Obama’s misguided rule to reduce pay discrimination
A Note from the AntiGlobalist: Central planning is to the economy as social engineering is to society. To control the perplexing and mysterious social forces of society through the powers of the state is doomed to failure just as the Soviets who tried to control the millions of prices in their economy, as if they possessed the hand of God to make society kneel to their Utopian fantasies. There is not, nor has there ever been, any bureaucratic organization capable of controlling for the perplexing nature of society and economy because it is outside of human capacity to control for the enormous multitude of these factors. As the central planners of the Communist states would learn first-hand, the idea that the enormous quantity of information in a given society or economy can be properly controlled and guided is an impossibility. And as you will see from this article, the failure of the Obama Administration to take into account this truth, as they struggle to ascertain even a fragment of the knowledge required to do what they intend. Rather, they are doomed to failure and unfortunately, to drag the rest of us along with them in the process.
It’s well intended, but Obama’s plan to require businesses to collect more pay data on their employees will lead to inaccurate data and faulty policies.
(Politico/Hamilton) Under President Barack Obama, the federal government has made fighting discrimination a top priority, from signing the Lilly Ledbetter Act just a few days after he entered office to recent efforts to reduce the pay gap through unilateral actions. These moves, while well-intentioned, can also have unintended consequences and even set back the quest to eliminate pay discrimination.
The clearest example of this came in September, when the U.S. Equal Employment Opportunity Commission finalized changes to a form — called the EEO-1 Form — that collects demographic data on workers. For the first time, the EEOC required U.S. employers to report data on wages and hours worked by gender, race and ethnicity, an attempt to address a very real issue — that some people are paid less because of their sex, race or ethnicity.
Collecting this data may seem like a logical step in order to eliminate pay discrimination. But the change to the EEO-1 form imposes a very broad requirement on employers — so broad that even after employers spend countless additional hours filling it out, the resulting data will be inaccurate and lead to misguided policy decisions. To prevent this from happening and as a much-needed step toward reducing the regulatory burden on U.S. businesses, President-elect Donald Trump and the GOP Congress should make undoing the rule a priority next year.
To start, let’s assume that pay discrimination based on sex, race or ethnicity is a major problem. (Even that is questionable: The government’s own statistics estimate that only about 35 percent of the gender gap may be caused by some form of discrimination.) Is the EEOC’s new rule unreasonable?
On the surface, the government asking for one more set of data seems tolerable. But the details of the requirement demonstrate how challenging this is for employers. Under the new rule, the EEOC requires employers to report the exact hours worked by all their employees, broken down by gender, race, ethnicity, income level (in one of 12 pay bands) and job category (in one of 10 defined categories). Altogether, each employer must fill in more than 1,800 new boxes on a form so that the government can analyze whether certain workers are paid less than other workers, despite working in similar jobs with similar hours.
This is a huge new burden on businesses. Already, according to EEOC estimates, about 67,000 businesses with 100 or more workers spend 1.1 million hours a year to fill out an EEOC form reporting data about employees’ ethnicity, race and sex by job category. The new requirement, by adding in employees’ hours worked and corresponding pay data, nearly doubles the estimated annual labor cost associated with reporting data to the EEOC — on top of one-time implementation costs totaling $27.2 million.
Worse than the increased costs on business, the new EEOC data will not identify employers who discriminate against their employees. Why? Because the EEOC job categories are so broad that they make direct comparisons meaningless. Oral surgeons will be counted in the same job category as credit counselors, and firefighters in the same job category as blackjack dealers, even though each person’s pay is dramatically affected by the various educational requirements, required experience levels and hazardous conditions of each job. The pay for a marketing professional straight out of college will be directly compared with that of a nonsupervisory marketing professional with 25 years of experience.
The EEOC says it will use the data “to compute within-job-category variation, across-job-category variation, and overall variation, thus supporting the agencies’ ability to discern potential discrimination.” But without controlling for pay variations tied to these other important differences in worker qualities and market needs, the data’s validity for assessing discrimination is questionable at best. At worst, it will create a false impression of the true state of pay discrimination in the U.S.
The requirement that employers record the number of hours their employees work is also likely to result in inaccurate data because many companies simply don’t have that information. A 2016 survey from the American Payroll Association found that 36 percent of respondents work for a company that doesn’t require them to record the number of hours they work. After businesses complained that they don’t track hours for employees exempt from overtime laws, thus making pay comparisons difficult, the EEOC gave firms two options: Either use a 40-hour workweek as a proxy for the time estimate or provide data to support a different number. These employers are now stuck either implementing major new time-tracking systems in order to accurately provide the data on each individual worker’s hours or knowingly reporting a number (40) that may be inaccurate. Some employers may choose to implement tracking and others may not, which means the entire database could be contaminated by faulty data.
Employers are also required to report pay as defined by W-2 earnings, even though W-2 earnings are affected by choices workers make on voluntary overtime, for example, or on contributing to a 401(k) account. In other words, one worker voluntarily contributing the maximum amount to a 401(k) may appear to make less than a worker contributing nothing, even if their salaries are exactly the same.
In trying to prevent an employer from paying workers less based on their sex, race or ethnicity — characteristics fairly easy to objectively categorize — these new requirements are reducing the employer’s ability to pay based on more subjective metrics about worker qualities that are critical to job performance, such as experience, skills, talent and effort.
Trump and Republican lawmakers may be able to prevent this new rule from taking effect by using the Congressional Review Act, which allows majorities in both houses of Congress to use an expedited procedure to undo recent regulations. It’s a process Republicans are already promising to use to repeal a number of Obama-era rules.
As it stands today, the economic threat from the EEOC rule is real. The whole reporting system continues to push us closer to a Soviet-style system where workers are assigned to rigid job categories with pay that is equal to all others in each category. Federal government workers and military personnel are already classified like this, so of course such a system makes sense to EEOC personnel. What they don’t realize is that especially in smaller companies, people play fluid roles, and one person often has multiple job functions that don’t fit neatly into a government box based on 10 very broad categories. Someone managing the sales operation might also be helping out with IT; or someone answering the phones might also be heading up recruiting and hiring efforts. This makes comparing the duties and pay of these unique workers to others impossible.
I have to wonder what comes next after the EEOC collects these data sets. The inaccurate conclusions that will be drawn from this data could result in a slow push to pay everyone within a job category the same, effectively chipping away at the meritocratic foundations that make U.S. businesses — and the American economy — the best in the world.