Friday, May 15, 2009

Follow-Up: Male-Female Wage Differentials

It is well-documented that women, on average, earn less than men do. If you are interested in some background, William Darity and Patrick Mason (Journal of Economic Perspectives, 1998) give a thorough overview of the theory and evidence regarding discrimination in employment.

Where females are concerned, data suggest that their earnings are currently just 78 percent of what their male counterparts make. This was highlighted two weeks ago on the National Committee on Pay Equity's "Equal Pay Day." Each year's Equal Pay Day is held on the day of the current calendar year marking the point at which females have earned enough additional money beyond their earnings in the prior year to match what men earned in the year ending Dec 31. This year's Equal Pay Day was April 29; only by then had an average woman earned enough additional money to equal what an average male had earned in 2008.

Now this 78:100 ratio is not uniformly true across all jobs and sectors in the economy: it is only an average. In some industries, women on average make considerably more than men. See this piece on CNN's web site for a list of occupations in which women outearn men. And CNN's Jeanne Sahadi notes that simply comparing average to average is a limited way of looking at the world of pay.

Nevertheless, a disparity exists between these two averages. And economists, psychologists, and sociologists tell each other lots of different stories regarding why such differences exist. And the new story in yesterday's BBC online quiz and accompanying article is that men are more likely to negotiate salary and raises than are women. According to author Marilyn Davidson, a professor of work psychology at Manchester Business School, women may be less comfortable in such conversations, or be relatively more focused than men on job satisfaction rather pay itself.

Carnegie Mellon economics professor Linda Babcock found similar evidence in an experimental setting, but also points out that (1) females might benefit from a softer, less aggressive approach to the subject, and (2) the results may vary depending upon whether the other party is male or female.

Traditionally economists have focused upon two micro-theoretic sources of employer discrimination. First, employers may have a preconception that one group of workers is more productive than another--either based upon an unfair stereotype or upon some sloppy anecdotal form of statistical inference. If so, the employer will discriminate.

In another story, made famous by Gary Becker of the University of Chicago in his 1957 classic The Economics of Discrimination,



employers may simply have a "taste for discrimination," and make hiring and pay decisions in light of her preference for one group over another. In either case, though, when a market is sufficiently competitive, hiring or paying workers based upon physical characteristics unrelated to job performance--rather than hiring and paying workers based upon how those decisions will help one's firm--paves the road to ruin for firms stupid enough to persist in such practices.

So over time we would expect that, as long as firms are operating in markets where they face sufficient competitive pressure, the unwise, mean-spirited firms would fall by the wayside and go out of business. And a straightforward extension is that, over time, we should expect to see wage equalization across all professions, regardless of sex, race, etc.

But there is not equal pay across the sexes: men really do earn more than women, at least on average. Are there micro-based theories that pass the smell test? That is, are there theories that predict that successful firms might nevertheless engage in discriminatory practices?

One theory suggests that it's not the employers who are the bigots, but their customers. So savvy firms might be led to do what successful firms usually do: give customers what they want. If so, and firms are successful as a result, discrimination in employment and compensation by firms might lead to long-term viability--though the theory is unsavory indeed.

Another theory suggests that the pay differences have more to do with what specific objectives women seek in the labor market relative to their male counterparts. If the career and earnings objectives of females are more interesting and varied than those of males, then perhaps the pay differences we see have less to do with discrimination than we'd thought.

In his controversial book, Why Men Earn More: The Startling Truth Behind the Pay Gap and What You Can Do About It, author Warren Farrell argues that women earn less than men do because they seek a more rich array of sources of satisfaction in their lives--



some of which prove so deeply satisfying that they are willing to work for a bit less money in order to gain the satisfaction they derive in exchange.

Carrie Lucas, vice president for policy and economics at the Independent Women's Forum, echoed these sentiments in a 2007 article in the Washington Post. And more recently, in the week leading up to Equal Pay Day, Libby Purves penned a similar commentary for the Times of London.

In the same day that Ms. Purves's reflection appeared, Brits learned that under the new Equalities Bill, firms "will be forced by law to disclose how much they pay men compared with women in a surprise government move to narrow the pay gap." Though the gap is narrower in the UK (where women earn 17 percent less than males) than in the US, and the bill's authors admit that women may seek different objectives than men, they nevertheless believe that "companies are still paying men more than women for similar work, in the belief that that no one will discuss their salary level so they will not be caught breaking the law."

The equalities bill has now passed a second reading.

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