Legal, informational, and testing restrictions in employment: A study of antidiscrimination policy

This dissertation addresses the problem of informational and legal restrictions on employment screening processes such as educational requirements and standardized testing. For the past two decades, the legal system in the U.S. has struggled with this issue and has labeled certain information or tests as discriminatory because they have adverse impact on minority groups. In the first chapter, we consider the major legal cases in this area and discuss the rationale for these major decisions in light of the evidence on testing and information from the fields of psychometrics and economics. We find that the legal system must take into account the productive inefficiencies that can be caused by informational restrictions, as well as the effects on incentives of firms and workers involved in these legal limitations. In chapter 2, we develop an extension of the language model of discrimination, adding differences in worker ability and the use of language knowledge as a signal of ability. We show that legal restrictions unambiguously lower output. They also result in lower wages for low ability minority workers, without increasing the wage for high ability minorities. Thus informational restrictions have an adverse and regressive effect on the minority income distribution. In chapter 3, we allow firms two selection devices, a standardized test and a language interview. We also consider two possible firm technologies. We find that firms will react to testing restrictions by producing through methods that are less sensitive to employee ability. This results in a regressive wage effect, even in the case of one language group. With two language groups, we find that integration tends to increase with restrictions on standardized testing, but production is reduced and low ability minority wages fall.