Wednesday, January 18, 2006

Discrimination or Basic Economics?


According to ABC News, "six female employees at the Wall Street bank Dresdner Kleinwort Wasserstein Securities LLC are trying to break the proverbial glass ceiling with a $1.4 billion sex discrimination lawsuit". The women alleged that they were "passed over for promotions, and generally treated as second-class citizens at the firm". They are pursuing the lawsuit with the hopes of making the world a better place for their daughters.

I am very skeptical of the economic merits of this case. These six women allege that they were not paid what they were worth -- presumably their discounted value of marginal productivity. If these workers are paid less than they are worth, why didn't another company act as an arbitrageur and offer to pay them more? In fact, it seems like an alert entrepreneur could hire an entire firm of women who are allegedly paid too little and earn economic profits. Why hasn't this been done? The most likely answer to me is that they are already being paid a wage commensurate with their business abilities.

The women's attorney, Doug Wigdor, argues that discrimination is obvious considering that "Under 2 percent of the managing directors at the bank are women". This is a common fallacy. A grouping of a particular people does not automatically prove there has been discrimination. It may be that women have not worked in the industry as long as men or that they have different educational qualifications. "2%" is not compelling justification by it's own right. To be a bit more controversial, some people have argued that women are different than men. Some scholars believe that while men and women have the same average intelligence, the variance is greater for men. This explains, among other things, the greater proportion of men in top positions and the greater number of men in prisons and homeless shelters. Should we be upset that there are fewer female beggars than male?

Lastly, it might be that the consumers in general prefer men over women and this is the reason for the alleged discrimination. If so, this lawsuit is completely misdirected. The company should not be forced to pay because they were successfully serving the needs and biases of their consumers.

3 comments:

Dana said...

When you put a lot of time and energy into moving up in a company and then you are denied a promotion on bases that are contrary to the 14th amendment and equal rights laws of the 60s, I think you may have a case. Also, in banking, unlike probably law, its not like companies are banging down each others doors stealing key employees - there is a general gentlemen's rule about that. So just because they haven't been offered the compensation by other competitors doesn't necessarily mean they are worth less.

Also, the whole idea behind lawsuits like these is the break the biases. Assuming that the clients are assigned banking people to work with, funneling them to men, just because, is probably illegal. Look at it from a race perspective - just because the clients may want to work with a white person, doesn't mean that the company then can get away with not hiring qualified black employees. It isn't a question of economics, it is an issue of breaking up the "old boys network" and the gender biases that distort free market labor.

This case isn't about the money, more than a warning to other businesses still acting in a manner befitting the 50's rather than a post civil rights era.

David said...

Hi Dana,

I'm not disputing the legal grounds for a lawsuit, rather, I am arguing that there is not much of an economic case for one.

Whether or not bankers try and "steal" employees is not at issue. These are all intelligent women and as such I am sure they are aware of the hiring situations of other businesses in their industry. Presumably, they would take a better job if one came around. The cartel behavior that you suggest the banking industry exhibits has been proved to be highly unstable, both theoretically and empirically. It is too profitable for one firm to undercut the others and the result is that monopolies (or in this case actually monopsonies) don't last long. I searched the economics journals for articles on labor and the banking industry, and I could find no article even suggesting that banking was a monoposony for labor. Also, I could not find anything showing there is something economically different with banking firms compared to other firms.

In short, it is my contention that the burden of proof for discrimination according to economics is on the women and it should require very good economic explanations. Reliance on an "old boys network" is not sufficient by itself. Nonetheless, these women may still make a nice paycheck for their efforts.

David

Steve said...

Actually, Dana, the opposite is true. Investment banks are far more likely to actively "steal" each others' employees than are law firms. There really isn't any "gentleman's rule." There is tremendous competition among banks for the top producing employees. The fact that only 2% of managing directors at this company are women doesn't say very much. Keep in mind far fewer women than men even try to become investment bankers. In addition, becoming a managing director at an investment bank is very time-consuming and might not be worth it to smart women who want to have children. The time spent on maternity leave might have hurt some of these women, but they may have missed out on a lot when they were gone. It's a fast-moving industry. Finally, this case doesn't help break biases but instead sets a bad precedent. It makes women look bad and discourages banks from hiring them. Why take the risk that some women might sue you down the road?