The Mythical Gender Pay Gap
An economist looks at the data and concludes that the war for equal pay has already been won
Equal pay for equal work” is the latest rallying cry of progressive politicians — alluding to an alleged disparity between men and women’s incomes due to discrimination.
Kamala Harris has made a plan for “Holding Corporations Accountable for Pay Inequality in America” a central plank of her presidential campaign; her latest populist ploy involves calling for equal pay for the women’s soccer players.
If it’s true that women only earn $0.79 for every dollar a man makes for the same work, then these politicians shouldn’t be trumpeting this information. Instead, they should seize what is a clear market signal that profits are available to the entrepreneur who hires equally-qualified women to replace their over-paid male employees. According to Harris’ logic, perhaps the U.S. men’s soccer team would fare better if they poached some of the talent from the all-star women.
Over 60 years ago, University of Chicago economist Gary Becker laid out the economic logic of discrimination and noted how the market punishes arbitrary discrimination through competition. Robert Murphy summarizes it as follows:
“In a free market, the owner has the legal right to hire whomever he wants. After all, it’s his restaurant, and the wages he pays are (initially) his property. But if he allows nepotism to influence his hiring decision, he suffers an implicit fine of $1.50 per hour. He makes less money if he makes employment decisions based on factors, such as family relationships, that have nothing to do with the job.”
The same principles applies to gender-based and racial discrimination. Therefore, in trying to understand the reasons for the gender pay gap, we have to look elsewhere.
Veronique de Rugy, an economist and scholar with the Mercatus Institute has concluded from the data that most of the gap disappears when you account for the kinds of jobs men and women work, their education and skill levels, and the number of hours worked. Single women with no children, for example, earn more than men. Whatever discrepancy may have existed due to discrimination has already been eliminated. The “Battle of Sexes” is over, and women won.
She joins me this Sunday to discuss the true source of the infamous 79 cents statistic.
The working mother gap
Even Vox.com admits that the gender pay gap is really a “working mother” pay gap. Veronique is featured on their Netflix original series, “Explained” in the episode dealing with the gender pay gap. She says that the $0.79 number tells you almost nothing, and disputes the characterization of the gap as a “penalty” for women who chose to have children rather than working the hours men tend to work.
Since the divergence results from people’s free choices, she says, we should not look to address it with legislation, as European countries have done.
Iceland, for example, implemented mandatory maternity/paternity leave to remove the stigma from women taking time off work after having children. This helped reduce the pay gap a bit, but at a high cost to taxpayers. Furthermore, anti-discrimination legislation often has unintended consequences, such as discouraging employers from hiring people around the age when they are likely to have children.
Paid family leave and similar measures sounds good on paper and appeals to voters’ emotions, but actually punish the very people they are trying to help.
My take: Kamala Harris’s proposal may just beat out Elizabeth Warren’s “Accountable Capitalism Act” to be the main exhibit in the Hall of Fame of bad policy ideas.
Not to be outdone, Elizabeth Warren has suggested that women deserve equal pay (or better!) for work in sports. Here, Warren betrays her true instincts as a control-freak. Levelling pay in sports would require a complete overhaul of the laws of supply and demand, and a nullification of the consumer’s preference to watch men’s sports.
“The levelling process is the victory of abstraction over the individual. ”
― Søren Kierkegaard, The Present Age
De Rugy speculates that these ideas are not serious policy proposals, but rather outrage offerings to an angry public.
Equip yourself with the facts and data to debunk the myths surrounding this confounding issue.
The Gender Pay Gap is a Myth
Bob Zadek: Welcome to The Bob Zadek Show. It has been illegal in our country to pay women less than men for the same work. We detected what may have been a problem, so as a country we passed a law.
Case closed, right? Wrong.
Case is not closed. During this election cycle and in the immediate past, our country has been on a bit of a scavenger hunt to find suitable recipients from whom to transfer the wealth from in areas of American economic life.
The question is “To whom we can garner votes by transferring money to them?”
Well, maybe renters are in need of wealth transfer from landlords. That was the subject of a show a couple of weeks ago. What about reparations for slavery 300 or 200 years ago? Let’s transfer wealth to people who may have been descendants of slaves from people who may have been descendants of slave owners.
Okay. How about women? That is a big voting class. Let us buy a bunch of votes by passing a statute that will transfer wealth from other male workers and some of the women workers to women.
So, we have to first detect a reason for the wealth transfer and then we can affect legislation to transfer that wealth. The reason in the instance of transferring wealth to women is the gender pay gap. It is assumed by some in this country that women are wrongfully paid less for the same work. Employers are ignoring the pressures of the marketplace, and are doing what is not doing what is best for their company. Instead, they are satisfying some internal need to harm women.
In this morning’s show I’d like to examine whether there is a gender pay gap, to begin with, or whether that is manufactured as the political cover to transfer wealth from one group to another. And, if there is a gender pay gap, what causes that gender pay gap? And if there is a gender pay gap and we have discovered the cause, what is the best way to fix it, assuming there is a way to fix it.
In solving a problem such as this, I thought it would be sensible to have an expert on the area of the gender pay gap and on economics in general. With that introduction, I’m happy to welcome to the show Veronique de Rugy. Veronique is a senior research fellow at the Mercatus Center at George Mason University, my favorite economic think tank in the country. She writes a weekly opinion column for Creators Syndicate. She writes regularly for my favorite magazine, Reason Magazine, and she blogs about economics at National Review Online, another must read. She was a resident fellow at the American Enterprise Institute. She was a policy analyst at Cato and a research fellow at the Atlas Economic Research Foundation. My goodness, what incredible creds. I welcome Veronique to the show.
Veronique de Rugy: Good morning to you. Thank you for having me.
Bob Zadek: It’s my pleasure and the audiences pleasure to be sure. Veronique, is there a gender pay gap? Now let’s just define terms so we don’t get off into the weeds. A gender pay gap, as I use the phrase, is a decision by an employer to make the irrational decision to pay a woman less than a male for doing the exact same work. Is there a gender pay gap in this country today as Kamala Harris and Elizabeth Warren and others seem to indicate?
Veronique de Rugy: You hit the nail on the head when you said, let’s define the terms. Because if you define it like this, the answer is no. But the reason why there is so much outrage is because actually people go around without really defining it. They don’t really look at equal work. They are not comparing the pay of women and men doing equal work at an equal level of education and so on and so forth. And the reason why there is this outrage is that effectively what people are doing is they’re taking everyone who works 35 hours or more a week for the year and they find the median for women. So basically the point where 50% of women are above, and 50% of women are underneath this.
They do the same for men and they compare those two things. If you compare this you get a number which is quite big. Something like 23 cents or 24, depending on the year. But if you compare it correctly, by looking at similar education, number of hours, the same job, etc. you find that actually the gap is much smaller. It remains a gap but it is much smaller. And the question then becomes why is there still a gap?
“But if you compare it correctly, by looking at similar education, number of hours, the same job, etc. you find that actually the gap is much smaller. It remains a gap but it is much smaller.”
Bob Zadek: So statistically, if you compare the exact same jobs, if you do the hard work and have the statistically defensible analysis, there is a slight pay gap. But if you do the careless calculation without looking at other factors, then the gap is much larger. There is an impossibility of making apples and apples. So that accounts for the dishonesty of the headline grabbing calculation, whereas if you make the right calculation, there is still a wage disparity, although much smaller.
Now, Veronique, before we get into the wage disparity, let’s discuss for a minute the low hanging fruit. We have employers in this country who let us assume for the most part are interested in obeying the law and in making as much return for their owners as they can, in order to have their business prosper and grow. It would be such bad business for an employer to offer a prospective employee a woman less than she is worth, because that woman will decline the job and somebody else will hire that woman because it is good business.
The Narrative of Mean-Spirited Employers is False
Bob Zadek: So, once you assume a gender pay gap as Kamala Harris, Elizabeth Warren, and Bernie Sanders do, you have to assume that employers have no idea what they’re doing and have no concept about how to make a profit. Isn’t that the inevitable conclusion once you assume a wage a gender gap?
Veronique de Rugy: That’s one of the assumptions. I think another one is that businesses are out there to mistreat their employees. You get this idea all the time, whether you talk about the pay gap or whether you talk about overtime pay. There’s always this assumption that employers could be paying much more for their employees for overtime, but they don’t do it even though they’re sitting on this big pile of cash. So, these are two main assumptions.
Business owners are up to no good and it is not in their interest to treat their employees well ever. And there is no competition somehow, and people have no options. Now, the truth of the matter is there are times where it is more true than not. When the economy is not growing.
When you are in a recession, and when there’s much less competition for employees. In this case the truth is that the bargaining power is in the hands of employers. However, it doesn’t mean that they want to actually mistreat their employees. It just means that they don’t have a good reason to stretch themselves, to keep employees, and to attract employees, because they themselves have less of a need for an employee.
I think another point that’s important to explain here is the fact that there are a lot of government interventions that in fact lead businesses to see women and to think, you know what, this woman, for a variety of reasons, for instance, because I have to pay for paid leave, it makes women more expensive. This actually leads to fewer employment for women. But this is a response to a government intervention. It is not in the nature of business to discriminate against women randomly.
Bob Zadek: Let’s just explore that a little bit further because that is actually a government created wage discrimination between women and men.
There are many state and federal statutes that tell employers that we know better about how to run your HR, than you do. We know it is in your best interest and in the best interest of all of your employees to have mandated maternity leave and mandated leave to take care of six relatives and the like. All of these mandated benefits are imposed upon a business. When you do that most of the consumers of that fringe benefit are women, which means that the cost of hiring a woman is simply greater than the cost of hiring a man.
While the employer is out of pocket the same amount, the employer is forced to pay the woman, not in wages, but in benefits that may be that particular woman doesn’t or the employer doesn’t have the money to pay. So, when you include the other costs, women are perhaps paid the same amount, except they don’t get paid with money, but rather they get paid with these forced benefits that they might not even want. You observe this quite a bit with your studies.
Veronique de Rugy: There is a big debate going on right now about a federal paid leave because we are the only industrialized country that doesn’t have one. It’s bizarre to me when you have Republicans arguing that you should emulate policies from countries like France and Spain and Italy, countries that haven’t been growing in years. Their whole argument is that this is a policy that allows women to take paid time-off, so they can take up to 12 weeks. But not necessarily with pay. No one denies the benefit paid leave. The question is whether the federal government should actually mandate it. It is pretty interesting to notice that roughly 65% of women in this country report getting paid leave already.
What is important about this is that when you look at the economic studies that have been done in countries and in states where there is paid-leave laws on their books, what you find is actually quite astonishing. You find that women in countries that have mandated paid leave from the federal government make less money. As you say, their overall compensation may not change, but their base compensation may change.
They make less money, they get fewer hours, they’re discriminated against in terms of getting jobs over a man. They are promoted less. The gap between women in leadership positions between the US and the rest of the industrial countries is actually gigantic. This is linked to paid leave, which ends up leading to worse outcomes for women. When we say the road to hell is paved with good intentions, is really true when it comes to these gender policies.
The reason why we got on this is that there is a moment where businesses end up discriminating against women, but usually it is either because they are bad business people, but there are very few of those and they paid the price of it, especially during booming times like right now. But most of the time it is because the government is putting something into law that makes it unappealing to hire women.
Bob Zadek: It is unappealing because the government imposes a cost upon the hiring of women.
Veronique de Rugy: Yeah, it makes the cost of hiring women more expensive than hiring men.
Government Intervention Makes Discrimination Worse
Bob Zadek: That is a crucial point because if you focus not on what the woman received in cash, but how much the employer pays overall for that woman employee, then the employer pays more for having a woman. So, in effect, a woman being employed will cost an employer more, not less, than having a male be employed. The problem is that the woman doesn’t get to pick how those costs are paid. A woman is not given the choice. The government has mandated that a woman accept as a non-economic benefit some form of compensation. And that’s what skews the numbers. Women are getting the same compensation. They don’t get it in cash.
Veronique de Rugy: One of the problems is that the government has put so many regulations on the labor market that it is actually not possible to engage in individual bargaining with your employers. Now, your employer may not want to be doing this with every single one of its employees, and it may be easier to have the same one-size-fits-all policy for everyone, but that said, when you think about the paid leave policy, one of the solutions rather than a federal mandate, you could allow employees to accumulate overtime without paying them so they can use it for whatever they need, like for sick days or for when they have a child.
But right now it is just not possible. In Washington, there are people advocating that we basically change the law to actually give more flexibility to employers and employees to actually negotiate. When you have a fixed paid leave policy, or a fixed healthcare policy, these are all fringe benefits that are added on top of our base compensation. In the end people complain that wages are not growing, but actually total compensation is growing, you are just getting less and less cash.
Over time, those fringe benefits used to make like 5% of total compensation and now it’s really close to a third. There’s no free lunch. You can’t have both. Contrary to what a lot of politicians believe, companies are not all the same. They’re not all sitting on big piles of cash, where if they wanted they could give more to their employees. These are trade-offs. Politicians tend to not understand that there are these trade offs they happen. What people see is how much money they get. They don’t actually realize the full cost of them being employed.
“Politicians tend to not understand that there are these trade offs they happen.”
Bob Zadek: Our government abhors choice and freedom. In our consumer lives, we are given enormous choices. We get to pick and design and customize everything we want. We have the most choice-filled life as consumers, but as citizens there is an erosion of choice. Veronique points out that very erosion. When the government creates a mandated fringe benefit for employment, the government is saying, “Okay employer, you must compensate all employees by giving them this,” which means the employer doesn’t give the employee the wages so the employee can decide how they want to spend it. So, all of these policies like paid leave policies, are simply forbidding the employee from getting the money and doing what they wish.
We require you forego some income and take paid leave whether you like it or not because we decided that’s best for you. It’s the government’s way of legislating away choice and legislating away freedom for the employee. It’s not the government giving you a benefit. It’s removing a choice.
You have written and spoken about the fact that there is in fact, a somewhat statistically insignificant, but real gender pay gap. In fact women are paid less than men. The reason may be due to biology.
“The Mommy Tax” is the Real Reason for the Pay Gap
Veronique de Rugy: For a very long time, people have pointed out that the number used by everyone from Bernie Sanders and Elizabeth Warren to Kamala Harris to President Obama and President Clinton, before him. They are using an invalid number. So it has been interesting to see what liberal economists have said who actually invested in the field and started to look very closely at this issue. An economist at Harvard, Claudia Goldman, a very respected labor economist, for example, has been saying that we can’t use these numbers.
She then asks, “What explains this main gap?” She did not find that it was discrimination against women. She explains that it is due to something she calls “temporal purposes.” Women don’t want to work full time jobs or they want to work full time job, but they want to have more flexibility. They want to have more time to spend with their children. They want to have the ability to get out of the meeting if the school calls and says, can you please come, your child just vomited.
Women are caregivers much more often than men and they express this in their preferences in the jobs that they will do. This is very visible in law firms where when you look at the career choices of women with the same degree in the same law firm, where they may decide not to take the partnership route, which basically means you have to be available 100% of the time for your client, and instead they will take the route of being high-ranked lawyers without the time constraints. This demand for flexibility explains the majority of the pay gap.
Bob Zadek: So in fact, there is a real cost to accommodate the particular needs or requirements of certain women. You used an important word, you said women who choose “choose,” so that it is a voluntary choice. Women choose the needs of their family if there is a conflict. In doing so that imposes a cost on the employer collectively and the employer simply says, “no problem. We will respect your choice. We will allow you to do that. However that is how we are in effect compensating you.” The woman who makes that choice is simply being compensated by being given the choice that a value to the woman. To measure her pay simply as net pay after taxes on her paycheck is an improper measure.
You have to measure total compensation, including the non-cash piece, which is freedom.
If you want the freedom it comes with a cost. So, while women are paid less in cash, the employer is foregoing value of the same or greater amount. It’s just that the woman is being compensated with a non-cash benefit. So it is not mean-spirited discrimination.
That would be, since 1963, against the law. Kamala Harris and others are crying for somebody else to pay for that choice, and they are either wanting all employees or us taxpayers to pick up the tab on that choice. Isn’t that what’s happening? Isn’t this a fight over who pays for that voluntary decision the woman makes to opt for certain personal benefits rather over salary? Isn’t it about spreading the cost of that choice to somebody other than the woman?
“Kamala Harris and others are crying for somebody else to pay for that choice, and they are either wanting all employees or us taxpayers to pick up the tab on that choice.”
Veronique de Rugy: That’s true. I think they are coming from a complete lack of understanding. There is no discrimination, it is just that temporal flexibility is real. When you talk to women, they tell you that they would rather give up some pay to be able to work less and have more flexible hours. I mean this, this is not a secret.
The word “choice” is important. What Kamala Harris and others want is for women to be able to have the flexibility in their jobs and still be compensated more.
There is no trade off. There’s a free lunch. You work less, but you’re still paid exactly as much as the man who works longer hours and is always available on the phone. But the thing that’s interesting about where the debate is going exactly this notion of choice and an outrage over what is called a “mommy tax.” It is really unfair because effectively women don’t have a choice, because nature has made them the caregivers. It’s not a choice, it is reality. It dictates that women must have more flexible hours.
Women have to be the one having the children. Isn’t it unfair that as a result they have to work less. That is kind of an alarming development in my opinion, because I don’t know where you go from there. It’s all about what you and I see as a choice, which they do not see as a choice. They do not think they have a choice.
Claudia Godwin says there are a lot of these high paying jobs that are organized culturally, in such a way that for example you are a client at a law firm, and you put your faith in a few lawyers. You put your life and your business in for whatever you hire them for. The requirement that there is no substitute for the client away from these lawyers is one of the things that create these barriers. The fact that you can’t switch from one lawyer to another is one of the reasons why women could not those high ranking senior partners.
Godwin claims that if there was a cultural shift where there was more acceptance of employees being perfect substitutes of one another, you would see less of this need for temporal flexibility. She has done a lot of studies on pharmacy where it is actually a perfect example of people with the same degree. There is a perfect substitution from one employee to another. There is no pay gap in these professions.
The Free Market Punishes Arbitrary Employer Discrimination
Bob Zadek: I’d like to just remind our audience that to assume that a business would behave irrationally and still be able to survive in a somewhat free market, which we have in this country, is just totally incomprehensible. There is no history of any business adopting irrational business model, whether it’s going back to the Jim Crow south and not hiring or selling to blacks., or whatever. There’s no instance where that business model could possibly survive.
Veronique de Rugy: Unless it’s enforced by the government.
Bob Zadek: This is a perfect reminder that when we had segregated lunch counters in the South or would not lease hotel rooms to blacks, that was not done as a business model. That was the law in the South. There is no suggestion that if there were not Jim Crow laws, that even in the South the businesses could survive so easily.
To assume that a mean-spirited employer as a matter of employer policy could survive by paying any employee less than what they are worth is just irrational. And it is contrary to every understanding of the free market.
“This is a perfect reminder that when we had segregated lunch counters in the South or would not lease hotel rooms to blacks, that was not done as a business model. That was the law in the South. There is no suggestion that if there were not Jim Crow laws, that even in the South the businesses could survive so easily.”
You will always find people who misbehave, right? What you want to see is a system where the incentives are actually in treating people the best, and the free market does this. It doesn’t mean that every single actor is going to be a perfect pleasant and civil and loving person, but it is in their economic interest to do so. By the way, the interesting thing is to see what is happening to wages and to all these fringe benefits for women when the economy is growing. Target just announced that it was going to extend paid lead to part-time employees, right? And why is this?
Veronique de Rugy: Target needs employees and the economy is growing and there’s a competition between companies to attract the best employees. You can do this by giving more cash or more fringe benefits. It’s not necessarily that target employers think that the best thing they can do is just give tons of cash and tons of benefits for their employees all the time at the expense of their bottom line. They see this as a means for survival and good business practice. So the free market aligns incentives with these good behaviors.
The market is a process, right? And what comes out at the end is not necessarily your dream Unicorn world. A lot of people call market failure the fact that the market outcome is not the one they dreamed up. When you look at a market or outcome, you should know that considering all the constraints — and that includes a lot of government intervention — this is the best outcome we could get. If you’re displeased with it, you need to understand why a ton of women report having paid leave, so what are the constraints and regulations that get in the way of employers giving more of these benefits and income to women. Suddenly it makes sense that is not the case that the employers are evil.
Bob Zadek: They are simply motivated by their own self-interest. As Adam Smith pointed out, it is not out of their generosity that butchers and bakers provide you with exactly what you want at the price you want to pay. They stay up all night figuring out how to give you what you want because it is in their self-interest, and their self-interest is to please the consumers and to please the public.
Kamala Harris’s Bill Will Discourage Hiring of Women
Bob Zadek: Now Veronique, I’m sure you’ve given some thought, perhaps with a bit of a smile if not a smirk on your face. Kamala Harris sees the headlines for about a day and a half with her proposed bill which she entitled “holding corporations accountable for pay inequality in America.” I’m sure you have glanced at her proposal. We have a couple of seconds left. It is laughably ignorant economically. I wonder if he would just comment because this bill is important and shows the mindset we are up against.
Veronique de Rugy: It is exactly what we have been talking about. It is the complete ignorance of the facts of economics and it panders to the ignorance of people who believe government is the solution to whatever problem we can dream up. Not only is this proposal quite terrible because it ignores the problem as if it just doesn’t exist. But actually the way she proposes to address it is devastating. She would actually force companies to report quarterly all of their pay, and if they cannot justify to a bureaucrat in Washington why there is a discrepancy in gender pay, they will be subject to significant fines. Imagine the compliance costs for employers above a hundred employees to be doing this. It means that at all times you are under scrutiny.
As a business what are you going to do? One way to comply with this stupid law is for employers to stop hiring women. That’s one way of doing it. I don’t think companies will go as far as doing this because actually women have become a really indispensable part of their labor force. But it will definitely make it less appealing to hire women when you’re under scrutiny for every move that you make.
Bob Zadek: We started this show by discussing the law in 1963 that made it illegal under federal law to pay a woman less than a man for the same work. So, the problem was solved 55 years ago and we are still talking about a solved problem. It makes no sense whatsoever. It is simply a way to impose a cost borne by each and every one of our listeners to impose a compliance cost, and as Veronique said, is pandering to the women’s vote. I describe it as creating a need in the total absence of a need and then filling it. That’s what the Kamala Harris and Elizabeth Warren proposal about women in boardrooms is all about.
Veronique, it is a good summary that there is a statistically insignificant wage gap, not enough of a gap to generate any headlines, and this is because of the fact of life that women So, the summary that there is an in statistically insignificant wage gap, not enough to garner any headlines, whatever. And that is because of the fact of life that women cost a tiny bit more for an employer to hire and that tiny bit more is reflected in the tiny bit less that women are paid. So, in fact, the cost to the employer is the same. It is a matter of choice.
- Women’s Workplace Issues | C-SPAN.org
- The Economics of Discrimination — Econlib by Robert Murphy
- Are Politicians Purveyors of Outrage? By Veronique de Rugy (The New American, May 31, 2019
- Gary Becker’s Economics of Discrimination (1957)