The Economics and Law of Sexual Harassment in the Workplace


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This week, I leave you with this short 2003 paper in the Journal of Economic Perspectives by Kaushik Basu. It both follows somewhat from my last post, is related to the day's news, and relevant for thinking about principles for intervention in labor markets for a host of issues that our colleagues deal with in developing and developed economies...Here is the abstract - but you can read the paper in 30 minutes...

Suppose a firm has a widespread reputation for sexually harassing its employees. When a person signs up to work for such a firm, it would appear that both the firm and the worker are better off by virtue of the "exchange". Is there a case then for government to ban sexual harassment in the workplace? Starting from this question, this paper constructs an argument for legislative intervention. This "economic approach" is applied to other labor market practices and is used to evaluate and critique the current law concerning sexual harassment in the U.S. and other nations.


Berk Ozler

Lead Economist, Development Research Group, World Bank

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Julian Jamison
November 06, 2017

Fun paper (hadn't seen it) and I love that he is willing to dive into moral / normative aspects forthrightly, which too many economists avoid. That being said, the theory side is pretty bad.
There are several ad hoc assumptions, e.g. the fact that all employers want to harass and with the same utility, whereas employees are heterogeneous. Worse (as we shall see) is the assumption that harassment is binary (implicitly per hour worked, in his model). No discussion of robustness anywhere.
But let's go with the flow for now. The conclusion is that the equilibrium allowing harassment makes some people worse off than the one without. A natural follow-up question is what happens to total surplus, and the obvious answer is that it is higher in the former case (basically just the First Welfare Theorem, since the no-harassment equilibrium outcome is still a feasible allocation). It's true that it doesn't Pareto dominate, but with the right set of transfers it would in fact dominate.
Ah, but isn't the point of the paper all about free markets (namely that somehow they don't work with "large numbers") so that my idea of transfers goes against the spirit? Well yes, but note that his example is not a free market to begin with: workers are only allowed to "supply" being a harassee at a precisely fixed ratio to their labor supply (the 0-1 assumption from above). A truly free market would at the very least have two parameters: a wage piece-rate for labor, and a piece-rate for intensity of harassment. Simply decouple the two and allow contract menus with two dimensions.
It is clear that in this case the equilibrium wage will be w* since the marginal incentives for productivity and labor are the same as without harassment. And there will be an equilibrium 'wage' for harassment (which will be exactly theta in his competitive market), after which workers in equilibrium can choose how much to provide. Since they can always choose 0 (and many will), this scenario Pareto dominates the legislated no-harassment one. His version distorts the free market and unsurprisingly finds inefficiencies, although even there the surplus is higher.
[The astute reader will note that I have implicitly assumed separability between labor and harassment, as did Basu. In a more complicated world, we will need more complicated contracts than additive piece-rates, but it will all go through.]
The really ironic element is that even after all that struggle, he is forced (bottom of p.150) to admit 'behavioral' preferences, since the argument doesn't hold up in a (finite) neo-classical world. But of course the real reason we (quite rightly!) have laws against contracts allowing sexual harassment is precisely and fully behavioral: people are present-biased; they can't accurately predict future utility as a function of outcomes (i.e. they don't entirely know how it will feel over time); and they simply make mistakes. We should admit that explicitly, rather than trying to fit a square peg into a round hole.