Nominated essay for our essay contest

As part of the Future Markets Consultation, students and young scholars were invited to participate in an essay contest. This essay was nominated in the category of young scholars. It was written by Babatunde Onabajo, an independent researcher.

This paper examines the labor market, and argues that quotas should increasingly be used in the hiring process. At a time when more women than ever before are leaving the labor market due to imposed shutdowns stated to combat COVID-19, as well as persistent economic inequality between white people and ethnic minorities, together with the fact that an entire generation of young people have had their grades and education disrupted or stopped because of the pandemic, the allocation of jobs in many sectors can no longer be left to the market mechanism. The use of quotas to ensure that every segment of the community is in gainful employment is therefore recommended and is aligned with the concept of “inclusive development”.

Introduction

Something noteworthy happened during the COVID-19 pandemic. Across many countries, consumers rushed stores to hoard food and most conspicuously, toilet roll. In the United Kingdom, stores pleaded with consumers to consider the needs of others, assuring them that there is enough food for everyone, a sentiment that was reiterated by the country’s prime minister Boris Johnson. Similarly, the same occurred in the United States. In Germany, an article from the German news service Tagesschau on March 15th 2020 is titled, “Es ist genug für alle da”, that is, “there is enough [food] for everyone”. And the same was seen across many other parts of the world. But despite the pleas, consumers continued to strip stores bare. It was clear that appealing to people’s “better angels” was an endeavor in futility, and stores did something almost unheard of in peacetime: they rationed food. In the United Kingdom, people were restricted to buying only a certain number of foodstuffs. For example, if you wanted to purchase pasta, prior to the COVID-19 pandemic you could buy as much as you wanted to your heart’s content, but during the pandemic you were limited to only three at some stores. Furthermore, the elderly and emergency workers were given priority in the form of “dedicated hours” early in the morning so that they could avoid the long queues at some stores. In the United States, Amazon did the same and also prevented new registrations to their Fresh program. Similar steps were taken by organizations and companies across the world, which is unprecedented in peacetime, and is even more unprecedented as the steps came without any form of government interference.

Without knowing it, these steps taken by businesses – and without any legislation or government interference – were an admission that sometimes the market mechanism fails. Sometimes the distribution of resources that results from the market mechanism, or a mechanism purporting to be the market mechanism, is unpalatable. The scenario of one person just buying up all the food, together with hand sanitisers and toilet roll, just didn’t sit right with many people. If left to their own devices, the elderly and emergency workers would have been deprived of food, exacerbating the distributional inequalities that have already resulted from the COVID-19 pandemic.

In a similar vein, this paper examines the labor market, and argues that quotas should increasingly be used in the hiring process. At a time when more women than ever before are leaving the labor market due to imposed shutdowns stated to combat COVID-19, as well as persistent economic inequality between white people and ethnic minorities, together with the fact that an entire generation of young people have had their grades and education disrupted or stopped because of the pandemic, the allocation of jobs in many sectors can no longer be left to the market mechanism. The use of quotas to ensure that every segment of the community is in gainful employment is therefore recommended and is aligned with the concept of “inclusive development”.

In the context of Anglo-American capitalism – that is, the model of capitalism that prevails in both the United Kingdom and the United States, and is purported by proponents to be typified by low levels of government intervention in the market, a laissez-faire approach to the exchange of contracts as well as relatively low levels of regulation and labor market protections – hiring quotas to increase employment and improve employment seniority positions among women and ethnic minorities are extremely controversial. The model of capitalism across most of continental Europe can be generalized as being not as “extreme” as that prevailing in the United States and the United Kingdom: the government takes a much more active role in the economy and there is a stronger social safety net in the form of unemployment insurance as well as other measures such as relatively higher minimum wage rates. Despite this, quotas are also controversial across many parts of continental Europe and have also been met with opposition.

This paper advances the view that perhaps now is a time for a rethink of quotas. It should be noted that the author of this paper was also once against quotas – and still is, in situations that can be shown to be meritocratic and competitive, such as sports – but with time, experience, greater reading of the relevant material plus contextual contemporary events such as the George Floyd protests, has influenced the author to reach this position. The author argues that quotas increase employment of those in the margins of society, and with it confer an array of social benefits such as improved health outcomes, family stability, decreased risk of mental health issues, greater feelings of inclusiveness among minorities as well as economic benefits such as a decreased risk of falling into poverty, increased profitability among firms, reduced search times/unemployment duration rates among minorities, greater innovation and decreased reliance on unemployment insurance. The author further argues that quotas ensure all segments of the community feel they are bound by a “social contract” from which they are not excluded, and the use of quotas conforms to the principles of a just society as laid out by the 20th century American political philosopher John Rawls. This paper also argues that the so-called “invisible hand” cannot be deemed the only way to distribute jobs, but other means should be explored by reference to what mathematicians call the “fair cake-cutting problem”.

It should be noted throughout this paper that the term “quotas” is used in the sense that their implementation is used by institutions and firms for valid social justice reasons; it is true, sadly, that quotas can also be used for reasons that are discriminatory or simply unpalatable, such as in the case of Nazi Germany that prohibited Jews from certain businesses. Furthermore, the term “quotas” is used within the meaning of labor markets and not within the meaning of international economics or trade policy, where the term refers to the restriction of imports or exports for a certain period of time.

This paper begins with explaining quotas within the tradition of Anglo-American capitalism, explaining how quotas has been approached both in practice as well as theory. It then explores quotas through various countries in continental Europe. After that, it presents an economic and political justification for quotas, before concluding. This paper is also a forerunner to the book the author is writing, Corporate Social Responsibility in a post-George Floyd World. This paper is written for a broad audience. References to legislation should not be taken as legal advice and a person should always seek assistance from a qualified legal professional should they need it.

Quotas within the Tradition of Anglo-American Capitalism

Hiring quotas are measures usually designed to either increase overall employment among those deemed institutionally disadvantaged – women, ethnic minorities and those with disabilities – among firms and/or, relatedly, are designed to increase the seniority of women, ethnic minorities and those with disabilities within existing firms. In the United States, the use of quotas falls within a program known as “affirmative action”. In the United Kingdom, to the author’s knowledge, there is no singular program that covers the use of quotas as in the United States but it could be said there is a patchwork of different programs employed by some public sector bodies such as the Metropolitan Police Service designed to increase representation among minorities; some organizations typically state in job postings something to the effect of “Applications from women and minorities are particularly welcome”, although as we will soon see, whether this is in fact true and not a false signal is questionable.

Hiring quotas have always been controversial in both the United States and the United Kingdom, both in practice as well as theory. In the United States, the origin of quotas can be traced largely back to the 1964 Civil Rights Act, which came at a time when African Americans were demanding to be treated fairly. This legislation prohibits employment discrimination on the basis of race and sex, and Title VII of the legislation established the body known as the Equal Employment Opportunity Commission (EEOC) that examines compliance with the legislation. Furthermore, this legislation was given more “teeth” with Executive Order No. 11246 and No. 11375 that prohibits government contractors from discriminating on the basis of characteristics such as sex and race and, furthermore, they must take affirmative action to ensure they are treating all applicants equally.

The United Kingdom is somewhat distinct from the United States, even though the economies of both have followed similar trajectories from the 1980s onwards due to the relationship between President Ronald Reagan of the United States and Prime Minister Margaret Thatcher. In the United Kingdom, there is, generally speaking, no central program outlining quotas like affirmative action in the United States. The closest comparison is the Equality Act 2010 which prohibits discrimination in employment on the basis of race and sex. Intriguingly, however, there is one notable exception and that is in the area of political parties – for example, the Conservative Party or the Labour Party – creating all-women shortlists, and this exception is expected to last until 2030. Apart from this, it is generally held1 in the United Kingdom that the use of quotas to increase representation of women or ethnic minorities is illegal and attempts to utilize them – for example, by the Cheshire Police Force – have been met with backlash. This creates the interesting situation that, at least on paper, the United States might be deemed more “progressive” in regards to representation of various segments of the community than the United Kingdom.

The use of quotas in both the United States and the United Kingdom, following the Anglo-American model of capitalism, have been met with greater degrees of controversy than many countries in continental Europe. Borjas (2013) rightly refers to the debate in the United States as “emotional”. But why is this?

In the United States and the United Kingdom, the opposition to quotas is primarily made on economic grounds. The argument against quotas is that it undermines meritocracy, the notion often summarized as being that the “best person should get the job”. This argument is taken further by some in stating that quotas actually work against minorities because it gives the impression that women are not as talented as men, or in the context of race, ethnic minorities such as black people are not as talented as white people; in this regard, it is argued, quotas are “demeaning”. Discrepancies in the average salary, levels of seniority within a firm or unemployment rates between the two groups are therefore attributable to either cultural factors such as one’s willingness to work or one’s skills.
In any event, the prevailing economic school-of-thought in both the United States and the United Kingdom is the neoclassical school. This worldview puts at its center the individual, homo economicus or “rational man”, who is devoid of any cultural influence or bias or whim and is completely objective in maximizing utility (another word for satisfaction) subject to a budget constraint, which is the term economists use to describe the limit of one’s resources. It should be noted that in countries such as Germany, this model has increasingly been called into question in recent times, although tension between the two worldviews can be traced as far back as the 19th century.

But the reader might be surprised to learn that what economic theory, from the position of neoclassical economics, has to say about quotas is less polarized and more mixed than the position espoused by politicians and what one might read in the media. It is true that neoclassical economics traditionally took the view that discrimination or biases did not play a significant part in the labor market and that disparities in outcomes between various groups are merely reflections of underlying differences in productivity. However, since the contribution by Professor Gary Becker of the University of Chicago that showed that discrimination by employers contributes to various outcomes in the labor market, this view has been considered more frequently. Borjas (2013) notes both positions.

Quotas across Continental Europe

It was noted that the proposal or use of quotas in either the United States or the United Kingdom is frequently opposed on economic grounds. Interestingly, across continental Europe, the opposition to quotas is often made on what might be called political or legal grounds – the argument being that it undermines the true equality of citizens in the eyes of the law. Perhaps nowhere in continental Europe is this seen more than in France, where even the collection of data demarcated by race is forbidden2, and researchers often have to use innovative techniques to find how ethnicity shapes one’s experience in France. However, the use of quotas is accepted to a very limited degree in France for women and those with disabilities.

This interpretation of equality in the face of quotas is seldom heard in the United States, although on occasion one might hear reference to the “I Have A Dream” speech by the 20th century civil rights campaigner Dr. Martin Luther King that describes a world where a person is judged by the content of their character rather than race or religion. In the United Kingdom, this interpretation is not heard at all.

A number of countries across continental Europe have prohibited affirmative action, such as France as well as Slovakia. The European Court of Justice (ECJ) has taken a very dim view of affirmative action policies, and has suggested that they may only be used temporarily for genuine social and economic reasons.

The “European” argument against quotas – if it may be called that – is that it does not treat each citizen equally and therefore runs contrary to the constitution of the respective European country. Furthermore, quotas run the risk of creating a “parallel” identity, therefore harming social cohesion. As an aside, although we do not hear this argument used particularly in the United States against quotas, we do hear it on the general topic of American identity, hence opposition in some parts of American society to hyphenated identities such as “African-American” and “Italian-American”.

Why We Should Rethink Quotas

The evidence is strong that diversity is good for business (Borjas, 2013). Stewart (2018), noting the lack of female representation on investment teams and alluding to modern portfolio theory which recommends that portfolios have a diverse range of investments to increase returns and minimize risk, rightly asked: “If diversity works for our portfolios, shouldn’t it work for our portfolio managers too?” It could be said that the lack of diversity in
many segments of the labor market represents a form of market failure, whereby those involved in the hiring process fail – for institutional reasons or otherwise – to pick the most suitable person for the job.

There are a number of reasons why we should rethink quotas. The first reason begins from the hiring process. Thanks to the pioneering work of Dale Mortensen, Sir Christopher Pissarides and Peter Diamond, all of whom were collectively awarded the Nobel Memorial Prize in Economic Sciences for their work on markets with search frictions, we have a richer picture of how labor markets work. In the model put forward by the three, those searching for work and firms looking for workers have some difficulty finding each other in the labor market. This difficulty leads to unemployment. This might sound like a simple analysis, but it was actually quite revolutionary within the economics discipline because economists struggled to explain how is it that vacancies can exist at the same time that people are looking for work. This inability to explain this phenomenon led to two extreme camps: on the one hand, those in the “classical” school who argued that all unemployment is voluntary and those in the “Keynesian” camp who argued that all or the vast majority of unemployment is involuntary.

The model put forward by the three is helpful in explaining why ethnic minorities typically experience higher unemployment rates than white people: in the United States, black people have consistently been twice as unemployed as white people since the 1950s, and similar outcomes are seen in the United Kingdom and France. It could be said that ethnic minorities face an additional “search friction” than white people in that in addition to all the things white job-seekers are looking for, ethnic minorities also have to seek firms that are actually open to hiring them. This extra search friction adds to the unemployment duration faced by ethnic minorities. A firm that utilizes a quota system communicates to ethnic minorities that, “We’re open to hiring you”. Faced between a firm that openly makes such communication and one that does not, ceteris paribus3, an ethnic minority is more likely to apply to the former. This is likely to reduce unemployment duration experienced by ethnic minorities.

Ironically, and contrary to what proponents from the Anglo-American capitalist school of thought state, sometimes quotas are actually necessary to ensure labor markets are competitive. This is because people act on limited information. In economic terms, we say that “bounded rationality” is closer to reality than the model of homo economicus – people act on rules of thumb and proxies, and don’t have complete information as the model of homo economicus suggests.

Because people act on limited information, sometimes groups of people self-select themselves out of applying for certain positions. We know this happens with women in Science, Technology, Engineering and Mathematics (“STEM”) positions because it is seen as “male-dominated”. This self-selection process has the indirect consequence of making labor markets anti-competitive; a quota system corrects this by ensuring that there are a sufficient number of people from a particular group to give confidence to prospective candidates that they have a genuine prospect of success in the position. Historically, such changes in perception have had dramatic results: India is well-known today for its success in cricket, but it might come as a surprise to the reader that this wasn’t always the case. Prior to 1983, India was more known for its success in hockey, having won five Olympic gold medals in the sport. That changed in 1983, when India surprisingly won the World Cup in cricket despite not being considered serious contenders for the title. Since then, India has gone on to dominate the sport.

All Things Being Equal

A further argument might be made in favor of quotas in light of COVID-19. The position put forward by some within the Anglo-American model of capitalism is that the “best person should get the job”, the best person sometimes being taken to mean the person with the highest qualifications. But in a world where a substantial number of young people have had their education disrupted by shutdown measures in response to the disease, it might be said that relying on qualifications is misleading. Indeed, Laxman Narasimhan of the firm Reckitt Benckiser stated that candidates of the future, in light of COVID-19, will be judged more on experiences than qualifications.

At a legal and political level, the argument put forward by those within the continental European model that quotas creates a “two-tier” society is misjudged. On the contrary, it is sometimes the case that a group is so hindered that the only way they can be brought back into the fold of society is to use measures such as quotas. This can be gleaned from the framework put forward by Rawls. Furthermore, and as pointed out by Sen, it is difficult to divorce political liberty from economic circumstances: outcomes such as access to justice are intertwined with wealth, which in turn hints at the necessity of ensuring representation in the labor market.

Conclusion

Quotas have been met with fierce opposition in the United States, the United Kingdom and various countries across Europe. But with the George Floyd protests and women having to leave the labor market for childcare responsibilities due to shutdowns in response to COVID-19, as well as a generation of young people whose education have been disrupted, perhaps now more than ever we need to give quotas a serious rethink to promote inclusive development and ensure no segment of society is locked out of the labor market.

References available upon request and have been omitted due to word count

  1. There is one further exception to this and that revolves around the use of what is known as “positive action” but a detailed discussion of this is beyond the scope of this paper and in any event, there is a very blurred line in English law between what counts as positive action and positive discrimination, the latter being illegal altogether.
  2. By contrast, in the United Kingdom and the United States, collecting data on racial composition of one’s firm is not illegal if there is a valid justification behind it. Indeed, in some circumstances, it is actually mandatory for a firm to collect such data.