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Wednesday, May 13, 2015 Leer en Español

Is There Really a Pink Tax?

Applying economics to the question of prices for men and women

You’ve heard that women, on average, earn only 77 cents for every dollar men do. You have probably also heard that this is evidence of systemic discrimination.

But in earlier columns, and in this video, I argued that the 77 cents claim, while true, is not evidence that employers are discriminating against women, or that markets have somehow “failed.” Having shed some light on this idea, I thought the issue had been put safely to bed thanks to sound economic thinking.

But the idea is back — this time with a twist: pay disparity isn’t the only way in which markets discriminate against women. The latest contender is the so-called “pink tax,” perhaps best described in this video.

The idea is that sellers charge women more than men for the exact same product or service. What appears to be the same deodorant or razor is more expensive in the women’s version than in the men’s. Other examples include a whole variety of cosmetics, dry cleaning, and haircuts.

Is there, in fact, a “pink tax?” Are women being discriminated against on the spending side of the market as well as the earning side?

The first question we might ask is how economists determine if there is discrimination in a market, especially since we can’t get inside people’s heads to know their precise intentions. What we try to do is to figure out what all of the relevant variables are that might explain the differential outcome. So with the wage gap, we look at things like education, experience, and preferences for certain types of work. We try to adjust for differences between men and women and see if any gap remains. That is, if a man and a woman who were economically identical and differed only in their genitalia were doing the same job, would there be a pay gap?

If such differences persist even after we think we’ve accounted for all the factors that might explain the difference, then we tentatively conclude that the remaining gap might be due to discrimination. We also continue to look for factors we might have missed. Discrimination is our tentative conclusion only when all the economic explanations have been exhausted.

So how might we apply this process to the supposed pink tax?

First, what are the other explanations we might have for the price differentials? One question is whether the products being compared are, in fact, the same. Are there differences in the way they are produced, and might those production differences lead to price differences? Perhaps women’s haircuts cost more than men’s because they are more complicated or require more skill on the part of the service provider. Perhaps women’s clothes cost more to dry clean because they have, on average, more embellishments or other aspects of the fabric that require more care by the dry cleaner. We might call both men’s and women’s shirts “shirts,” but that doesn’t make them the same thing for the purposes of dry cleaning them. The same goes for haircuts.

A second kind of explanation might rely on subjective differences. After all, economic value is always, in the end, subjective. Things are valuable to us because we believe, for whatever reason, that they will contribute to the satisfaction of our various ends. So perhaps women are willing to pay more for a particular cosmetic product because they have a strong preference for how it smells, or some other feature of the good that does not matter as much to men.

Even the pink tax video narrator says, at the end, that if she wants to avoid the pink tax, she will “just have to smell like a man.” That statement suggests that not only do men’s and women’s products differ objectively (in that they smell different); it also implies that women might care about how the products smell more than men do.

Subjective value might apply to personal services, too. If getting that haircut “just right” matters more to women than to men, women will be willing to pay more for it, hair dressers will be willing to spend more time on women’s haircuts, and women will be more attached to particular service providers than men are. Women’s haircuts may also take longer in general and be more involved.

What we might be seeing here is what economists call “price discrimination.” That word “discrimination” has all kinds of negative connotations (and those are invoked at the end of the pink tax video), but it this context, it simply means “differentiation.” The economic definition of price discrimination is selling the identical product to different people at different prices that are not related to cost.

We see price discrimination all the time and find it harmless. Examples include student or senior citizen discounts at the movies, cheaper flights if you buy tickets in advance rather than the day before, and the differential amounts of financial aid students get at the same college. One of the reasons we find price discrimination harmless is that we are not “taxing” those who pay the higher price, but instead enabling more people to consume the good by offering a discount to various groups.

Often, price discrimination takes place because the different groups have different price elasticities for the product. That’s a fancy way of saying that they are more or less price sensitive. For example, last-minute air travelers are often businesspeople who have to be somewhere fast, so they are less concerned about price.

Our sensitivity to price is often related to how many substitutes there are for the good in question, and how close we perceive those substitutes to be. The more, and the closer, the substitutes, the more price sensitive people will be, and the more likely firms are to lower the price for them. If it’s true that men perceive that many of these products (especially the cosmetics) are more easily substituted for each other, then men will be less willing to pay higher prices than women. Unsurprisingly, firms respond by pricing accordingly.

So is this really a “pink tax” or is it a “blue discount?” And is it really that firms are somehow punishing women, or is it that women’s preferences are such that they are willing to pay more to get exactly the product they want?

Finally, it’s interesting that the call here is for sellers to cut their prices for women, rather than raise their prices for men. We see the same phenomenon with the wage gap, where it’s always a reason to raise women’s wages and not to cut men’s wages. Is the goal here really “equality,” or is it to use the force of law to cut prices and raise wages?

Does seeing the pink tax as generally harmless price discrimination resulting from the nature of men’s and women’s preferences mean all such price differentials are not true gender discrimination? It does not. There may be differentials that we can’t explain and we might tentatively conclude that there appears to be discrimination. But that means we have to keep looking for alternative explanations. The differentials are unexplained — but not necessarily unjust.

Before we conclude injustice, we have to make sure we’ve exhausted all the explanations economics can offer. 

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.