A Brief History of the Economics of Wage Discrimination

How we think and talk about why wage gaps exist informs policy—and can change how markets work all on its own.

Graduate Sunanda Prabhugaunkar demonstrates polarity by utilizing a superconducting electromagnet in a materials science lab during a 2010 science and technology educational workshop at Northwestern University.   Photo: Marina Makropoulos/Chicago Tribune

April 8 is Equal Pay Day, a date selected to represent the gender pay gap—i.e., 77 percent, depending on whom you ask, representing how much more the typical full-time working woman would have to work to earn the same as a man. This year it’s not all bad news, as you might infer from the demographics of colleges and suchlike trends:

But for young women, the wage gap is even smaller – at 93 percent – meaning they caught up to their same-aged male counterparts by roughly the last week in January of this year.

As our video explains, the estimated 16-cent pay gap today has narrowed from 36 cents in 1980. Back then, the average woman would have had to work approximately 90 days, roughly into the beginning of May, in order to catch up with men’s earnings from the year before.

I wouldn’t be surprised if it narrows more, faster; females are far outpacing males in the next wave of professionals, to the point where there’s concern about young men being at risk from an educational-attainment gap. But in certain high-importance, high-income sectors, such as technology, women hold a surprising minority of jobs and are less likely to stay in the industry altogether:

Today, even as so many barriers have fallen—whether at elite universities, where women outnumber men, or in running for the presidency, where polls show that fewer people think gender makes a difference—computer engineering, the most innovative sector of the economy, remains behind. Many women who want to be engineers encounter a field where they not only are significantly underrepresented but also feel pushed away.

Tech executives often fault schools, parents or society in general for failing to encourage girls to pursue computer science. But something else is at play in the industry: Among the women who join the field, 56 percent leave by midcareer, a startling attrition rate that is double that for men, according to research from the Harvard Business School.

It makes for an interesting contrast. The wage gap appears to be narrowing and could, in theory I guess, reverse as the education-attainment-gap-generation enters the workforce. On the other hand, one of the theoretically most meritocratic major industries in America struggles with a pernicious gender gap.

Economists have seemingly been struggling with it for a long time, but it’s not that long. The economics of discrimination mostly spans the career of one Chicago economist: the legendary Nobel laureate Gary Becker.

Becker got his PhD. in 1957 with a work entitled “The Economics of Discrimination”; the book it turned into was one of his qualifications for the Nobel. In his Nobel lecture, Becker, who almost went into sociology instead of economics, described why he chose the topic:

Discrimination against outsiders has always existed, but with the exception of a few discussions of the employment of women (see Edgeworth [1922], and Faucett [1918]), economists wrote little on this subject before the 1950s. I began to worry about racial, religious, and gender discrimination while a graduate student, and used the concept of discrimination coefficients to organize my approach to prejudice and hostility to members of particular groups.

By “discrimination coefficient,” Becker meant that individuals have “tastes for discrimination,” which must be paid with money: almost literally a discrimination tax.

Becker is sometimes blasted for being naively neoclassical, but it’s worth putting things in context: it was 1957; no one had really thought about discrimination in systematically economic terms before; Becker was introducing behavioral concepts into it (by assuming that people irrationally discriminate); and his overall point was this is really dumb, discrimination costs you money.

And to make a very long story short, this insight became a tautology: the market will fix this. As fellow U. of C. prof Kerwin Kofi Charles put it in 2007, “the notion that employer prejudice is ‘driven out of the market’ in the long run remains a staple of most textbook treatments of the employer prejudice model.” It’s a staple of rhetoric about discrimination and inequality, particularly when discussing the tech industry: Silicon Valley CEOs and VC types are extremely smart people in a highly competitive field that puts a premium on logical skills; why would they leave money on the table for something as regressive as discrimination?

A recent Harvard Business School study crystallizes this. Basically, a bunch of angel investors were pitched by men and women, attractive and unattractive. Unsurprisingly, the Don Drapers won big-time.

So this is an example of a dumb market, right? Depends on what you mean by “dumb” and “market": “our results document gender discrimination in entrepreneurship, but this discrimination does not necessarily represent irrational marketplace behavior. If discrimination arises along the entire growth path of female-led ventures, then early stage investors may rationally seek to avoid such investments.”

As norms have changed, the economics of discrimination have changed as well. In his book Identity Economics, Nobel laureate George Akerlof, writing with Duke economist Rachel Kranton, describes how our thinking has built on Becker’s work—beginning with Becker, since he essentially created the field:

In the first such model, which grew out of Gary Becker’s work on racial discrimination, some firm owners are said to have a “distaste” for employing women. In the slightly more complicated version, the firm owner has no personal distaste for women employees, but male workers do. The firm must then pay men higher wages for working with women. Every woman hired by such a firm thus increases the firm’s costs…. In a competitive marketplace, either the workers will pay for their prejudice in terms of lower wages or the firms that indulge their workers’ tastes will be replaced by lower cost firms….

In 1957, this was an obvious conclusion to draw; discrimination was open and ugly, and Becker needed merely to look south to see the economic damage it wrought on an entire region of the country.

Decades later, it’s less a war than a very badly played game of poker.

[A]n identity theory suggests why discrimination and occupational segregation persist despite competitive market forces. It suggests that the real problem is the norms that stipulate that men and women should do particular jobs, irrespective of their individual tastes and abilities. No one firm, acting on its own, has much incentive to change the society-wide norms. The cost would be too high relative to the benefits for the individual firm. Small, competitive firms would derive only a small fraction of the overall returns from changing gender norms that are society-wide….

According to this theory, then, society-wide changes are necessary to change gender norms. The complete remedy for discrimination is to remove gender tags from jobs. Both at home and in the workplace, this has been an aim of the Women’s Movement…. The Women’s Movement and changes in the law—not changes in competition Becker-style—have been responsible for the shift in labor market patterns since the 1960s. Associations of specific jobs with gender have diminished, as reflected in changes in language, and the job composition has shifted dramatically. Firemen have become firefighters; policemen have become police officers; and chairmen have become simply chairs.

It’s fascinating to see an economist, a septuagenarian Nobel winner, crediting changes in language for the evolution in labor markets. Over the years, and the evolution of behavioral economics from Becker’s “discrimination coefficient,” economics has taken a more textured view of human behavior, and in this case it’s not just descriptive, but prescriptive. In that sense, the challenge to industry norms expressed by the subjects in pieces like “Technology’s Man Problem” aren’t throwing a monkey wrench into the free market; they’re taking a monkey wrench to it to tighten the gears.

 

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