The gender earnings gap and its economic consequences

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, September 10, 2013

The debate about the earnings gap between women and men in the workforce has long history and most of the debate in the media is full of misinformation. Even politicians lose sight of the real causes of earnings differentials which, to say the least, are complicated and are not amenable to quick solutions. In a market economy, one cannot legislate equality of earnings of men and women in the labor market.

The good news is that the earnings gap is narrowing over time between sexes. For full-time workers, median weekly earnings of females were 62.3 percent of males in 1970, increased to 82 percent in 2011 and to 85 percent in 2012. The gap is worst in Utah as compared to the national average. Many studies demonstrate that there are many other reasons the gender earnings gap persists aside from discrimination in workplaces.

Many believe that women earn less than men partly because they are concentrated in low-paid occupations. Not so, according to the Bureau of labor Statistics data (www.bls.gov) on occupational distribution and earnings differentials between men and women. The data is on median weekly earnings of full-time wage and salary workers across 22 major occupational groups in 2012. Following are some of the highlights: 1) The women’s share of total workers is more than 50 percent in nine out of 22 occupational groups and their share is more than 50 percent in six out of the top 10 highest paid occupations, 2) in 22 occupational groups weekly earnings of women, as a percent of men’s weekly earnings, range from 54 percent in legal occupations to 94 percent in community and social service Occupations, 3) in only the 12th lowest weekly earnings occupations, the women workers share of total workers is more than 50 percent. 

The above data show that even though more women than men work in the top 10 highest-paid occupations, women still earned less than men in those occupations in 2012. Hence, occupational distribution of women is not the main reason for the current earnings gap. The hopeful sign is that over a period of time earnings gap has narrowed substantially, partly because more women are now working in higher paid occupations and positions within. In addition, BLS data also show that women gained a greater percentage change in constant dollar earnings than men from 1979-2011 at all levels of educational attainment, from high school diploma to college degree. Given the occupational distribution and growth in earnings of women workers, the question is, why are there still differences in earnings across all occupations?

  

There are other factors in play aside from occupational distribution and outright sexual, racial and ethnic discrimination. For example, earnings differences in the same occupation could arise due to job location, job security, occupational positions, more freedom in the work place and/or pleasant surroundings, better fringe benefits, experience and seniority premiums and turnover rates that affect the cost of searching and hiring employees.

The problem arises when other factors are the same, but there are still differences in earnings. That must change because businesses are losing the full benefits of women’s productivity. Efficiency wage theory stipulates that when businesses offer higher wages it motivates workers to be more efficient and more productive. It would also reduce costly monitoring, because if women find differences in earnings at the workplace, they may shirk and hence underperform. They would also be constantly looking for jobs that pay them higher salaries, hence increasing the turnover rates and costs of employers.

Economists Daniel M.G. Raff and Lawrence Summers, in their research paper, Journal of Labor Economics, October 1987, argue that Henry Ford’s decision in 1914 to implement efficiency wage in his auto plants met with great success. When Henry Ford increased the wage rate to $5 a day, much above the going wage rate, productivity and profits increased. It reduced the turnover rate and assured an ample supply of qualified labor.

Businesses also have more to gain if they have a diversified sex mix to generate new ideas and innovations. Sameness in middle and senior management, dominated by white males, is bound to produce stale ideas, a recipe for failure in the global market place. Businesses are missing out on underutilization of human capital, since more and more women are graduating from colleges. In a special report, The Economist, Nov. 26, 2011, reports on a study by Catalyst, which finds that Fortune 500 companies with the most women in top management positions also had higher returns on equity than those with the lowest representation.

The earnings gap also contributes to wealth gap; see my upcoming blog on this issue on this paper’s website. Therefore it makes no economic sense for business to pay different wages to men and women at the same job with the same qualifications and work history. 

The economy would benefit a great deal if such discrimination in earnings between sexes were outlawed. It is time that businesses realize the productive potential of women in the labor force.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.   He also writes blogs for the Standard-Examiner at http://blogs.standard.net/economics,etc.