A Drive for Efficiency May Not Drive Inefficient Discrimination From the Marketplace

Lesley Wexler, Wal-Mart Matters, 46 Wake Forest L. Rev. 95 (2011).

In Wal-Mart Matters, 46 Wake Forest L. Rev. 95 (2011), Lesley Wexler challenges the law and economic orthodoxy that suggests that inefficient employment discrimination tends to be driven out of the marketplace.  The typical rationale is that employers who discriminate will have higher costs of production based on their inefficient discrimination and will necessarily be less competitive than their competitors.  Professor Wexler describes how systematic sexual discrimination can exist indefinitely even when an employer’s successful business model focuses almost exclusively on efficiency and providing the lowest cost goods in the marketpalce.  Wal-Mart Matters is an article that I like lots because it discusses employment discrimination and law and economics in challenging a point of orthodoxy and explaining why the orthodoxy may not be convincing or correct in a particular situation.  To be clear, the article is not an exhaustive treatment of the issues and does not appear intended to be.  However, it makes the reader think  about how a theoretical point regarding markets may not work as well as expected in a real-world market.  The subject matter is of particular interest to me because I teach employment discrimination and have taught law and economics.  However, the article ought to be of interest to a wide variety of law professors and legal commentators.

The article is timely, but its title is a little unfortunate.  Given the article’s timing, its title may suggest to some that it is about the Wal-Mart litigation that was decided by the Supreme Court this past year.  Though Wal-Mart and its practices are at the core of this article, the litigation is only a point of departure.  Rather than analyze the substance of the class action against Wal-Mart, Professor Wexler asks that the reader assume that the allegations of sex discrimination in pay and promotion that are at the core of the litigation are supported or supportable.  Professor Wexler then examines how a widespread practice of seemingly irrational sex discrimination could exist at Wal-Mart given law and economics principles that claim that irrational discrimination will be driven out of the marketplace and given that Wal-Mart appears to follow a practice that focuses on efficiency as a business model.

Professor Wexler first discusses Wal-Mart’s corporate policies and suggests that Wal-Mart’s professed business model focused on efficiency is real.  That focus on efficiency allows Wal-Mart to squeeze as much productivity out of its workers and as much profit out of its business as possible. The result appears to be lower prices, significant market share and significant profits.  As Professor Wexler indicates, “The decision to focus on costs as a business model is rational and one that a fully competitive market would likely reward if a company could maintain low-price leadership.” (P. at 101).

The article then notes that a focus on lowering costs can trigger rational discrimination.  Indeed, a preference for low costs through hiring low cost workers is consistent with a focus on efficiency and rational discrimination.  Attempts to avoid workers with disabilities who need to be accommodated may lower costs if the employer is not caught.  Workers who are more likely to join unions or are less likely to conform to corporate culture may be viewed as more costly than other workers.  Not hiring them may lower costs.  Workers who may be thought to be likely to get pregnant or likely to leave the workforce may be thought more costly.  A low-cost employer may rationally and sometimes legally or illegally discriminate against all such workers mentioned above.  That type of discrimination can be pervasive precisely because it is rational.  Indeed, economic arguments recognize that rational discrimination may not be driven out of a competitive marketplace without regulation precisely because it is rational.

However, the article focuses on supposed irrational discrimination, the type of pervasive and widespread discrimination alleged in the Wal-Mart class action.  The Wal-Mart plaintiffs claimed that Wal-Mart’s “uniform corporate culture” includes gender stereotyping that has led to various assumptions that trigger discrimination.  Those assumptions include that customers and employees may prefer to work in somewhat sex-segregated departments.  Such assumptions may have led to assignments that left women in lower-paid departments at Wal-Mart.  Similarly, plaintiffs claimed that many Wal-Mart managers assumed that women were or should be secondary wage-earners in their families and could be paid accordingly.  These stereotypes, if applied systematically, could lead to the widespread sex-based pay and promotions disparities the class claimed.  However, such systematic discrimination would also appear to lead to pay and promotions being mismatched to Wal-Mart’s most productive workers.  That type of discrimination would appear to be the type that Wal-Mart would abhor as an efficiency-based business.  It is also the type of discrimination that law and economics scholars suggest would be driven out of the competitive marketplace as those who were undercompensated for their skills would move to competitors who would compensate them properly for their talents.

Law and economics principles tell us that, over time, firms that pay based on something other than merit would arguably have an overpaid or underperforming workforce.  That would drive those firms’ costs up and make them less efficient and less profitable than their competitors.  Given Wal-Mart’s focus on efficiency and market position, the discrimination asserted in the lawsuit would seem inconsistent with economic theory and the reality of Wal-Mart’s focus on efficiency and low-cost production.

The article then explains how broad and pervasive sex discrimination could persist at Wal-Mart.  Professor Wexler posits a market failure in Wal-Mart’s case.  Market failure suggests that the market in which Wal-Mart operates does not operate as a perfectly competitive market.  This is a sensible conjecture.  Economists rarely assert that markets are perfectly competitive; they merely explain what would happen if a market were perfectly competitive.  Consequently, analyzing what might occur when the conditions necessary for a perfectly competitive market are not met is sensible.

The article suggests that the typical factors that might normally police discrimination and help drive it out of Wal-Mart may not exist.  Professor Wexler posits that Wal-Mart’s workers may not perceive any incentive to push to change policy.  In addition, they may have insufficient information or power to alter policy.  Additionally, market competition may not serve to alter Wal-Mart’s putative behavior.  Wal-Mart’s market position and the possibility that its competitors have similar policies may allow irrational discrimination to persist. Lastly, Professor Wexler suggests that consumers may not know about Wal-Mart’s practices or may not care enough given the benefits Wal-Mart confers in lower prices to collectively pressure Wal-Mart to change putative discrimination.  After suggesting that Wal-Mart is not functioning in a perfectly competitive market, the article suggests that the claim that discrimination will be driven out of a perfectly competitive market may not be applicable in Wal-Mart’s situation.

I like Professor Wexler’s challenge to a typical oversimplification that some make regarding law and economics.  By focusing on how markets actually work rather than on how markets that are perfectly functioning might work, Professor Wexler provides useful analysis of the real world.  Economic analysis is a wonderful tool for describing many varied types of situations.  However, some academics rarely use the entire economics toolbox.  Professor Wexler starts to do so by using market failure – another tool in the economist’s toolbox – to analyze the plausibility of the claims made in the Wal-Mart class litigation.  Challenging a standard analysis with additional analysis that sharpens and explains issues is what law professors do best.  Here, the sharpening of issues helps provides a possible explanation of how widespread sex discrimination may exist in a firm committed to efficiency even when such sex discrimination itself may be inefficient.  That is why Professor Wexler’s article is one I like lots.