Magazine | October 18, 2010, Issue

Sex, Workers

Gender discrimination does not explain the male-female pay gap

President Obama recently urged the Senate to pass the Paycheck Fairness Act, which would make it easier for women to sue their employers for gender discrimination. The act is needed, Obama said in a written statement, because “even in 2010, women make only 77 cents for every dollar that men earn.” The House passed the legislation in 2009, but the Senate has yet to act.

Whereas under current law, women who sue their employers must prove gender bias, the Paycheck Fairness Act would shift the burden to employers to show that gender pay differences are not caused by bias. A woman could allege bias even if her better-compensated male coworkers were better educated and more highly skilled, forcing the employer to show that those extra qualifications were necessary for the job. The bill also would automatically sign women up for class-action gender-discrimination suits.

In urging passage of the act, Vice President Joe Biden exhorted senators to “get on the right side of history.” But that would put them on the wrong side of almost every piece of rigorous research on gender pay. Indeed, an academic-literature survey published by the Department of Labor in 2009 concluded that discrimination’s role in creating the pay gap may be practically nonexistent. Even White House domestic-policy chief Valerie Jarrett implicitly admitted, in the Washington Post, that the gender pay gap may be smaller if we factor in education and experience levels. She didn’t say how much smaller, but the truth is that the 23 percent gender pay gap shrinks significantly — and perhaps disappears altogether — when one accounts for various differences between men and women.

Among never-married individuals without children, for example, the pay gap is actually negative — in this group, women earn more than men, because they have better educational qualifications.

Once women do marry and have children, they are more likely to opt for employment that accommodates child-care responsibilities. More women work part-time than men, and women are twice as likely to work in the non-profit sector, which offers lower pay but more flexible work conditions. Women are also four times more likely to leave the workforce temporarily to care for children. This reduces seniority and job-specific skills and discourages employers from investing in female employees, who may not stay long enough for such investments to pay off.

Men tend to enter careers involving more physical risks and less job security. The 25 most dangerous jobs are all male-dominated, and unemployment has risen significantly more for men than for women in the current recession. Men demand and receive higher pay to compensate for these risks.

In addition, men’s lower aversion to risk might help them negotiate harder for wages. The American Association of University Women reports that men are four times more likely to bargain when it comes to salary in a new job than women are.

There is also evidence that women prefer positions with more generous benefits relative to wages — which, again, are often found in the government and non-profit sectors. Thus the gap in total compensation may be smaller than the gap in salaries alone. Economists Eric Solberg and Teresa Laughlin of California State University found that factoring in benefits eliminated around nine percentage points of the pay gap, and concluded that “any measure of earnings that excludes fringe benefits may produce misleading results as to the existence, magnitude, consequence, and source of market discrimination.”

When all of these factors are considered, the pay gap may vanish almost completely. A study by former Congressional Budget Office director June O’Neill and Baruch College economics professor Dave O’Neill showed that accounting for differences in male and female worker characteristics such as education, years of experience, and chosen occupation boosts the female/male pay ratio to between 92 and 99 percent. The remaining difference could be attributable to gender discrimination, but could also be due to factors that aren’t easily observed and controlled for. And even if we take the low-end estimate of 92 percent and assume that the entire remaining gap is due to discrimination, we have eliminated two-thirds of the gap cited by the White House.

#page#Similarly, the 2009 Department of Labor study mentioned above, which both reviewed existing literature and conducted its own statistical analysis of the pay gap, reached “the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action.” Yet it is precisely this raw wage gap that the White House cites in support of the Paycheck Fairness Act.

Discrimination is unlikely to drive the gender pay gap because, as economist Gary Becker pointed out a half century ago, when one employer underpays his workers, competing businesses can earn windfall profits by luring them away. If Employer A pays women 77 cents on the dollar, Employer B can hire all Employer A’s female workers at 78 cents on the dollar to replace his costlier male workers. This raises Employer B’s profits, while Employer A must now pay full freight for employees. The Royal Swedish Academy of Sciences noted, in awarding Becker the 1992 Prize in Economics, that “discrimination thus tends to be economically detrimental not only to those who are discriminated against, but also to those who practice discrimination.” As long as there is a critical mass of non-discriminating employers — and the growth of female-run businesses in recent decades and changes in social norms among males indicates there is — then employers’ profit motives will narrow the pay gap to levels justifiable in terms of productivity. Ironically, while the Left assumes that businesses readily sacrifice worker safety and degrade the environment in search of profits, they nevertheless believe employers forgo profits simply to satisfy a misbegotten desire to discriminate.

Even if some of the pay gap is due to discrimination, therefore, economic liberalization may be the key to reducing it. Because employers that discriminate lose profits relative to non-discriminating competitors, increased competition weeds out discrimination. Several studies have shown that as industries faced increased competition, through either deregulation or international trade, the gender pay gap shrank. And the pay gap is larger in monopoly markets without competition and smaller in start-ups and small businesses that must be productive in order to survive. Women need more markets, more enterprise, and more opportunity, not more regulation and litigation.

If as a society we wish to subsidize female earners, we can do so more efficiently through policy than lawsuits. For instance, relative to what it pays men, Social Security pays women additional benefits equal to around 3 percent of lifetime earnings, because of the progressivity of the benefit formula and the fact that women live longer. Thus, Social Security by itself effectively raises female wages by 3 percent relative to men’s, erasing much or all of any discrimination-based pay gap. Other programs surely have similar effects.

And even if there is a small remaining pay gap due to true discrimination, it is an open question whether that problem is worth solving with legislation that opens the door to a multitude of costly lawsuits. In addition to harming job creation, the risk of a pay-gap lawsuit could make employers less willing to hire women, effectively increasing gender discrimination.

The point isn’t that discrimination can’t or doesn’t exist. It’s that the Left discusses the pay gap almost solely with reference to discrimination when it is explainable almost entirely without reference to discrimination. Discrimination is odious, but it is not in employers’ interests to discriminate and discrimination is not a major cause of overall male-female pay differences. The administration’s claims of a 23 percent gender pay gap are best viewed as an election-year effort to foster resentment among women, a voter group that supported Democrats in 2008 but has more recently shifted against them. The president’s deliberate disregard of the research crosses the line into policy malpractice. If enacted, the Paycheck Fairness Act will impose costs on employers, the economy, and the women it is intended to help.

– Mr. Biggs is a resident scholar at the American Enterprise Institute.

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