Mind the Gap

The Economic Case for Equal Pay

Each year in early April, women in the United States mark Equal Pay Day, the date on which their earnings finally reach the amount American men took home the previous year. Women who hold year-round, full-time jobs earn, on average, 20 percent less than their male counterparts, the equivalent of 80.5 cents on the dollar. The gender wage gap is widest for African American and Hispanic women, who make just 61 and 53 percent, respectively, of what white non-Hispanic men earn. And although the gap is decreasing overall, progress is slow. At the current rate, American women will not reach pay equity with men until 2106.
The United States is not alone: the wage gap between the sexes is a global phenomenon. Indeed, in not a single country do women earn as much as men. According to the World Economic Forum, women around the world are paid on average just 63 percent of what men earn.
The gender wage gap doesn’t short change only women. A McKinsey Global Institute study estimates that closing gaps between men and women in the work force, including the wage gap, could boost the global annual GDP by up to $28 trillion in 2025—gains that would benefit developed and developing countries alike. The United States, for example, could grow its GDP by $4.3 trillion, China by $4.2 trillion, and India by $2.9 trillion if women were to work the same hours as men, participate in the labor force at the same rate as men, and be employed at the same levels as men across sectors. Companies stand to benefit as well: greater female representation in highly compensated corporate leadership positions can improve firm performance. In order to eliminate the gap, however, one must first understand its cause.
Given evidence that closing gender inequalities in the workplace could boost growth, what explains the wage gap’s persistence? Outright discrimination—paying a woman less than a man for equal work solely on the basis of her gender—certainly remains a factor, notwithstanding that 40 percent of nations have prohibited this practice. Yet that explains only part of the disparity. Upon closer examination of the data, it’s clear that structural barriers also contribute.
Women remain disproportionately concentrated in low-wage industries and occupations. Indeed, occupational segregation fuels the wage gap in nations across the globe. The higher the percentage of female workers in a given occupation or field, the lower the average earnings—a relationship that exists regardless of the skill level required. In the United States, for example, women are overrepresented in lower-wage education, health care, and retail occupations, while men are disproportionately represented in the higher-paying construction, maintenance, and transportation industries.
Not only do women remain in lower-paying fields, they still spend a disproportionate amount of time on unpaid labor, or so-called invisible work, in their personal lives, which exacerbates the pay gap. Women in countries that are part of with the Organization for Economic Cooperation and Development (OECD) spend almost twice as much time on unpaid work as men on average. In the United States, women spend 28 hours on uncompensated labor per week, as compared with only 17 hours for men. Consequently, women also comprise 64 percent of part-time workers: employees who are busy cooking dinner, cleaning the house, and caring for children have less time available for income-generating work.
The gender pay gap widens as employees move up the corporate ladder. This is particularly true for women of color, who face significant obstacles in climbing corporate ranks and have fewer opportunities for advancement to leadership positions. Globally, only 34 percent of managers are women, and in the United Kingdom, male managers are 40 percent more likely than their female counterparts to be promoted into higher-paying roles. In only five countries—the Bahamas, Colombia, Jamaica, Laos, and the Philippines—are women as likely as men to hold managerial positions. 
Perhaps nothing depresses women’s earnings more than becoming a parent, particularly low-income women. Studies from numerous countries show that the gender wage gap is close to non-existent up until the point at which women have their first child. In the United States, for example, women who are not married and have no children earn 96 cents for every dollar men make. When women become mothers, however, their wages plummet, even while childless women increase their earnings apace with their male counterparts. Bosses and colleagues tend to perceive women as less competent after they have children, and mothers suffer an average four percent pay cut per child.
Men, on the other hand, actually benefit from having children: their earnings increase more than six percent on average. Even in changing times, the motherhood wage penalty is particularly stubborn: a recent study from Denmark—considered one of the most gender-equal countries in the world—concluded that childbearing accounts for an astounding 80 percent of the national gender wage gap.

A protester seen holding a placard that says end gender pay gap now during the Labour Day Protest in Manila. (Getty)

Fortunately, some leaders are taking action to end the pay disparity. A handful of governments have adopted new laws that emphasize transparency: Austria, Belgium, Denmark, Portugal, and Switzerland require companies to report their pay gap data, and Iceland and France now fine companies that fail to adhere to regulations. Other countries, including Australia and Germany, have extended technical assistance to the private sector on how to close their wage gap or have given employees the right to request peer salary information.  
The act of reporting alone can make a difference. Since April 2017, companies in the United Kingdom with more than 250 employees have been required to release information on their overall gender pay gap, the gender distribution of bonuses, and the proportion of men and women in each quartile pay band. Around 50 percent of companies shrank their pay gap in the first year of reporting alone.
Some countries have backed up the new transparency with stronger enforcement. France requires firms to report their overall gender pay gap, male and female promotion rates, and the gender of their ten highest-paid employees. Based on these and other indicators, each company gets a score between zero and 100; companies that score below 75 have to draw up plans to address their gender gaps. Firms that fail to implement these plans within three years incur fines of up to one percent of their total payroll.
In Iceland, pay inequality is effectively a criminal offense: companies with 25 or more employees must obtain equal pay certification by the government or face the consequence of a daily fine of approximately $400 for noncompliance. But Reykjavik has dug down even deeper, in an effort to address the undervaluation of work traditionally done by women: in January 2018, Iceland became the first country in the world to mandate that companies prove they offer men and women equal pay not only for equal work but also for work of the same value, by assessing job classifications and rendering salary determinations according to the value each position brings.
The United States has considered some policy solutions of its own to the problem of unequal pay. The Paycheck Fairness Act, which would require companies to share salary data with the Equal Employment Opportunity Commission and make it unlawful for employers to prevent employees from sharing compensation information with colleagues, passed the House of Representatives in late March and is an important first step. But even economic reasoning alone suggests a need for further reforms.
According to the McKinsey Global Institute, the U.S. GDP stands to grow by as much as 19 percent if women and men participate in the labor force equally. Reform would also help the United States recover its relative global standing when it comes to women in the workplace. In the late 1980s and early 1990s, the United States had one of the highest rates of female labor force participation among Western nations, and its economy benefited; estimates suggest that the U.S.economy was $2 trillion, or 13.5 percent, larger in 2015 than it would have been had women’s labor force participation rate and hours worked stayed at their 1970 levels. Yet by 2010, most OECD countries had surpassed it in female work force participation. In 1990, the U.S. women’s labor force participation rate stood at 74 percent, the sixth highest among OECD countries at the time; but by 2010, the rate had increased to only 75.2 percent, putting the United States at a meager rank of 17. A lack of programs designed to support American parents in their prime career and childbearing years may help explain that relative decline. Today, the United States stands alone as the only developed country in the world without any form of mandated paid family leave. 
Generous parental leave policies can help the United States offset the disproportionate burden women bear for childcare and unpaid care work and thus narrow the pay gap, but only if done right. In Denmark, where parents are guaranteed one year of paid leave—of which 18 weeks are maternity leave, two weeks are paternity leave, and 32 weeks are parental leave—fathers take only one month off on average while mothers take ten months on average. Out of the shared parental leave period, Danish fathers take less than 12 percent. The gendered expectation that women will be primary caregivers helps explain this result, but simple economics drives many couple’s choices: because the woman is more likely to be the secondary earner, it makes financial sense for her to stay home.
Some governments have intervened by encouraging fathers to take more paternity leave, thereby reducing the motherhood penalty women suffer. It benefits men’s relationships with their children as well: research has found that fathers who take more than two weeks off from work to care for their newborn children are more involved in their children’s care nine months later. In Sweden—which in 1974 became the first country in the world to expand its paid leave policy to include fathers—the government incrementally implemented a policy of so-called use-it-or-lose-it months. These are months of paid leave given to one parent that cannot be transferred to the other. When the first such month was introduced in 1995, the immediate effect of the reform was astounding: the number of Swedish fathers taking one month of parental leave grew from nine percent to 47 percent. Today, fathers take close to 30 percent of total parental leave, compared with 0.5 percent in 1974 and ten percent in 1998.
Once paid leave ends, however, working parents still face the prospect of paying for expensive childcare, leading some mothers to stay home out of economic considerations. The U.S. Department of Health and Human Services deems childcare to be affordable so long as its cost does not exceed ten percent of a family’s income. But across the country, infant care costs on average more than 27 percent of the median household income for single working parents, and one in four families spends more than ten percent of its income on childcare. The hourly cost of childcare grew 32 percent between 1990 and 2010; in 33 states, infant care is actually more expensive than college. Subsidizing childcare, increasing the availability of child-care centers, and improving low-income families’ access to child tax credits could thus significantly increase employment rates for low-income mothers in the United States.
Without access to childcare or smart parental leave policies, women with children come under systemic pressure to stay home. Unfortunately, the U.S. tax code adds to this pressure by taxing married couples as a unit, thereby penalizing secondary earners. The first dollar earned by the second spouse is taxed at the same rate as the last dollar earned by the primary spouse, as any additional income brought into the household is taxed at increasingly higher rates. Because women disproportionally fall into this category, reforming such tax laws could go a long way in boosting their labor force participation. The Canadian government, for example, replaced a spousal tax exemption with a non-refundable tax credit in 1988. Doing so meant that the secondary earner’s marginal tax rate no longer depended on his or her spouse’s rate. This reform, together with others, including tax cuts benefiting families with children, meant that a woman whose earning potential was lower than her husband’s now had reason to join the work force—and sure enough, such women did so, at a rate ten percent higher than before the tax reforms.
Better policies can’t address every source of pay discrimination. But the persistence of the wage gap suggests that some of the obstacles to pay equity are institutional ones that are susceptible to policy solutions. The United States is long overdue to mind its pay gap—and finally take steps to close it.

This article was originally published on ForeignAffairs.com.

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