25 November 2009

The (First) Unemployment, Anti-diversity and Outsourcing Encouragement Act of 2009

While Obama's first law, forbidding wage discrimination, sounds noble at first glance, it is ultimately destined to reduce employment and erode the possibility of merit pay. It effectively pushes businesses toward rigid, union-style pay scales based on easily-measurable differences like seniority at the expense of pay differentials based on intangibles like merit, reliability and market conditions.

The law forbids companies from having pay disparities based on gender, race, national origin, religion, age and disabilities. The problem lies in that the most noble reasons for pay disparities, market conditions and merit pay, are intangibles that are difficult to measure. This opens up employers to the potential for litigation if they don't follow a rigid pay scale based on seniority and measurable experience like diplomas and licenses.

It would be folly to argue that there are never injustices in pay structures, but the solution to such injustices is for workers to move on to work for employers who pay them their true value. In my own salary negotiations, I have found that there are few negotiating techniques more effective for a valuable, underpaid employee than seriously threatening to leave the company. Great employees are hard to come by and considerable worth a premium over other employees who may have the same race, education and years experience but not work as effectively.

Market conditions can also play a considerable role. During the Internet bubble of the late nineties, my company had such a difficult time finding workers that I ended up hiring less qualified workers than myself at higher wages that I was making. I knew, however, that if the wage disparity continued, I could move to another company or request a pay rise. Further, I was well aware that these new, highly paid employees would be the first to be fired when times were hard. Ultimately, my company raised wages of existing "underpaid" employees to curb the tempation to leave the company.

In bear markets like the current one, with rising unemployment, the expanding pool of skilled, unemployed workers will cause wage levels in many industries to fall. New hires are rationally paid less than existing employees, creating pressure for existing employees to work harder to avoid getting fired. If companies were forced to re-level wages to market conditinos every six months or to hire new workers based on a rigid, out-dated pay scale, they would be unable to effectively adapt to changing labor market conditions. Who would want to work for a company that re-leveled their wages to market conditions every year? Who would want to work for a company that paid mediocre and exceptional workers with the same seniority the same wage?

Perhaps the most ironic aspect of the new policy is that Obama also actively promotes volunteerism. In other words, he encourages people to work for free. We have a lot of unpaid volunteers at my school, for example, and they are mostly the wives of well-paid husbands who have their children enrolled. This new law makes a dangerous proposition of paying a modest stipend to such volunteers. Unless such volunteers are paid the same wages as other full-time employees performing similar functions, they cannot be offered a cent for fear of litigation under this new law. In other words, Obama would prefer that some people not be paid at all, rather than allow the possibility of them being paid at pay levels agreeable to both parties.

Most noble reasons for wage disparity are intangibles like work ethic, reliability and market conditions which are difficult to measure. This new law will force companies to try to defend such practices in court. Companies should be fearful of hiring new workers under these conditions and may very rationally consider outsourcing more of their operations to countries where merit pay is still legal. They might also be expected to hire a less measurably diverse work force, as gender, race, national origin, religion, age and disability diversity is now, more than ever, a liability. All hail the first unemployment, anti-diversity and outsourcing encouragement law of the Obama administration.

1 comment:

  1. Outsourcing to other countries is certainly one possibility. Having no employees and using a temporary agency to staff a business is yet another.