On Women’s Discrimination in the Labor Market

By Filippo Massari for the Austrian Economics Center.

The wage gap between men and women is a topic that periodically finds its way in public debates. Even though it is often the case that the issue is treated in an ideological and simplistic manner, economists, sociologists and other social scientists have devoted much attention to it over the years. For this reason the academic literature is large and many different valid explanations have aroused.

A widely held explanation of gender wage gap deems the labor market imperfect and blames employers for discriminating women. This is directly visible, for example, right at the beginning of the section dedicated to gender equality in the European Commission website, where the following is stated: “The gender pay gap reflects ongoing discrimination and inequalities in the labour market which, in practice, mainly affect women”. Despite the relevance most commentators associate with it, this argument seems one of the least robust among the ones put forward.

As a first thing, it should be mentioned that direct discrimination in the labor market is not supported by economic theory nor by logic. Wages differ as a consequence of different productivity levels, a phenomenon that is suitably captured by the productivity theory of wages. According to this enduring theory, people earn what they produce, namely their wage equals to that part of the final product’s value attributed to their work. That some workers are paid less than others when their productivity levels are the same would occur as a surprise to the many advocates of the productivity theory, who argue that, in similar situations, companies would look for female employees since they provide the same service as their male counterparts but are paid less. Doing this, the market would adjust in such a way that wages converge to the same level on the grounds that the increased demand for women pushes their wages upwards while the decreased demand for men has the exact opposite effect. In the end, equally productive workers will earn the same amount of money.

It is true that if most employers discriminate women, the result would be a wage gap between equally productive workers; nevertheless this assumption does not seem realistic: the difference between men’s wages and women’s wages is profit for the company. This creates an opportunity that employers could easily grasp by deciding to hire only women. Some of them would probably set aside their ideological views on the role of women to earn some additional profit, while others would not even have a choice as not everyone is lucky enough to enjoy profits when paying their employees more than necessary. Nowadays competition is fierce and companies struggle to survive. Under these conditions, those who pay their employees more than their direct competitors – or potential direct competitors – are very likely to go out of business quickly – if that premium is not counterbalanced by something that creates economic value. In addition, most people agree that markets are profit-driven and any action undertaken by a business aims at obtaining the highest possible profit level, even when it does not seem the case. It is not clear why discrimination of women should be an exception to this established consuetude.

When it comes to analyzing data, discrimination tends to be an explanation when the researcher is not able to come up with anything better. It is worth noting that failure to provide a better explanation for the wage gap than direct discrimination in the labor market does not necessarily mean that women are actually discriminated, nor does it rule out such a possibility. As a matter of fact, discrimination is not measurable. It is, thus, uncertain whether the wage gap, when controlling for known factors of productivity, is due to discrimination or to other unknown factors that do not enter the model estimated.

Those who blame employers of discrimination may have a point when women are paid less because of prejudice. When hiring an employee, employers may be driven to evaluate men and women in a different way if they see in women certain characteristics that are generally believed to be associated with lower productivity. Prejudice, however, is most of the times ineludible and this is part of a wider problem, strictly speaking the impossibility to estimate with extreme accuracy the productivity of employees. In fact employers have to rely on several other factors that they consider related to productivity, but may not be. It is possible that these substitutes for productivity tend to favor men over women, but this is just a consequence of a problem that can be addressed only by developing better techniques to evaluate performance and expected performance of workers. No law can effectively tackle this issue without giving rise to other ones and the market is once again the best problem-solver. Companies have to compete in the labor market and evaluating workers’ productivity as precisely as possible is in their best interest. Needless to say that those who best evaluate productivity of workers face an advantage over competitors that allows them to be more cost efficient.

As neither theory, nor logic nor unequivocal empirical findings support the argument of direct discrimination in the labor market and as the gender wage gap can be explained by other factors, those who urge governments to take actions should first verify whether the problem exists and then estimate the side effects of such an action. Only at that point a call for intervention is reasonable.