All Commentary
Thursday, December 3, 2015

The Size of the Gender Pay Gap Matters

The details are actually crucial

Concerns over pervasive sex-based differences in pay have led to a mass movement for “equal pay for equal work” and condemnations of workplace discrimination against women. Inspired by Jennifer Lawrence’s discussion of the topic, Anne Butcher wrote the article “Three Mistakes Libertarians Make on the Gender Pay Gap” to contribute a market-friendly view to this topic.

She begins with this description of what she considers a common libertarian mistake: “Denying it exists or arguing over the exact size of the gap.”

One of the most commonly cited figures when it comes to the wage gap is that women are paid 77 cents for every dollar men make (the most recent Bureau of Labor Statistics numbers show it’s more like 83 cents). It is true that this number doesn’t tell the whole story; it’s based on ALL working men and ALL working women, without accounting for the fact that men and women may choose different career paths.

However, even when the numbers are broken down by different jobs, the wage gap still exists. The numbers don’t always match that 83% figure, but in an overwhelming number of career options, men still make more. Arguing that the wage gap doesn’t exist makes libertarians look uneducated as well as insensitive.

Libertarians should also avoid saying things like “Well, if you correct for certain variables, the wage gap is only 90 cents for every dollar.” You don’t win friends or even arguments by saying “the situation is unfair, but it’s slightly more fair than you think it is!” It’s okay to point these factors out when discussing the wage gap, especially if you think the people you’re talking to have never heard them before.

However, you shouldn’t use these talking points to avoid those discussions altogether. Instead, use them in tandem with practical, free-market solutions to the wage gap problem. It’s more productive and it demonstrates that you still take the problem seriously.

Butcher rightly looks to voluntary actions to promote a more equal society, and I agree strongly with this focus. However, despite this market-friendly approach, I disagree with much of the general sentiment and specific claims.

First, “looking uneducated and insensitive” is not a convincing reason to subscribe to a particular view. The truth or falsehood of a statement is independent of its popularity; as Ludwig von Mises put it, “The proof of a theory is in its reasoning, not in its sponsorship.” Regarding insensitivity, figuring out how to tell the truth in a rhetorically effective way matters, but denying or ignoring the truth to be popular is intellectually unprincipled.

More substantively, after accounting for relevant factors, the wage gap between men and women can fall to around 90 percent. After accounting for more factors (job, hours, age, work experience, education, etc.), the wage gap falls to about 94 percent to 98 percent, and it varies by occupation whether men or women have the higher average wage.

Moreover, it is unclear the extent to which this unexplained remainder reflects sex discrimination rather than other relevant variables excluded from the statistical model. For example, recent empirical evidence suggests that looking at jobs by hour overlooks the relevance of being available at inconvenient times. That is, people with 60-plus hour, available-on-demand work weeks may make much more per hour than seemingly identical work from people with standard 40-hour work weeks, because employers compensate inconveniently scheduled employees for temporally inflexible schedules.

The higher compensation for inconvenient work schedules will not be captured by weighting each hour equally and dividing pay by the total number of hours, making a per hour comparison problematic. As Harvard economist Claudia Goldin explains in her article “A Grand Gender Convergence: Its Last Chapter”:

What, then, is the cause of the remaining pay gap? Quite simply the gap exists because hours of work in many occupations are worth more when given at particular moments and when the hours are more continuous.

That is, in many occupations earnings have a nonlinear relationship with respect to hours. A flexible schedule often comes at a high price, particularly in the corporate, financial, and legal worlds.

As a consequence, tech jobs that offer greater work flexibility and that do not offer substantial compensation for inconvenient hours tend to have smaller pay gaps than legal jobs with inflexible hours. Thus, the mere existence of an unexplained wage gap does not imply, by itself, arbitrary discrimination, because there is also a data gap.

Depending on the study, the unexplained gap falls to as low as two percent, and the part of it inconsistent with the principle of “equal pay for equal work” necessarily must be smaller still. This does not mean that the remainder is not worth addressing in some way. Where arbitrary deviations from this principle can be identified, they should be addressed — especially if reducing the unexplained remainder entails something as straightforward as encouraging women to negotiate their salary more often.

Yet, it is not this small unexplained remainder that is claimed as a central injustice in the struggle for gender equality. I do not mean “the situation is unfair, but it’s slightly fairer than you think it is.” I mean that there are no impassioned protestors rallying to outlaw some undefined fraction of two or six percent. Activists generally assume that the unexplained gap is much larger than it is (by an order of magnitude), and this makes a huge difference to the political and social steps perceived to be necessary to solve the problem.

Additionally, in order to show that widespread discrimination exists, equal pay activists have to explain why both market forces and legislation have failed to solve the alleged problem.

According to a lot of psychological research, individuals have unconscious biases that associate different genders with different tasks. These biases can affect appraisals of a candidate’s worth. Yet, seemingly in contrast, the empirical economics literature shows that people are generally paid based on their productivity, not their gender.

How can people be so biased but still create rational outcomes?

The answer is market forces. In a competitive marketplace, if women are systematically underpaid, employers have a large profit opportunity by hiring more female workers. Cutting labor costs by 23 or 17 percent would give businesses in any industry a huge advantage, so competition between employers erodes any irrational difference in pay by rewarding businesses that successfully overcome gender biases. Individuals may be biased, but that doesn’t necessarily mean the market is.

This conversation also tends to take place in a historical and legal vacuum. Most of the activists for equal pay speak as if legislation has not already been passed to outlaw gender discrimination. But Congress outlawed gender wage discrimination over fifty years ago in the Equal Pay Act of 1963, with several updates since.

If these discriminatory practices were pervasive, companies paying 23 percent or 10 percent less to women of equal qualifications could be sued, forced to pay damages, and made to reform their practices. The rarity of such lawsuits suggests that the vast majority of businesses abide by the principle of equal pay for equal work.

Finally, it is not uneducated or insensitive to focus on the many substantive factors like profession, age, education, and hours that explain almost all of the difference between men and women’s pay. Nor is it irrelevant: On the contrary, these factors are the most relevant reason for aggregate differences in pay between men and women. As economist Steve Horwitz emphasizes, social pressures and cultural norms that systematically push women away from higher paying professions and towards disproportionate child-rearing responsibilities affect women’s chosen career paths — reducing their overall salaries far more than workplace discrimination.

If we misdiagnose the pay gap, we will prescribe the wrong treatment — and that’s true whether it’s coercive government actions or voluntary free market solutions. Regardless of the method, if we care about the problem, we must focus on the real culprits.

People who believe that markets still have pervasive gender discrimination are essentially claiming that entrepreneurs have a huge profitable opportunity to hire women and outcompete biased businesses. If that’s true, go for it. And if you’re right, then by releasing your inner bourgeois, you can do more to reduce the pay gap than all the speeches and marches and laws put together.