Obama's Misguided Effort to Protect the Unemployed From Hiring Bias

This proposal would fail to help the jobless but could make finding work even more difficult

600 job fair mirror REUTERS Lucy Nicholson.jpg

In politics few actions are as lauded as speaking out against discrimination. So we probably shouldn't be surprised that President Obama announced an anti-discrimination provision as part of his proposed jobs bill: he wants to ban discrimination of unemployed people. While this is a lovely political talking point, it won't cut unemployment and could even make matters worse for jobless Americans.

The Idea

The proposal here is simple enough: employers would not be able to use an applicant's current employment status as a consideration in the hiring decision process. In effect, being unemployed would become a protected designation, like race and sex. People who believe that they were denied a job because they were unemployed could sue the company that denied them the position. Job opening ads that exclude unemployed people from applying would also be prohibited.

Is This Really A Problem? (No.)

For starters, we have little evidence that this sort of discrimination is playing a significant role in hiring. Yes, prolonged unemployment is a problem. But the reason for this is due to the lack of job openings paired with a skills mismatch. While there might be a handful of instances where employers are shunning the unemployed, no one is suggesting that discrimination is playing a major role in the U.S. unemployment problem.

The lack of exclusionary ads demonstrates this point. Tuesday's New York Times article on the proposal by Robert Pear says:

The Equal Employment Opportunity Commission has received reports of such advertisements but has no data to show how common they are.

If such ads were common, then such data would be readily available.*

Will This Proposal Create Jobs? (No.)

But let's pretend, just for argument's sake, that discrimination against the unemployed really does occur with modest frequency. Let's say that one out of ten employers discriminates against the unemployed -- which is almost certainly a much higher percentage than the portion that really does. Let's think about how this might work.

So imagine that Joe is unemployed and applies for a job at XYZ Corp. It turns out XYZ likes to discriminate against the unemployed, so a current employee at ABC Corp, Sheila, is hired instead. Now for this to be legitimate discrimination, we must assume that Joe was at least equally qualified for the job that Sheila got. So they must have similar experience levels. Now that Sheila has left her job, ABC will need to hire someone. Joe will be a prime candidate for Sheila's old job, and it's statistically very unlikely that Sheila's previous employer is also a discriminator.

This story of labor market turnover shows that, even if this sort of discrimination does occur sometimes, it shouldn't cause unemployment to be higher or the duration of unemployment to be much longer than it would have been anyway. At worst, it causes slightly slower wage growth for unemployed Americans. Whenever a new job opening is filled by a current employee, another opening is created, which can be filled by an unemployed person. This discrimination does not actually kill jobs. At most, it shuffles the labor market outcome.

Will This Proposal Kill Jobs? (Probably.)

Instead, the rule to ban discrimination against unemployed Americans could actually slow hiring. Imagine that you're an employer that is considering bringing on another employee. At this point, you figure you have the money to hire someone now, but you could probably wait six months or a year -- consumer demand in the short-term looks weak.

But you hear of a new law that will forbid you to discriminate by not hiring unemployed people. You would never discriminate anyway, but now you worry about the get a huge influx of unemployed applicants you'll get -- after all, millions of Americans are unemployed. And there's definitely a chance that, if you don't hire one of them because a better already-employed candidate is out there, then you'll get sued.

A potential lawsuit is not something you want to deal with. So you figure you will hold off on hiring until unemployment declines a little further and the risk of litigation declines.

Did you see what just happened there? By creating a law to forbid a practice that only a small minority of firms take part in anyway, everybody else may change their behavior. The decision to create a job just took on additional risk -- risk that's much higher when the number of unemployed Americans is very great. As a result, firms now have a disincentive to hire when unemployment is high. Obviously, this is precisely what we don't want.

The Argument Nobody Wants to Hear

Racial discrimination is never justified and neither is sexual discrimination. But discriminating based on employment status could be justified in some situations. (I hate to be the one to make this point, because I'm sure it will annoy people. But the point needs to be made.)

Actually, the Obama administration actually inadvertently makes this point, as reported by that New York Time article mentioned above:

Skills often atrophy when a person is out of work, and White House officials said that discrimination could worsen the problem, creating a class of people who could be left behind as the economy recovers.

But wait -- if skills atrophy, isn't that a legitimate reason to hire a currently employed worker over someone who hasn't been unemployed for an extended period? While this is a tragic problem for many Americans, is it a problem that should be ignored by potential employers? This no longer looks like arbitrary discrimination, like bias based on race.

In light of this fact that the White House mentions, this sort of discrimination against the unemployed is justified to an extent. If you have two people who are otherwise equal, but one has been unemployed for two years, for example, then it might be sensible to hire the employed person, since you don't have to worry about her skills having atrophied. But if you have a clearly better candidate that experienced a bout of unemployment, then he should probably still be hired -- and probably would be.

Given this fact, how do you enforce penalizing firms for bad discrimination versus valid discrimination? You probably can't, which means that this proposal is logistically unworkable. The law shouldn't forbid employers from acting rationally and picking the best candidate for a job just because some Americans happen to have experienced a unfortunate consequence of a terrible economy.

For all of these reasons, let's hope the president's proposal to ban discrimination against the unemployed is just politics and doesn't catch on. It's poor policy. It intends to solve a problem that doesn't really exist and would make the unemployment problem even worse. But it sure does sound good on the campaign trail.


* Note: I've gotten some push back for my hand waving here from a few readers. Just to reiterate: I'm not saying that these ads don't exist, just that they aren't a significant enough problem that the government should bother dwelling on it. If you want to read an argument for why discrimination against the unemployed is a problem, check out this report by the National Education Law Project. It's an interesting read, but within their four weeks of researching online jobs postings, they found just 150 listings that discouraged the unemployed from applying. Out of probably millions of listings out there, I think this makes my point even clearer. Moreover, even if you think that the practice of discriminating against the unemployed is very common, then the other three-quarters of this post explains why the government still shouldn't worry about it.  

Image Credit: REUTERS/Lucy Nicholson