Banning Age Discrimination in Employment - US Lessons for European Lawmakers

In 2000, the European Union adopted Directive 2000/78/EC prohibiting, among others, direct or indirect discrimination on grounds of age in employment. This Directive contains precise definitions of direct and indirect discrimination and of harassment and allows certain exceptions to the principle of equal opportunities, which are defined as legitimate in a limited range of circumstances. Substantial changes in Member State legislation have been observed in recent years in direct consequence of the adoption of the EU legislation. However, some countries, including Germany, have not fully transposed the provisions yet. The Commission has already initiated infringement proceedings against certain Member States and is due to publish a report in 2006 on the state of transposition of Directive 2000/78/EC. The latest deadline for transposing the Directive into German law is December 31, 2006. The German parliament is in the process of meeting that deadline by enacting the Antidiscrimination Act (ADG).

In the United States age discrimination in employment is forbidden by the federal Age Discrimination in Employment Act (ADEA) that was enacted in 1967. The ADEA arose out of the legal culture of Title VII of the 1964 Civil Rights Act. The language of the ADEA mostly tracks that of Title VII, and judges frequently look at Title VII case law in evaluating ADEA cases. The Act protects workers above the age of forty against discrimination on basis of age in hiring and discharge practices, as well as in setting the terms and conditions of employment. Furthermore, mandatory retirement is forbidden.

Since its enactment, the ADEA produced certain unintended consequences, such as failing to promote hiring of elderly, allowing for windfalls to already wealthy employees, and contributing to the unemployment of elderly people. This sparked heated debates about the efficacy, efficiency, and moral legitimacy of the ADEA. In his book "Aging and old Age" (1995, p. 319), Judge Posner sums up his analysis of the act as follows: "The age discrimination law is at once inefficient, regressive, and harmful to the elderly." Overall one can observe a growing consensus that the anti-discrimination principle should be discarded in favor of older norms of laissez-faire and free market.

Age discrimination can be best explained by the model of statistical discrimination. A person’s age is widely used by employers as a proxy for that person’s productivity. Of course, one can argue that this decline in productivity with increasing age is a misconception. However, it seems unlikely that profit maximizers will continuously employ an irrational proxy over a long time. Market pressures should prevent this behavior without the need of legal intervention. It seems more likely that the use of this proxy is actually cost efficient for employers given the high information costs of individual assessment of productivity. By outlawing the use of the age proxy, the ADEA burdens employers with additional information costs. Alternatively, they will use new, less efficient proxies in the future shifting the disadvantages from the elderly to a new disfavored group while still incurring an efficiency loss. Moreover, the less efficient selection proxy will lead to a less productive workforce in the firm. Either way, the ADEA’s outlawing of the age proxy is costly.

Furthermore, prohibition of mandatory retirement by the ADEA has harmful effects on life cycle wage patterns. In such implied contracts the worker is paid below his marginal product during the beginning of his career and above marginal product towards the end. This way employee shirking is reduced without high monitoring costs resulting in higher career productivity and therefore higher career wages for the employee. In this mutually beneficial agreement, mandatory retirement used to form the natural ending point. This is particularly important to the employer that he does not have to continue to pay wages above marginal product beyond a certain point. Ex ante the employee agrees to that "mandatory" retirement in order to enter into an life cycle agreement. It is only ex post that the employee disapproves of retirement given his wage above productivity and reservation wage. By prohibiting mandatory retirement, the ADEA life cycle contracts takes away the natural ending point to life cycle contracts making them less attractive for the employment parties. Since life cycle contracts are usually seen as an efficient way to align the incentives and interest between employers and employees thereby decreasing labor market efficiency.

Several authors point out that the ADEA is largely ineffective in enforcing the prohibition of age discrimination in hiring decisions. The main reason for that is the relief offered by the statute. Injunctive relief is often not adequate since the plaintiff would enter into a job with tensions with the employer from the start. Also in hiring situation, substantial damages are extremely difficult to prove for several reasons. The plaintiff usually would have earned a wage in the denied employment that is only slightly higher than his reservation wage because if the new job would pay much more than his present job, it is hard to prove that the plaintiff was the best-qualified applicant. This prediction is backed up by several empirical studies that show hiring cases under the ADEA are rare and hardly ever successful (see Posner, 1995, p. 329 for data). The ADEA is therefore a not an effective protection against age discrimination in hiring situations.

In addition, the ADEA produces costs of compliance, administration, and litigation just like legal interventions often do. However, this statute might be particularly costly due to numerous record keeping requirements. Furthermore, the risk of costly litigation is particularly high because of the burden of proof and expensive remedies. The ADEA plaintiff is entitled to jury trail under §626(c)(2) and remedies, such as injunctive relief, reinstatement, front pay, attorney’s fees and liquidated damages under §626(b).

Finally, some argue that the ADEA acts as a barrier for elderly workers from employment. Posner (1995, p. 325) finds that anti-discrimination laws can be counterproductive. "Antidiscrimination laws can boomerang against the protected class as employers take rational measures to minimize the impact of the laws."(Posner, Economic Analysis of Law, 2003, p. 351). Hiring elderly worker brings about the risk of ADEA litigation for the employer. The effect of discouraging hiring will not be prevented by the ADEA’s ban on discrimination in hiring decisions. As shown above, the ADEA is not effective in enforcing this ban and therefore will not be able to counteract the strong incentive against employing the protected group.

In the face of these arguments it seems doubtful that the German ADG and other European equivalents will contribute to solving the problems of elderly in the labor market. More likely, the already highly regulated German labor market will receive additional costly burdens. Moreover, the introduction of the anti-discrimination principle to protect elderly workers does not fit in well with the German employment law background. While in the absence of a general wrongful discharge law the antidiscrimination principle serves the function of protecting employees from arbitral firings, there seems to be no need for such protection in Germany where a wrongful discharge law is in place.

There can clearly be benefits from looking abroad for models for policy design. It would make sense, however, not to copy without first evaluating the legal discussion about the model in the other country and taking into account the differences in the legal cultures.

Comments

[Alex Spinrad]

One of the interesting issues in discrimination -and particularly in age discrimination - is the question of indirect discrimination i.e., unintentional application of criteria which result in such discrimination. The Supreme Court in the US has at least opened the door to such claims. Here in Israel, the Equal Opportunities in Employment Law, on its face, prohibits indirect discrimination (the definition of discrimination includes "the application of inapprpriate criteria"); but the enforcement of the statutory prohibition has been virtually non-existent. This can be attributed to the sociological phenomenon of judicial conservatism - which practically constitutes a judicial, conservative attempt to prevent the application of the legislature's intent. Are there similar experiences in Europe?(Knesset's) intent.

[Konrad von Hoff]

Indeed, indirect discrimination is an important aspect of anti-discrimination principle. In 2005, the US Supreme Court held disparate impact doctrine applicable under the Age Discrimination in Employment Act (Smith v. City of Jackson (2005), 125 S. Ct. 1536). This means that there can be liability of an employer under the ADEA for facially neutral policies that have a foreseeable adverse effect on persons over the age of 40. However, at the same time the Court pointed out the limits of disparate impact in the age discrimination context. The "reasonable factor other than age" defense is available also under disparate impact doctrine. If the facially neutral policy (which by definition is a factor other than age) is reasonable, the employer's practice is lawful. The reasonableness requirement is less than a business necessity test. It is not required that the employer achieves his goal while not affecting the protected class.
The EU discrimination directives also require the prohibition of indirect discrimination by the national anti-discrimination laws. It remains to be seen how effective that will be in practice.

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[Employment Finder]

Age and Sex discrimation is rooted in the industry and cant be changed unless it is removed from people's mindset. Only bringing new laws wont help get rid of it

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