimum employment credentials such as high school diplomas, previous experience, minimum test scores, and so on may not be required of applicants unless such credentials can be demonstrated to relate significantly to successful job performance.4 As a consequence, employers must spend additional resources to validate the criteria they impose as prerequisites for employment. This raises hiring costs further. In short, affirmative action requirements increase the costs of filling job vacancies. This will tend to raise unemployment rates for two reasons. First, the burden of complying will force some marginal firms in the economy to shut down, reducing the number of employment opportunities for all workers. (Moreover, smaller firms - those with less than 15 employees - will hesitate to expand because adding employees to the payroll will subject them to the requirements of affirmative action; the growth of the small business sector will therefore be retarded.) Secondly, those expenses of complying with affirmative action that vary according to the number of workers hired raise the cost Of labor relative to other inputs. It follows that firms will employ fewer workers at the margin. But, neither of these effects would necessarily follow racial lines: Employment among whites and minorities would be reduced similarly. There are other costs associated with affirmative action that do differ according to race, however. These differential costs arise because the duties imposed on employers by the program extend beyond the hiring stage to include the personnel actions covered by Title VII of the 1964 Civil ~ g h t s Act. In particular, employers must take account of minority representation when making decisions concerning the termination of workers, pay, promotion, transfer, training, and other dimensions of employment. This means that once a minority employee is hired, it will be more costly to fire him or her, to deny pay increases, promotion, training opportunities, and so on - more costly in the sense that any negative personnel action involving a minority employee raises the threat of discrimination charges that must be defended both on the basis of job performance and in terms of the racial characteristics of the workforce. As a result, firms may be more hesitant to hire ' minorities than whites, and those who are hired will tend to be "overqualified" as a precaution against having to take negative personnel actions in the future. To summarize, although some of the costs of complying with affirmative action may be higher for minorities than for whites, the important point is that affirmative action increased the cost of hiring

Ai~mative Action and Unemployment

483

labor relative to other inputs. This implies hi_'gher unemployment rates following the onset of affirmative action. We present empirical evidence in support of this hypothesis in the following section. III. Empirical Model and Results Our main hypothesis is that the introduction of affirmative action requirements led to an increase in unemployment rates. In order to test this proposition, we constructed an estimable regression equation of the following form: Ut =

ao + alRGNPt + a~.RAGEXt + as(B/W)t + a~aMINWt + asPHATt + a6 FLFPRt + aTD72t + asTRENDt + aoTRENDSQt + et,

where Ut = the unemployment rate in year t, measured separately for minorities, MU, and for whites, WU; RGNPt = RAGEXt = (B/W)t = RMINVCt-PHATt = FLFPRt = D72t = TRENDt = TRENDSQt et =

real gross national product; real spending by federal, state, and local governments; ratio of average weekly unemployment insurance benefit to the average weekly wage in the manufacturing sector; real minimum wage; inflation rate; female labor force participation rate; dummy variable for the Equal Employment Opportunity Act of 1972 (= 1 for the years 1972-1982, and zero otherwise); linear time trend; = time squared; and regression error term.

This is a standard set of explanatory variables of the unemployment rate. The level of aggregate demand for goods and services is one of the prime determinants of the derived demand for labor. Increases in aggregate demand, for example, will draw down accumulated inventories of finished goods and induce firms to step up their current production rates. In the short run this can be accomplished by offering overtime to existing employees, but if the demand shift is viewed as being permanent, previously laid off workers will be recalled and new employees hired. Similarly, reductions in aggregate demand will lead to a contraction in output and employment. Increases in real GNP

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A~rmative Action and Unemployment

should therefore be associated with lower levels of unemployment, and vice-versa. The effect of increased spending by federal, state, and local governments, RAGEX, on unemployment rates is unclear. On the one hand, this variable serves as a proxy for employment opportunities in government, so an increase in such expenditures may create more public job openings for all workers. On the other hand, if higher government spending levels are associated with increases in the value of transfer payments to individuals, this will reduce the relative cost of being unemployed. The sign of the estimated coefficient on R~GEX therefore depends upon which of these effects is larger. If being unemployed is considered to be the occupation of searching for employment, then the variable (B~W) measures the average r~ative wage earned by job seekers. Specifically, (B/W) is the ratio of the average weekly benefit check paid by state unemployment insurance funds to the average weekly wage earned by workers in the nonagricultural sector. As benefits rise relative to wages, we expect unemployment rates to go up, ce~er/s par/b~. Minimum wage laws are commonly thought to be responsible for at least a portion of historical black-white unemployment rate differentials, and for substantially increasing teenage unemployment (see, e.g., Brozen 1969 and Mincer 1976).5 We therefore included the real value of the guaranteed minimum hourly wage as an explanatory variable in our regressions. If the conventional wisdom is correct, the estimated coefficient on RMINW should have a positive sign. The variable PHAT allows for the existence of a short-run Phillips relationship. If individuals form their expectations about future inflation rates adaptively, then an increase in the inflation rate will in the short run cause some workers to accept job offers that subsequently (when expectations about inflation have been revised upwards) pay a real wage that is i~laOt~oOnW.~aTh~atemPelOymex~pntec~a~e will fall temporarily. In contrast, ly low will cause unemployment to rise in the short run as some workers quit jobs and others refuse to accept employment offers that will later turn out to pay an adequate real wage, FLFPR controls for the secular rise in female labor force participation occurring over the time period covered by our sample. Female labor force participants tend to experience higher unemployment rates than males for a variety of reasons.6 We therefore expect the estimated coefficient on this variable to have a positive sign. The main test of our hypothesis centers on the sign and significance level associated with the coefficient on D72. In particular, if affirmative action requirements did indeed raise unemployment rates

Affirmative Action and Unemployment

485

generally, a7 will be positive. On the other hand, if the program has had the effects intended by its proponents, the estimated coefficient should be negative in the minority unemployment rate equation, and either positive or insignificant in the white unemployment rate equation. Although the term "affirmative action" was used in connection with public antidiscfimination policy as early as 1961, there is reason to believe that the program was not effectively enforced until authority to do so was conferred on the EEOC by the 1972 Equal Employment Opportunity Act. We therefore chose to mark the beginning of affirmative action in that year. Finally, TREND and TttENDSQ control for events taking place during the same period that may have had an influence on unemployment rates, but that are not accounted for by the other independent variables. These otherwise omitted variables include such factors as the explosion in social welfare programs during the 1960's and a variety of structural changes taking place in labor markets, all of which may have tended to raise unemployment rates generally. Observations on all variables were obtained for the period 1948 to 1982 from standar d government sources.~ After transforming the continuous variables (except for the inflation rate) by taking their natural logarithms, we estimated the unemployment regressions by ordinary least squares.s The results reported in Table 1 suggest strongly that, holding other things equal, affirmative action requirements led to higher unemployment rates for both minorities and whites. In particular, passage of EEOA caused the natural logarithm of the minority unemployment rate to go up by 0.44 and the natural logarithm of the white unemployment rate to rise by 0.38. This implies that the average annual unemployment rates for both groups rose by about 1.5 percentage points following the introduction of affirmative action. The remaining coefficient estimates are consistent with the predictions of economic theory. Increases in aggregate demand reduce the unemployment rate sharply, and there is evidence of a negative~ ly-sloped short-run Phillips curve. Moreover, increased spending by federal, state, and local governments lowers the unemployment rate significantly, and the coefficient on the unemployment insurance benefit-to-wage ratio is of the expected sign. The former result appears consistent with the idea that the public sector is an important source of employment opportunities. The estimates also suggest that increasing female labor force participation has tended to raise unemployment rates generally, with the adverse effects being larger for minorities. Finally, the minimum wage does not have a significant influence on unemployment rates in our data set. Although this result may be due to the fact that we have not controlled for the age

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Am~natlve Action and Unemployment

distribution of the unemployed workers, it also lends support to Linneman's (1982, p. 444)observation about "the remarkable constancy of the minimum's real purchasing power." Overall, the regression specifications in Table 1 explain roughly 90 percent of the variation in unemployment rates over the past 35 years. To test whether or not the adverse employment effects of affirmative action have been different across races, we reestimated our two unemployment rate equations, constraining the coefficient on D72 in each to be equal to its estimated value in the other, and then performed an F-test on the appropriateness of the restriction. In neither case was the restricted least squares estimator of a7 significantly different from the unrestricted estimator (F = 0.36 in both cases). This suggests that the burden of affirmative action has been shared equally by minorities and whites.9

IV. Condudim3 Remarks In this paper we presented evidence that the introduction of affirmative action raised the unemployment rates of both minorities and whites significantly and that the burden of the program has been roughly equal for the two races. The results lend strong support to the hypothesis that affirmative action requirements have increased the cost of hiring minorities substantially, and suggests paradoxically that minorities have done no better than whites under this attempt by government to overcome the effects of past racial discrimination. The failure of government antidiserimination policy to aid minorities is well documented (BeUer 1978, Murray 1984, Sowell 1975). lo The findings in this paper are consistent with this literature. How then does one explain minority support for affirmative action? We conjecture that a rationale can be found in the interest-group model used by Leffler (1978) to analyze support for minimum wage legislation. In particular, affirmative action may "be a technique of lowering the costs of establishing eligibility for the increasingly generous public welfare programs" (Leffier 1978, p. 346). That is, by raising minority and white unemployment rates, affirmative action increases the number of individuals on the dole. Support for such an outcome from those having an interest in the welfare state workers with low labor-market productivities, lobbyists for the poor, and the bureaucrats administering these transfer programs - is quite rational when viewed from a self-interest perspective. Moreover, because the costs of affirmative action are spread over a large num-

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487

her of employers in the economy, the success of the beneficiaries in using the political process to obtain their desired ends is understandable. Notes: * Department of Economics and Finance, University of Mississippi, University, Mississippi 38677 ** Center for Study of Public Choice, George Mason University, Falfax, Virginia 22030. We are grateful to Valerie Cooley for helpful comments. The usual caveat applies. 1 Firms fa~l|ng to comply were threatened with the loss of government funding, but no such actions were taken until 1971 (Murray 1984, p. 91). 2 This is a slight overstatement. Although Leonard (1984) emphasizes employment gains for black males in the government contractor sector during the 1974--1980 period, his data also show a decrease in the aggregate employment share of this group over the same period. This suggests that the increased demand for black male workers by government contractors was more than offset by a demand reduction in other sectors of the economy. 3 Order No. 4 of the Office of Federal Contract compliance stated that An affirmative action program is a set of specific and result--oriented procedures to which a contractor commits itself to apply every good faith effort. The objectives of those procedures plus such efforts is equal employment opportunity. Procedures without effort to make them work are meaningless; and effort , undirected by specific and meaningful procedures, is inadequate. An acceptable afl'~rmative action program must include an analysis of areas within which the contractor is deficient in the utilization of m|nority groups and, further, goals and timetables to which the contractor's good faith efforts must be directed to correct the deficiencies and, thus, to increase materially the utilization of minorities at all levels and in all segments of his work force where deficiencies exist (U.S. House of Representatives 1982, p. 5). 4 Gril~,n v. Duke Power Co., 401 U.S. 424 (1971). In this landmark case, black employees at Duke Power Company's Dan River power-generating facility sued their employer, charging that the imposition of educational and aptitude test requirements as conditions of employment and transfer within the company violated Title VII of the 1964 Civil Rights Act. The Supreme Court held unanimously that Duke Power's policies were discriminatory, explaining that Title VII was directed at the consequences of employment practices, not the

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motivation. In short, Griggs established that proof of discrimination does not require showing intent to discriminate, and that job qualifications that are apparently neutral but are not related to employee performance are unlawful if they have a "disparate impact" on minorities or perpetuate the effects of past discrimination. 5 For a contrary view, see Linneman (1982). 6 On the determinants of sex differentials in unemployment rates, see Johnson (1983). 7 With the exception of observations on the minimum wage, data for all variables were obtained from U.S. Department of Commerce (1975) for the years 1948 through 1970. The specific citations are as follows, where the numbers in parentheses are the volume number, series, and page number, respectively: Gress national product (1, F47, p. 229); government expenditures (2, Y522, p. 1119); average weekly unemployment benefit (1, H309, p. 354); average weekly wage in manufacturing (1, D804, p. 169); consumer price index (1, E135, p. 210); female labor force participation rate (1, D13, p. 128); minority unemployment rate (1, D93, p. 135); and white unemployment rate (1, D90, p. 135). These series were updated through 1982 using the 1971--1985 issues of the Statistical Abstract. Effective federal minimum hourly wage rates for the 1950--1981 period are given in the 1982-83 Statistical Abstract, p. 407. 8 Similar results were obtained when all variables were entered in levels, and when we used a log--linear specification. 9 Further support for this conclusion is given by the fact that when we redefined the dependent variable to be the ratio of the minority to white unemployment rate, the estimated coefficient on D72 was positive, but not significantiy different from lero. 10 Indeed, after standardizing for skills and other individual characteristics, Borjas (1978) found large sex/race wage differentials to exist among full--tlme employees of the Department of Health, Education, and Welfare.

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Action and Unemployment

489

References: Barrett, Nancy S. and Morgenstem, Richard D., "Why Do Blacks ? ,, and Women Have High Unemployment Rates., Journal of Human Resources 9 (Fall 1974): 452-464. . : . Beller, Andrea H., "The Econormcs of Enmrcement of an Antldiscrimination Law: Title VII of the Civil Right.s Act of 1964," Journal of Law and Economics 21 (October 1978): 359--380. Bergmann, Barbara, "Curing High Unemployment Rates Among Blacks and Women," in Alice Amsden, ed., The Economics of Women and Work, New York: St. MartinWs Press, 1980, pp. 350--358. Borjas, George J., "Discrimination in HEW: Is the Doctor Sick or Are the Patients Healthy?," Journal of Law and Economics 11 (April 1978): 97-110. Brozen, Yale, "The Effect of Statutory Minimum Wage Increases on Teenage Unemployment," Journal of Law and Economics 12 (April 1969): 109-122. Johnson, Jane "Sex Differentials in Unemployment Rates: A Case for No Concern," Journal of Political Economy 91 (April 1983): 292-303. Leffler, Keith B., "Minimum Wages, Welfare, and Wealth Transf~s to the Poor," Journal of Law and Economics 21 (October 1978): 345-358. Leonard, Jonathan S., "The Impact of Affirmative Action on Employment," Journal of Labor Economics 2 (1984): 439-463. Linneman, Peter, "The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question," Journal of Political Economy 90 (June 1982): 443-469. Mincer, Jacob, "Unemployment Effects of Minimum Wages," Journal of Political Economy 84 (August 1976): S87--S104. Murray, Charles, Losing Ground." American Social Policy 1950-1980, New York: Basic Books, 1984. Sowell, Thomas, Affirmative Action Reconsidered: Was It Necessary in Academia?, Washington: American Enterprise Institute, 1975. U.S. Department of Commerce, Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, 2 vols., Washington: USGPO, 1975. U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, Washington: USGPO, various issues. U.S. House of Representatives, Committee on Education and Labor, Report on Affirmative Action and the Federal Enforcemen~ of Equal Employment Opportunity Laws, 97th Cong., 2d sess., 1982.

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Table 1: Regression Results

Intercept

Log of Minority

Log of White

Unemployment Rate

Unemployment Rate

32.7135

29.4747

ILAGEX

-3.5794 (-6.06)*** -1.3972

-3.1513 (-5.34)*** -1.0440

B/W

0.9901

2.6937

Log of: RGNP

RMINW FLFPR PHAT D72 TREND TRENDSQ R2 D-W F

(-2.81)*** (1.72)* -0.0066 (-0.02) 2.0179 (2.24)** -0.0331

(-3.10)*** 0.4365 (4.57)*** 0.2622 (7.14)*** -0.0026 (-4.42),,, 0.913 2.37 29.27

(-2.1o),, (4.68)*** -0.1162 (-0.37) 1.4394 (1.60) -0.0158

(-0.37)

0.3790 (.9) 3 2 *** 0.2009

(5.47)*** (-2.81)***

-0.0016 0.902 2.37 25.68

Notes: t-statistics in parentheses; D-W is the Durbin-Watson d.

Asterisks denote significance at the 1 percent (***), 5 percent (**), and 10 percent (*) levels.