Notes on The Human Capital Explanation for the Gender Gap in Earnings

1. Notes on The Human Capital Explanation for the Gender Gap in Earnings By Joyce Jacobsen

2. The Question. . . • Why women who do market work receive lower hourly earnings on average than do men • This article examines the human capital explanation for this puzzle.

3. Human Capital • Productivity-related attributes that people develop over time, such as: • Those gained during the formal education process • From on-the-job training or other programs • Experience gained from working in various firms, occupations or industries

4. Also… • Human capital refers to the physical and mental health of an individual to the extent that healthiness increases productivity.

5. Okay, so. . . What’s the point? • Generally, people with more human capital would be expected to be more productive than those with less • If you’re more productive, you can earn more per unit of time, all else equal.

6. But its not just more human capital • It might also be that different FORMS of human capital might lead to different earnings rates.

7. How Does This Relate to The Wage Gap? • While economists think that there are other explanations for the wage gap as well… they believe that differences between men and women in the attainment of human capital gets at SOME of this difference.

8. New Question • How does gender affect human capital investment decisions, thereby leading to different investments by gender? • How much of the gender gap in earnings can be explained by gender differences in human capital?

9. A Bit of History • From Adam Smith (what isn’t?), human capital is when a worker chooses to acquire talents “during his education, study, or apprenticeship,” which “as they make a part of his fortune, so do they likewise of that of the society to which he belongs” (Adam Smith, 1776). • Now, the definition has expanded to include anything that translates into higher productivity – even physical fitness or health.

10. Parallel between Human and Physical Capital • The decision as to whether or not to invest in HK is considered to be ne made by a rational economic agent seeking to maximize some function such as income. • Just like the decision to invest in physical capital, like machines. • Human and physical capital are directly comparable in terms of returns to an investment • Both depreciate over time.

11. General versus Specific Investments • Human capital types fall along a spectrum, wherein some forms are useful only in particular firms or jobs (specific) while other forms are useful in a broad range of situations (general). • Employers are generally unwilling to provide workers with general HK investments because they are concerned that the workers they train will leave the firm soon after the training and the firm will receive no return on this training investment.

12. More on General v. Specific • So… most general HK will be provided through formal education and specific through on-the-job training • Firms may also be hesitant to make specific HK investments in persons they think will be leaving the firm. • Workers won’t be willing to make specific HK investments without guarantee of future employment to provide a return on the investment.

13. What does this mean? • The greater risk associated with investment in specific human capital leads to the prediction that risk-averse workers will require a higher rate of return on specific than on general human capital.

14. HK Explanations for the Gender Wage Gap • Women may have less HK than men • Women could have the same HK as men, but it could vary in type in the following four ways: • Women may be more likely to invest in HK that has high non-market return • Women may be more likely to invest in HK that increases satisfaction with time spent in market work, non-market work, or leisure • Women may invest in HK that depreciates less rapidly than the HK in which men invest • Women may be less likely to invest in specific HK

15. This implies that. . . • All in all, women’s monetary return on a given amount of HK investment will therefore be lower than men’s.

16. The Investment Decision • Why would any two people vary in the amounts and types of HK that they have at any point in time when they are of the same age. • Scarce resources: time and money • Decisions regarding HK may not always be in the individual’s hands

17. Parent or Government Influence • In many countries, children may be viewed as viable laborers at early ages. In this case, the decision to send a kid to school involves weighing the opportunity cost of their foregone production, either in the market or in the household. • Sometimes these decisions are conditioned by the gender of the child

18. Women in Formal Education Around the World

19. Discussion of Table • On average across developing countries, women receive less than ¾ of the amount of men’s formal schooling • Literacy rates are unequal by gender • Why? Higher opportunity cost for educating women rather than men or • Leading to a higher payoff from educating men • higher out-of-pocket costs for educating women

20. Problem with this analysis? • It turns out that these explanations of lwoer investment in female children do not apply clearly to developed countries. • Here men and women have comparable levels of formal education • Women have higher rates of B.S. • Women less likely to drop out

21. Type of HK • Gender differences that favor men reappear: • Men more likely to go on to receive professinal degrees • Across developed countries, about 40% of bachelor’s degree holders are women • 1/3 of grad degree holders are women • At each level of post-secondary ed, men are more likely to receive degrees in higher-paying fields.

22. HK accumulated during employment? • Training rates are quite comparable across women and men • Type and quantity of training \received may be different. • Women more likely to attend vocational and technical institutes, and attend seminars outside of work • Men more likely to participate in apprenticeships and company training

23. More on Experience and OJT • Women have lower mean years of time at their current employer • Lower mean years of total work experience • Much higher rates of intermittent labor force attachment

24. Impact of Gender Differences in HK on the Gap • Evidence is fairly conclusive that women do not have as much HK as do men, at least of a form that returns a high monetary payoff in the formal work sector • What portion of the gender gap is accounted for by these differences?

25. HK affects wages and LFPR • It is logically possible that women might have lower average HK, in particular lower market-relevant HK, yet ear at an equal or even higher level than men. • Why? What if only women with high levels of HK work while men of all ranges of HK work?

26. Let’s Compare the Gap around the world • Gender wage ratios are remarkably similar between developed and developing countries • Even in countries where overall FLFP is low, the wage ratio is comparable to countries in which it is high. • See Table 9.3

27. How much of the gap is attributable to HK? • For US data, studies designed to measure the net effect of these differences on the wage gap generally report that some 30 to 50 percent of the gender wage gap is due to differences in HK.

28. Blau/Kahn Results • One caveat: • Blau and Kahn show that the overall level of wage inequality in a country matters. • The US gap would be more like Sweden or Australia if they had a lower level of pay inequality. • Why? Women tend to occupy lower-paid jobs than men.

29. Conclusion • Men and women differ in the amount and types of HK • These differences have a measurable effect on the gender wage gap

30. The Neoclassical explanation • Preferences for types of return differ systematically by gender • Women prefer types of HK that generate non-monetary returns • Women anticipate spending less time in the labor market

31. Critiques of Neoclassical Interpretation • What if labor markets are not perfectly competitive? • Here discrimination against women may occur. • But women might anticipate this and take actions to mitigate its effects on them personally. • Here they may invest less in HK

32. More critiques • Discrimination in access to human capital: firms might not make firm specific investments in women • This is especially true in developing countries

33. Another critique • HK theory focuses too narrowly on labor market activity and ignores interactions with marriage markets and choices made prior to entry into the prime labor market years • Women’s choice to spend less time in the labor force is not freely made. • Social norms and customs govern choice. • Ability and/or desire to acquire various forms of HK may be shaped by norms and customs which ascribe different activities to women and men.

34. More critiques • In its focus on the individual’s decision, it ignores the effects of other agents’ actions on that decision. • To the extent that women are crowded into a narrow range of occupations

35. Even More • All of the phenomena are also compatible with alternative models of wage determination. • Education may serve as a screening device to determine who is more or less able rather than as a way to increase ability or as a method of acculturating workers to the capitalist production mode and segmenting them so as to inhibit formation of worker coalitions. • Rising wages could be a function of linking wages to seniority rather than increased productivity

36. Do people really make these forward-looking calculations? • One study found that young women systematically underestimate the number of work years and therefore under invest in human capital • Degree of uncertainty introduced by changes in marriage market workings • Uncertainty regarding future payoffs might lead to differential behavior by gender if women and men differ systematically in risk-aversion and/or appraisal