Monday, June 23, 2008

The Wage Gap

There is a common misconception in the media, politics and the general public. It is the concept of wage discrimination towards women. Unscrupulous politicians, like Obama, pay lip service to fixing "the problem" in order to garner more votes. It's a frequent sound-bite that captures attention because it uses the word "discrimination" and it sounds "unfair."

Yes, it is true that women on average earn approximately 77 percent of what men earn. The key phrase here is "on average." This means that when you take all the men's salaries and and take all the women's salaries and throw them into separate pots and divide by the total number in each pot, the average salary is the result. This is not the same as picking only a specific job function, like teachers, and comparing the averages. This is also not the same as knowing the difference in salary between your aunt Sally and cousin Frank.

As my above explanation demonstrates, much of what determines what one makes is what they do for a living. (Wow! What an insight, eh?). The point is that women on average choose lower paying careers, such as teachers and receptionists whereas men choose higher paying careers such as scientists and engineers. This by itself makes an important point: If there are more men than women in higher paying careers and fewer men than women in lower paying careers, then clearly, men are going to have a higher average salary. Holding other factors constant, the only way you will get the wages to equalize is if you have an equal number of men and women in every career.

But there are other reasons why women earn less than men. But I thought you said.... Yes, the key phrase was "holding other factors constant." Aren't you paying attention?

Some other factors are personal preferences and experience. Men are more willing than women to work long hours, undertake frequent business travel, work in dangerous (hazard pay) or labor intensive (construction) industries, and stay with a particular company for longer periods of time.

Also, on average, men have more work experience. This is narrowing though because women are holding off on starting a family until later in life or are skipping it altogether. And when they do start a family, they are more likely these days to re-enter the workforce and have shorter durations of maternity leave.

But there are potentially lots of unobserved factors that influence wages that cannot be measured. Perhaps men are better salary negotiators, for example. How do you measure that?

There are tons of reports that come out every year by feminist groups, such as the American Association of University Women, that highlight the news catchers (i.e. women earn less!), barely brush over the facts and reasons and then attribute any unknown to whatever point they are trying to make (i.e discrimination). Whenever you run any economic model, you're not going to be able to account for everything. So just lumping any residual effect together and labeling it as "discrimination" is misleading.

Still not convinced? You have to ask yourself one thing: If a company could pay women less for the same quality of work, why would it ever hire a man? To maximize profits, it would make sense to only hire women!

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