How the new economics can improve employment discrimination law, and how economics can survive the demise of the 'rational actor'.

• Author: Moss, Scott A.

ABSTRACT

Much employment discrimination law is premised on a purely money-focused "reasonable" employee, the sort who can be made whole with damages equal to lost wages, and who does not hesitate to challenge workplace discrimination. This type of "rational" actor populated older economic models but has been since modified by behavioral economics and research on happiness. Behavioral and traditional economists alike have analyzed broad employment policies, such as the wisdom of discrimination statutes, but the devil is in the details of employment law. On the critical damages-and-liability issues the Supreme Court and litigators face regularly, the law essentially ignores the lessons of behavioral economics and the affective sciences.

(1) Damages: With emotional distress and punitive damages limited, the basic discrimination damages are the employee's lost income. Courts draw no distinction between a failure to hire a job applicant and a termination of a long-term employee, yet endowment effect and happiness research indicate that terminated long-term employees typically suffer greater psychological loss, justifying greater damages.

(2) Employer Duties: Effective antidiscrimination programs can shield employers from liability, but the cases and scholarship say little about what programs are effective. Research showing that people think and problem solve best in positive emotional states indicates that programs focused on negativity (for example, "discrimination gets us sued") yield fear and backlash but not the productive employee effort, understanding, and empathy that lessen bias.

(3) Employee Duties: Harassment victims often cannot sue unless they first complained to their employer. Courts should recognize the reasonableness of not complaining due to learned helplessness and because the endowment effect and loss aversion explain reluctance to upset even a bad status quo (a job with harassment). The risk of loss (retaliation) outweighs the possible gain (ending harassment).

This Article also analyzes broad implications of behavioral and happiness research for law and economics:

(1) Do behavioral and happiness adjustments to a rational actor model make economics indeterminate? Economics still can yield useful legal analyses, but likely narrower ones (for example, improving individual, micro-level determinations of damages and reasonable behavior) than past economic analyses of macro-level issues, like whether all discrimination law is "efficient."

(2) Psychologically informed economics often prescribes regulation of markets. It asks, "When is such regulation worth the transaction costs and incentive distortions?" More complex rules, like those this Article prescribes, are worth the cost in higher-stakes, less-repeated transactions like employment than in lower-stakes, often-repeated transactions like consumer purchases.

(3) Should courts rely on these new findings or instead disclaim reliance on any social science because new research often displaces prior findings? In employment cases, courts must assess make-whole damages and employee reasonableness, so they cannot avoid some conception of well-being and cognition--and even imperfect new findings beat disproven, too-narrow "rationality" assumptions.

This Article thus offers a half-full/half-empty assessment of the usefulness of economics, and of behavioral and happiness research, to law. It sounds a cautionary note against using social science to assess grand legal policies, but a hopeful note that such research can improve decision making by judges, firms, and individuals.

TABLE OF CONTENTS INTRODUCTION I. "MAKE-WHOLE" RELIEF: COMPENSATING NOT JUST MONETARY LOSS, BUT ENDOWMENT LOSS AND HAPPINESS LOSS A. How Relief Is Limited Primarily to Economic Loss in Employment Discrimination Cases 1. The Limited Prospect of Punitive Damages 2. The Limited Prospect of Emotional Distress Damages 3. The Lack of Distinction Between Hiring Discrimination Damages and Termination Discrimination Damages a. Back and Front Pay Calculations: Formulaic, but with Uncertain Length of Pay Continuation b. Factors Determining Duration of Front and Back Pay--Which Do Not Distinguish Hiring from Termination B. Why Relief for Termination Presumptively Should Exceed Economic Loss: Endowment Value and Happiness Impact 1. Strong Evidence, but Still-Heated Debate, over Existence and Extent of an Endowment Effect 2. Is There an Endowment Effect for Jobs? The Evidence from Experimental Studies 3. Happiness Economics Evidence: Job Loss Yields Substantially More Harm than the Income Loss C. How Courts Could, Under Current Law, Compensate Terminated Employees' Endowment Loss and Happiness Loss 1. Presume Emotional Distress Damages from Unlawful Termination, Especially for Long-Term Employees--and Make Such Damages Available for all Employment Claims 2. Award More Years of Front Pay for Terminated than Nonhired Employees D. Objections to Compensating Endowment and Happiness Loss, and Responses to Those Objections 1. Which Employees Actually Feel an "Endowment" in Their Jobs, or Suffer "Happiness" Loss Due to Employment? 2. Couldn't Nonhired Employees Suffer the Same Happiness Loss Due to Unemployment as Fired Employees? 3. Is It Desirable To Compensate Endowment and Happiness Loss, Even Assuming Those Losses Are Real? 4. Would Increasing Termination Damages Increase Hiring Discrimination? 5. Would Compensating Endowment Value Favor Men over Women, and White-Collar over Blue-Collar Workers? II. RECOGNIZING THE REALITIES OF EMPLOYER AND EMPLOYEE DUTIES: WHEN REASONABLE EMPLOYEES MIGHT NOT REPORT DISCRIMINATION; WHEN EMPLOYER ANTIBIAS PROGRAMS ARE (NOT) EFFECTIVE A. Employee Duty to Report Harassment Internally: Too Little Recognition of Reasonable Reluctance To Complain 1. Courts' Strict Rule, Almost Without Exceptions, that Employees Must Report Harassment Internally 2. Critiquing the Strict Requirement of Internal Reporting: Rational Employee Fear, Heightened by Cognitive Biases and Psychological Barriers 3. The Prescription: Eliminate the Faragher/Ellerth Employee Complaint Requirement, or At Least More Broadly Recognize Exceptions to the Requirement 4. Objections to More Judicial Recognition of the Reasonableness of Employees Not Reporting Harassment and Responses to Those Objections a. Failing To Report Harassment Is Based on Irrationally Exaggerated Fear b. Reporting Harassment Benefits Others and Should Be Encouraged B. Employers' Antidiscrimination and Antiharassment Duties 1. The Sufficiency of Formalities, and the Lack of Close Factual Scrutiny 2. The Need to Scrutinize the Specifics of Employer Policies for Negativity- and Fear-Focused Policies, Which are Least Likely to be Productive III. A BROADER ISSUE: HOW ECONOMICS STILL CAN PROVIDE USEFUL ANALYSES IN A POST-BEHAVIORAL, POST-HAPPINESS WORLD A. Is Economics Now Too Indeterminate To Be of Practical Use? B. When Are Paternalistic Regulations Worth the Transaction Costs and Incentive Distortions? C. Should Courts Base Decisions on Recent Social Science at All? CONCLUSION If it makes you happy, then why the hell are you so sad?

--Sheryl Crow

The most beautiful things in the world are the most useless, peacocks and lilies for instance.

--John Ruskin

INTRODUCTION

Employment discrimination law is stuck in the law-and-economics stone ages--before economists began revising the "rational actor" model with research findings in behavioral economics (1) and on factors affecting subjective well-being ("happiness research"), (2) and before legal scholars started applying those behavioral (3) and happiness (4) findings to law. Worse, in assuming a wholly money-focused "reasonable" employee, many employment doctrines are far narrower than even the earliest, most narrow rationality-based law-and-economics scholarship. (5) Employment discrimination law thus is based upon economic conceptions of decision making and preferences that are so narrow, they at best are out of date, and at worst never really existed.

[L]abor market specialists and human resources economists are coming to realize that traditional economics has been too simplistic in its assumptions on human motivation.... [L]abor market research must be rewritten.... [N]eoclassical economists have maintained that the labor market is no different ... than the market in goods.... [Yet] experiments and empirical investigations on the effectiveness of incentives indicate ... individuals do not exclusively think of themselves. (6) There has been great debate among economists about whether and to what extent there should be laws against employment discrimination, (7) which, given the employment-at-will doctrine, is both the main field of employment regulation and the source of doctrine for other areas of employment law, like whistleblowing. (8) Yet the devil is in the details of employment discrimination law, and there has been little contemporary economic or social science thinking about those details.

(1) Damages: Whether lawsuits are filed depends heavily on what damages are available, as shown by the dramatic increase in Title VII litigation (9) after Congress increased available damages in 1991. (10) What monetary relief is needed to "make whole" (the Title VII command) (11) a worker who lost a job due to discrimination?

(2) Employer Duties: Even in egregious cases of discrimination or harassment, employers have affirmative defenses, either to punitive damages (12) or to all liability, (13) based on efforts to prevent and redress discrimination. When should employers' antibias efforts be sufficient to shield them from liability for proven discrimination?

(3) Employee Duties: Employers may not be liable for discriminatory or retaliatory harassment, (14) even by supervisors. If an employer has an internal complaint process, an employee must file a prompt internal complaint to a supervisor or with the human resources department before suing. (15) When, if ever, should employees be...