Home Production, Market Production, and the Gender Wage Gap: Incentives and Explanations

1. Home Production, Market Production, and the Gender Wage Gap:Incentives and Explanations Stefania Albanesi and Claudia Olivetti Presented by: Melissa McEllin Thursday, February 21, 2008

2. Presentation Outline • Background • Previous Studies • Main Issue • Model and Assumptions • Connecting the Model with Evidence • Implications • Critique

3. Background • An emergence and persistence of gender differences, in market wages and in the division of labor within the household: • 10% differential in female and male wages in the U.S. (O’Neill 2003) • Husbands’ home hours are about 1/3 of wives’ (PSID 1976-2001) • Incentive pay in the labor market

4. Previous Studies • Francois (1998) • Model subjecting only one class of jobs to incentive problems • Efficiency jobs are assigned to men only, in an equilibrium with female wage discrimination • Shortcomings: He has the female wage differential stemming from job segregation – His model cannot account for gender differentials within the same occupation

5. Previous Studies • Gayle and Golan (2006) • Focus on gender differentials in on-the-job human capital accumulation • Shortcomings: Discusses only how statistical discrimination leads to occupational sorting and changes in labor market experience between genders

6. Previous Studies • Goldin (1986) • People choose occupations based on their expected life-cycle labor participation • This leads to certain expectations within the labor market which lead to differences in monitoring costs and incentive pay • Shortcomings: Introduces incentive pay and expectations, but does not explain occupational arrangements within groupings.

7. Main Issue • Joint determinations of gender differentials in earnings and in the household division of labor • Identify the source of statistical discrimination, within occupations, in light of the incentive problem on the labor market

8. Hypothesis • “Incentive problems in the labor market amplify differences in earnings due to gender differentials in home hours. In turn, gender earnings differentials reinforce the division of labor within the household, leading to a potentially self-fulfilling feedback mechanism.”

9. Building on Previous Ideas • Builds on 3 existing literatures: • Sexual division of labor • Statistical discrimination • Incentive contracts and job design

10. Model • Economy of adult agents, identical except for gender, and identical firms • All agents are married and belong to a household • 2 types of good: market good and home good

11. Assumptions • Utility cost of labor effort is increasing in home hours • Effort as well as home hours are private information (unobserved) • Unobservability of home hours  adverse selection • Unobservability of effort  moral hazard • Households value a public home good produced with the time of both spouses • Households optimally choose the contribution of each spouse to home production • Workers with high home hours are less attached to market work • Male and female workers are equal in labor market productivity, but females are more productive in home hours than males

12. Model: Labor Contracts • Since home hours are unobserved, the optimal menu of contracts will depend on the firms’ belief about the distribution of home hours • Since gender is observable, firms can offer different incentive contracts to female vs. male workers – but contract space is unlimited, so they will do this if and only if they believe that the distribution of home hours differs across genders

13. Model: Labor Contracts • If firms observe home hours but not effort, they would only face a moral hazard problem • If both home hours and effort are unobserved, this introduces adverse selection • High home hour workers will put in less effort, and will thus self sort into jobs with higher salary pay and less incentive pay • Low home hour workers will put in more effort at work, so they will sort into jobs with higher incentive pay • Incentive pay becomes a combination of output (rather than “effort”) and gender (rather than “home hours”)

14. Model: Households • Household production (G) is a function of home hours of the female (hf), home hours of the male (hm), and the amount of market good used in home production (k) G = g (hf, hm, k) • Individual labor earnings can finance purchases of the market good used in home production and can be transferred across spouses

15. Model: Choice of Home Hours • The optimal allocation of home hours within the household depends on the spouses’ relative opportunity cost of home hours and therefore on the prevailing labor contracts.

16. Model: Equilibrium • The household takes labor contracts as being given constraints by the firms; chooses home hours based on this • Ability to bear children is a reason women have an advantage in home hours

17. Model: Equilibrium • Equilibrium with Ex-Ante Differences Across Genders • Assume male and female workers are equally productive in market work, but women are more productive in home work • = the measure of women’s higher relative productivity in home work • A high value of , resulting from poor medical knowledge, implies that the only possible equilibrium is one where women are mostly devoted to home production while men specialize in market work • Improvements in medical technology reduce the value of , so an ungendered equilibria is possible • However, gendered initial conditions and market beliefs or expectations may create a self-fulfilling pattern, so an ungendered equilibria may never prevail

18. Model: Feedback • Predictions: • 1. The female/male earnings ratio should be lower when the incentive problem is more severe • 2. These effects are stronger when the difference in home hours is greater • 3. The wife/husband ratio of home hours should display a negative correlation with the wife/husband earnings ratio • 4. The wife/husband ratio of home hours should display a positive correlation with the husband/wife difference in the fraction of incentive pay.

20. Connecting the Model with the Evidence • Interpret contracts specifying different levels of effort as corresponding to different positions within a firm • Assume that uncertainty associated with a worker’s effort should be higher for management and sales jobs relative to production jobs  incentive pay can be used more in these jobs

21. Connecting the Model with Evidence • Empirical counterparts of predictions 1 & 2: • 1. Gender earning differentials should be higher in occupations in which the incentive problem is more severe. • 2. These effects should be stronger for married than for never-married workers.

22. Connecting the Model with the Evidence: Census Data • Census sample includes all white individuals between 25 and 54 years of age • Individuals employed at least 50 weeks in the past year and usually work at least 30 hours per week • Consider 3 occupational categories: sales, management, and production • Analyze both married and never married workers

24. Notes on the Chart • Large variation in the ratios of male/female median earnings across industries conditional on marital status, but always lower for married workers • For married workers, the female/male earnings ratio is lowest in management and sales occupations • For never married workers, the earnings ratio rankings are reversed

25. Connecting the Model with the Evidence: PSID • Unlike the Census, incentive pay and home hours are reported in the PSID • Find a strong negative correlation between the female/male earnings ratio and the male/female difference in the fraction of incentive pay • Correlation coefficient = -0.65, significant at the 1% level • Empirical counterparts of predictions 3 & 4

27. Summary of Results • Incentive problems in the labor market play a major role in their model • Incentive pay in the labor market amplifies gender earnings differentials • These earnings differentials reinforce the division of home hours • This can help to explain the substantial and persistent gender earnings gap that remains unexplained by gender differences in schooling, actual experience, and job characteristics

28. Implications • Highlights the importance of incentives and difference in the pay structure • Reveals that expectations of a gender wage gap, which characterize both male and female workers, can have a large impact (Babcock and Laschever 2003) • Suggests that equilibria with gender discrimination will be hard to break

29. Critique: What is Good • Addresses within-occupation differences in earnings • Examines the joint decisions of labor hours and home hours • Correlates with the empirical evidence on incentive pay well

30. Critique: What could be improved • Questionable Assumptions: • As home hours increase, labor effort will decrease • Utility cost of work effort is increasing in home hours • While equal in the labor force, women are more productive at home • Inadequate data set for comparison • Limited analysis stemming from the inability to address selection into different firms or industries • Assumes no efficiency losses for gender discrimination • Does not address how technological changes can affect female labor force participation