Gender and Racial Pay Gaps

1. Gender and Racial Pay Gaps

2. Introduction • Normally put together (as here) e.g. Altonji-Blank chapter in HOLE • There are similarities but there are also differences: • Women have babies • Ethnic minorities often geographically concentrated

3. The Gender Pay Gap • Men, on average, earn more than women, pretty much everywhere • But there is variation: • across countries, • over time • within countries at a point in time (e.g. differences in earnings profiles we saw earlier)

4. Variation in the Gender Pay Gap Across Countries (Blau-Kahn, JEP 2000)

5. Questions and Puzzles? • Is position of women in southern Europe really much better than in Northern Europe, the US? • Problem of sample selection (Petrongolo and Olivetti, CEP DP711) – proportion of women working in southern Europe much lower

6. Olivetti-Petrongolo CEP DP711

7. Variation in Gender Pay Gap Over Time - UK

8. Blau-Kahn, JEP 2000

9. Variation in Gender Pay Gap Over Time - US

10. Most other countries • Similar trend but timing different • But some countries have marked change around time of Equal Pay Act (e.g. UK), some do not (e.g. US)

11. Accounting for the Gender Pay Gap – the Oaxaca decomposition • Think of estimating separate earnings functions for men and women: • These must go through the means so:

12. Taking differences: • This can be written as: • i.e. gender pay gap is decomposed into: • Part due to differences in characteristics • Part due to differences in coefficients • Second part used to be called ‘discrimination’ but perhaps unwise to do so

13. But decomposition is not unique e.g. could write: • Will generally give different answers – only same answer if only difference in intercept • No reason to prefer one over the other and could evaluate at other characteristics – generally report them all and hope tell a similar story

14. wages wm (βm- βf)Xm βm(Xm- Xf) (βm- βf)Xf βf(Xm- Xf) wf Xf Xm X A Graphical Representation

15. Insights from Oaxaca decomposition – US 1979 (Altonji Blank, HOLE)

16. Insights from Oaxaca decomposition – US 1995 (Altonji Blank, HOLE)

17. What does UK look like?

18. Things to Note • Hard to find regressors that can explain most of gender pay gap • Problem bigger now than in the past as men and women more similar now • Perhaps do not have the right variable – focus especially on actual experience as opposed to potential

19. Altonji-Blank Table 6

20. Differences in actual experience not huge e.g. UK BCS 70

21. Blau-Kahn alternative measure of gender pay gap – position in male wage distribution

22. What insights from this? • Position of women in US looks better – high level of wage inequality tends to widen gender pay gap • Gender pay gap influenced by factors which do not seem to have gender-specific angle – Blau-Kahn JOLE 2003 show that collective bargaining and minimum wage important

23. Theories of the Gender Pay Gap • Human Capital Theories • Women have lower actual experience • Invest less in human capital • Discrimination • Prejudice • Statistical discrimination • Search Theories • ‘Psychological’ Theories

24. Human Capital Theories • Among past generations women had less education than men – now they have slightly more • But women still spend less time in paid work than men – but are gaps big enough? • Can explain some of the gap but not all of it – see earlier picture

25. Theories of Discrimination:Becker’s Theory of Prejudice • Becker The Economics of Discrimination proposed a theory of discrimination that was based on the prejudice of agents in the labour market, employers, workers and customers. It is • sometimes called a ‘tastes’ theory. • Basic idea is that some people are prejudiced so will be prepared to pay a price to avoid certain groups • This then affects the demand for labour of those groups.

26. A Simple Model of Employer Discrimination • Suppose that some employers are prejudiced against black people • Implies that if black and white wages were the same, they would always prefer to employ white workers. • But they do care about profits so that, if the black wage is sufficiently below the white, the extra money they can save by employing black workers is sufficient to overcome their prejudice.

27. Suppose the wage for white workers is Ww and that for black workers is Wb. • Firm f will choose to employ black workers if the relative wage is given by: • where df is the firm’s discrimination coefficient. If df=0 the employer is not prejudiced and employs whichever group of workers is cheapest • a larger value of df implies the employer is more prejudiced

28. Demands for Black and White Workers • If the wage paid by firm f is W, denote its demand for labour by: • If it employs white workers it will employ: • if it employs black workers it will employ:

29. order the F firms in the order of their discrimination coefficient so that there will be a cut-off f*, below which all firms employ black workers and above which they employ white workers. • The cut-off must satisfy: • Hence, the overall demand for black workers is going to be:

30. And aggragate demand for white workers: • What does equillibrium look like? • If no prejudice than black and white wages must be equal otherwise all firms employ all black or all white workers • But where there is prejudice white wages and black wages will diverge – prejudice has consequences for demand for labour and hence relative wages

31. Assessment • Prejudiced firms make lower profits as will only employ more expensive white workers • Becker predicted competition would drive out discrimination • Not clear this is a good prediction – but argument does not work for consumer discrimination

32. Statistical Discrimination • basic idea is that in a world of imperfect information, employers will base decisions on observable characteristics (like race and gender) that do not directly affect productivity because they are correlated with unobserved characteristics that do affect productivity. • Many variants of this theory – will present one

33. Simple model of statistical discrimination • true productivity of a worker, p, is not observed by employers but do know true distribution in population (mean is μ) • employers do observe an imperfect signal of productivity (e.g. education), s, • Under certain assumptions (that I don’t want to go into here), the expected productivity of someone with signal s is given by:

34. Θa measure of how informative is the signal about the quality of the worker concerned. • In a competitive labour market workers will receive a wage equal to their expected productivity so w=E(p). • Assume Θis lower for whites than blacks (why?) so that:

35. black and white workers with the same level of education will now get different wages so there is some discrimination. • But the average level of wages across will simply reflect the average level of productivity so there can only be discrimination overall if μw≠μb. • Now consider choice of education: • Leading to first-order condition:

36. If θ lower for blacks than whites then lower incentives for blacks to get educated • leads to a lower average level of productivity for blacks and lower average wages. • In equilibrium blacks get paid less than whites because they have lower productivity but this is the outcome of a rational decision-making process in which they have lower returns to skills because employers find it harder to evaluate their skills. • key point in models of statistical discrimination is that your fate is determined not just by what you do but by what people like you do. • This can lead to self-fulfilling expectations that are discriminatory in nature.

37. Vicious Cycle Theories of Discrimination • Employers think women are more likely than men to take time out of paid work so do not invest in them, promote them as much • Within couples becomes rational for the woman to take time out because opportunity cost for man is larger • Relies on a form of statistical discrimination – get judged by your gender not your personal characteristics

38. Search Theories • Search theories suggest • faster earnings growth if job offers arrive more regularly • Slower earnings growth if leave jobs more regularly • Women report more constraints on job search, commute shorter distances etc

39. For example:

40. Search Theories: Job Mobility Rates for better job

41. Job Mobility Rates not for better job

42. ‘Psychological’ Theories • A more recent development • By the time they enter labour market men and women are different in personalities • Why is suggest of furious nature vs. nurture debate • Some have suggested this can help to explain gender pay gap

43. Example of psychological differences

44. Evidence for this view • Babcock-Laschever ‘Women Don’t Ask’ – women don’t ask for what they want because of lower self-esteem, lower locus of control, more concern about what others think • Gneezy et al lab work – women try to avoid competition and don’t do so well when faced with it

45. Gneezy, Niederle, and Rustichini, QJE 2003

46. British Teenagers in BHPS

47. How to map this into wages? • Tried this in Manning-Swaffield • Not much success – at most a few percentage points • Still ended up with a large gap after 10 years in the labour market

48. Racial Pay Gaps • Harder to compare across countries as ethnic mix varies so much • Tend to be smaller than gender pay gaps • Often show a lot of variation across ethnic groups e.g. in UK Pakistanis/Bangladeshis do badly, Indians much better • Can often relate that to social background prior to immigration

49. Black-White Earnings Gap In US

50. Interpretation • Blacks made significant gains in 1960s and 1970s as a result of civil rights movement • But stagnation after 1980