The Damage of the Gender Pay Gap

The Damage of the Gender Pay Gap

It didn’t become obvious all at once. Kai and Leah always assumed they’d have careers as Merriam-Webster describes it: “a field for or pursuit of consecutive progressive achievement especially in public, professional, or business life.” After all, they both had a college education and had been gainfully employed for several years prior to marriage. And they barely missed a beat after the addition of young children to the household. The threat to career, it seemed, was overblown. A succession of nannies was hired to outsource the task of tending to the helpless new additions while mom and dad did things that were more productive, or at least more valued by a marketplace.

But the job of parent (a role that certainly doesn’t rise to the lofty title of career) changed as the children got older. They needed help with homework. They needed advice about navigating friendships. They always needed a ride somewhere. Yes, these things could be outsourced too, but not without consequences. Many parents make decisions, slowly and suddenly, consciously and not, to balance their work and family lives through the sacrifice of career. For one or both parents, consecutive progressive achievement is replaced with staying relevant or barely hanging on while launching their children into the world.

More often, it is the mother that sacrifices career. Most of the 21% gender pay gap — as measured by Blau and Khan — can be explained away by differences in occupational choice. These choices, or preferences, are taken by some to imply that differences in pay for men and women can hardly be called unfair or unjust. Grove and his colleagues argue further that the unexplained gap in pay is only about 4% when accounting for work-life preferences and attitudes toward risk taking and negotiating.

Does the fact that mothers sacrifice career more than fathers absolve corporations of the responsibility to provide equal pay? No. In this instance, fairness is saved by its frequent foe, efficiency. Kai made a very high salary early in his career, but like many men he married a woman equally talented and even more successful. In a world without rigid gender norms, the rational decision would have been for Kai to make greater sacrifices of career for his children than Leah. Instead, it was Leah who turned down opportunities for further advancement at her company so she could be more available at home.

The predicament of Kai and Leah is hardly uncommon. The Center for American Progress estimates that women account for more than half of the income in 41% of households. Since 2009, more women than men have earned doctoral degrees in the U.S., roughly a generation after they overtook men for the number of master’s and bachelor’s degrees awarded annually. In an economy powered by jobs where education trumps brawn, the persistence of a gender pay gap screams inefficiency. 

Determining the amount of economic inefficiency caused by gender norms is difficult, but for corporations we can estimate the cumulative disutility caused by the effective transfer of income from households where a woman provides a majority of the earnings to households where the situation is reversed.  

I recommend that corporations examine the differences between their pay distributions by gender for employee groups with similar education and experience following the approach of Bayer and Charles in their evaluations of pay differences by race. At each percentile, the average compensation by gender and deviation from the average across genders should be calculated. If equality of opportunity were realized, the sum of deviations for each gender should be close to zero when the entire distribution is considered, especially when the employee population is large. However, if systematic gender differences are present, we might expect even small differences at each percentile to cumulate to sizable disparities.

The next task is to value the impact of these differences on household utility. A $5,000 difference of income between genders at the 25th percentile of their respective distributions is likely to be far more meaningful than the same dollar difference at the 99th percentile where annual compensation may be measured in millions.

To determine the net loss or gain of utility for each gender, we average the gains and losses of utility at each percentile. The sum of the averages for both genders yields the average utility loss per employee (given the convexity of utility, there will always be a net loss). The next task is to redollarize this utility figure. To create comparability with corporate financials, this can be accomplished by determining the dollar value loss by shareholders that would result in the same level of utility sacrificed. We can arrive at a cumulative figure by multiplying this dollar value by the total number of employees. 

The work of Fortin, Bell, and Böhm suggests gender disparities will be particularly large at the upper end of the pay distribution, driven in part by the runaway growth of senior executive compensation. Although a utility-based approach will soften the gender gap where pay disparities are concentrated in the C-suite, the dollarized damage is still likely to be material at many public companies.

One potential pushback is that measuring the gender gap in this way may overstate the damage if high-earning men and low-earning women form households and vice versa — in this way the consequences of preferences and discrimination would “average out” across households. 

In reality, most households are like Kai and Leah’s. According to the Institute for Family Studies, educational attainment is the same for men and women in roughly four out of five U.S. households. Although Kai may benefit from gender discrimination and social norms, his household still suffers because his more successful spouse made sacrifices for family and the broader economy suffers because Leah’s potential is not realized.

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