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Equal Pay Day: Some Thoughts

Steven Horwitz

Tuesday was Equal Pay Day, designed to point out the lingering gap between men’s and women’s earnings. Depending on which group you listen to and which way of measuring you trust more, the average woman earns 75-80 percent of the average man’s pay. Many women’s organizations, as well as left-leaning organizations more generally, use those data to argue that gender discrimination is rampant in labor markets, with the often explicit recommendation that government step in to solve the problem.

Before we ask whether government intervention can do that, we should first ask if there even is a problem. What exactly does the gender earnings gap tell us, and what–if not discrimination–might explain it?

First, it’s important to know what the 75 percent number does not say. It does not mean that a woman doing the identical job as a man with the identical qualifications will get paid 75 cents for every dollar he does. Though measured in various ways, the usual number thrown about reflects the average earnings difference between men and women. If men and women take different kinds of jobs or have different skills, that will lead to differences in pay. Economists talk about the importance of “human capital”–the education, skills, and experience that workers have. Wages depend critically on the level and kind of human capital. It turns out that the most important reason men and women have different earnings is that their human capital differs.

Difference College Experiences

Even though more women than men go to college, women’s majors and experiences in college differ from those of men. Women tend to major in areas that lead to jobs that tend to pay less than jobs taken by men with comparable amount of education. For example, if women are more likely to go into teaching, nursing, or education, they will make less than men who are more likely to go into engineering and computer science.

Women are also more likely to interrupt their careers to engage in household production, particularly raising children. Career interruptions often lead to degradation in human capital, putting those women at a disadvantage compared to men in their cohort. These human capital factors might explain 50 percent or more of the gender earnings gap, according to some studies.

Because women remain more likely than men to be predominantly responsible for raising kids, cooking meals, doing laundry, and other household responsibilities, they tend to prefer jobs that, all other things equal, offer them more flexible hours, in-house daycare, or similar benefits. Jobs that offer these nonmonetary benefits will tend to pay less than those that do not, since total compensation is what ultimately matters to both employer and employee.  These so-called “compensating differentials” explain another hunk of the gender earnings gap.

Smaller Gap

That portion of the gap not explained by human capital, compensating differentials, or other economic factors is provisionally hypothesized by economists to be due to discrimination. At most perhaps 25 percent of the gap, or somewhere around 5 or 6 cents on the dollar, is thought to be due to discrimination. In a study done several years ago, never-married workers aged 27-33 with no children saw a pay gap of 2 cents on the dollar when controlling for human capital and compensating differentials. In some fields the gap is negative; that is, women make slightly more than men. In general, younger workers see a much smaller gap than older ones.

As libertarians we can note that markets do not completely eliminate gender discrimination in pay, but still deny that government is the best way to solve the problem. We can argue for using various institutions of civil society to put pressure on those who discriminate. We can also point out that if the source of differences in men’s and women’s earnings trace back to sexism in other places in society and/or the disproportionate responsibility women have for childcare and the household more generally, then we should be trying to change those practices.

Using government to address those issues is like doing surgery with a hacksaw. The particular contexts faced by specific couples as they try to sort out work/family balance are so idiosyncratic and so infused with Hayekian knowledge problems, that one-size-fits-all political solutions are far more likely to make matters worse than better. Instead, the best thing libertarians can do on Equal Pay Day is first to point to how the changes brought by liberalism, markets, and increased wealth have liberated women and brought them that much closer to equality. Then we should ask our feminist friends if they think that the patriarchical government they so distrust is really likely to have their best interests at heart in trying to solve the mostly nonexistent problem of the gender earnings gap.

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