(Reprinted from HKCER Letters, Vol. 43, March, 1997)
Personnel Guidelines with a Bite
Without much fanfare, the Code of Practice on Employment under the Sex Discrimination Ordinance came into effect on December 20, 1996. Section 69 (14) of the Sex Discrimination Ordinance states, "A failure on the part of any person to observe any provision of a Code of Practice shall not of itself render him liable to any proceedings; but in any proceedings under this Ordinance before any court any Code of Practice issued under this section shall be admissible in evidence, and if any provision of such a code appears to the court to be relevant to any question arising in the proceedings it shall be taken into account in determining that question." As sex discrimination has only a short legal history in Hong Kong, it is not yet clear what role the Code of Practice will play in discrimination cases. Nevertheless, every prudent personnel practitioner will keep the Code in the back of his or her mind. For this reason, the Code of Practice deserves closer scrutiny.
The Sex Discrimination Ordinance outlaws, among other things, sexual harassment and sex discrimination in the workplace. There is an economic rationale for this prohibition: Employment relationships are governed by incomplete contracts; an employee who has relationship-specific investments in the firm is therefore potentially subject to exploitation. Consider a worker who stands to lose her seniority (or even her pension) if she does not yield to her supervisor's sexual demands. Before the worker joins the firm, she can simply walk from anyone she does not like. Once she has invested a considerable amount of specific human capital in the firm, walking away is much more costly because the sunk investments will be lost. The supervisor is then in a position to exploit her "appropriable rents" (to borrow a concept from Benjamin Klein, Robert Crawford and Armen Alchian). In a sense, the supervisor's demands amount to stealing company assets for private gains and should be rightly punished. Even if the supervisor is the owner of the company, such opportunistic behavior is highly disturbing to most people. Both employer and employee will be made better off if this kind of opportunistic behavior is prohibited outright, because people will then be less hesitant to enter and to invest in long-term employment relationships.
Seeking sexual favors by withholding career advancements is a relatively clear-cut case of breaching the trust in employment relationships. It is less clear whether other forms of unwelcome sexual advances should be made illegal under the label of "sexual harassment." Unwelcome conduct such as touching or verbal abuse can take place in the workplace, but it is not necessarily directly employment-related. Just as with unwelcome conduct that takes place outside the workplace, the law of torts can be used to deal with such issues. Acceptable and unacceptable behavior change with social mores. It is more sensible to use the common law to decide what constitutes harassment than to lay down a set of rules of appropriate conduct. For example, obscene jokes can be offensive to some people, but a Code of Practice that forbids obscene jokes comes very close to legislating against bad taste.
Sexual harassment naturally attracts much media attention. But in terms of economic effects and the impact on personnel practices, the section dealing with sex discrimination in the Code of Practice is more significant than the section on sexual harassment. The Code repeatedly stress the use of objective, measurable standards in personnel decisions. For example, it recommends that recruitment and promotion decisions be made on the basis of "consistent selection criteria." These are criteria that are specifically related to the job, such as:
the type of experience the job holder should have, e.g., merchandising experience; the amount of experience required for the job, e.g., five years experience; the educational qualifications, if necessary, e.g., a diploma in merchandising; the specific technical and managerial skills, e.g., use of certain computer software, proficiency in Cantonese and English; the personal qualities required for the job, e.g., willingness to travel, willingness to meet people of different backgrounds; and the physical and other skills required for the job, e.g., eye-hand coordination for delicate assembly work (Code of Practice, Section 10.4).
Notable by their absence in this list are qualities such as general intelligence, the ability and the willingness to learn, and the attitude towards work. These attributes can be assessed (albeit imperfectly) upon personal interaction. However, such knowledge is extremely difficult to be communicated to and verified by third parties, and therefore decisions based upon tacit knowledge are difficult to defend in a court of law. It would be a shame if employers have to forsake their good judgment in pursuit of personnel practices that are more defensible on an "objective" basis. Take for example academic tenure decisions. Some universities rely on objective, quantifiable data such as student evaluations and publication counts in order to determine tenure. Other universities rely more on subjective evaluations of research quality and potential. There is no evidence that the former set of schools have better faculty than the latter. Nonetheless, fear of discrimination lawsuits have driven more universities to adopt objective criteria in their decision process.
In a similar vein, numbers are much easier for outsiders to understand than subjective evaluations. It is easy to show statistically, for example, that appointments or promotions are disproportionately given to members of one sex. It is much more difficult to show that appointments or promotions have been given to the most "suitable" candidates according to the employers' evaluations. One important issue yet to be determined is whether statistical evidence is admissible in sex discrimination cases. By requiring decisions to be verifiably non-discriminatory, equal opportunity legislation can potentially lead to the use of implicit numerical quotas in employment decisions--hardly a "fair" outcome in a society that places great value on merit.
Even if an employer follows all the official equal opportunities guidelines to the letter, chances are that he or she would still have to exercise considerable discretion in making appointments or promotions. Should disputes be brought to the court, the question of which party should bear the burden of proving discrimination becomes important. Because of the lack of verifiability in employment relationships, it would be very costly in terms of record keeping for the employer to justify to the court every personnel decision he or she has made. In contrast, specific acts of discrimination are easier to document. A system that requires the employer to prove that discrimination did not exist would therefore entail a much higher information cost than a system where the burden of proof is the employees.
As Frederick von Hayek points out, a successful economic organization relies on the effective use of decentralized, tacit knowledge. In the labor market, employers have powerful incentives to make the right personnel decision, for the simple reason that their money is at stake. Many of these decisions are based on nothing more than good instincts or seasoned judgment, and many may turn out to be wrong. However, subjective decisions are not the same as arbitrary decisions. Experimentation, mistakes, and the discipline of profits are all essential components of the market economy. Objective and verifiable criteria need not in any sense give a better or more reliable decision than the market test.
In this regard, a distinction should be made between collective decision making and private decision making. In the collective sphere, decisions often involve the coercive power of the state, and decision makers do not bear all the costs of their actions. Under these situations, transparent and objective rules to minimize the arbitrary exercise of power are particularly important (which, incidentally, is why governments tend to be "bureaucratic"). Unlike a private sector employer making a personnel decision in favor of, say, a male employee, the government does owe the public a rationale for any discrminatory treatment of the sexes. Exemptions from the Sex Discrimination Ordinance for discriminatory practices associated with government policies or government funds should be avoided as much as possible.
Besides discriminatory treatment in recruitment and promotion, the Sex Discrimination Ordinance also prohibits discrimination on the grounds of sex in the terms of employment or in the provision of benefits, facilities or services to employees. The Code of Practice mandates the principle of "equal pay for equal work". That is, a female employee is entitled to equal employment benefits when she is doing "like work" or the same work as that of a man. The majority of Hong Kong employers have largely followed this principle well before the enactment of the law, and this issue is relatively uncontroversial. The Code of Practice also "encourages" the progressive implementation of "equal pay for work of equal value" (Section 12.8).
Although the two principles differ only slightly in wording, "equal pay for work of equal value" is actually a significant departure from "equal pay for equal work". The former principle has been tried, for example, in the United States under the label of "comparable worth". It is mainly used as a bargaining tool for public sector jobs in some state and local governments. Mandating this principle to the private sector would be a severe intervention in the market economy.
The slogan that jobs of equal value warrant equal pay is deceptively simple. There is a fatal flaw to this principle which stems from a fundamental misconception about the value of work. Value is inherently a subjective concept. Absent a market in which individual preferences are revealed, no amount of objective data is sufficient to determine whether diamonds are more or less valuable than water. Similarly, in the absence of market-determined wages, no statistical procedure or job analysis will ever determine whether the work of a philosopher is more or less valuable than the work of a street porter. If job values were compared "on the basis of the demands made on a worker in terms of effort, skill, responsibility and working conditions" (Code of Practice, Section 12.7), a philosopher would have every reason to envy a common street porter! An informationally efficient labor market cannot afford to have wages set by these "objectively justifiable grounds". Taking the principle of "equal pay for work of equal value" seriously will mean a fundamental change in the method of wage determination in Hong Kong. This principle should not in any way be encouraged.
Table 1 shows female-male earnings ratios in selected developed economies. In 1991 Hong Kong had no sex discrimination law. Yet in terms of the size of the gender earnings gap, Hong Kong sits comfortably in a league of countries where various forms of equal opportunity legislations are in place. Research indicates that the increase in earnings experienced by Hong Kong women has been largely a result of the rising number of better educated women, and, more significantly, the rising number of women participating in the labor force. Women's economic progress can be attributed more to market forces than to legislative interventions.
Table 1 The Gender Earnings Gap Across Countries Female-male Country earnings ratio Sweden 0.77 Australia 0.75 Norway 0.73 Austria 0.73 Hong Kong 0.71 Germany 0.69 United States 0.68 United Kingdom 0.63 Switzerland 0.62
Note: Figure for Hong Kong is for the year 1991; figures for other countries are for the mid-1980s.
Sources: Francine D. Blau and Lawrence M. Kahn, "The Gender Earnings Gap: Learning from International Comparisons," American Economic Review 82 (May 1992): 533-538; Wing Suen, "Gender Gap in Hong Kong: An Update", Asian Economic Journal 9 (November 1995): 311-319.