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Earnings inequality at the top has slowed progress in pay equity between men and women

June 4, 2016

Nicole Fortin, a professor of economics with the University of British Columbia, addressed the 50th anniversary meeting of the Canadian Economics Association with a “state of the art” presentation on earnings inequality in top incomes and the gender pay gap, examining three questions:

  1. What are the consequences of under representation of women in top incomes to the overall pay gap?
  2. How is it contributing to the slowdown in the convergence of male and female wages?
  3. What could be done to change things?

In contrast to the United States, the labour force participation rates of men and women have been steadily converging in Canada. In the United States this has not happened to the same degree, particularly after the Great Recession. This convergence is driven by recent cohorts of women. The increase in overall participation reflects a generational effect. Women born in the 1940s have a labour market engagement that dips off during child-bearing years, but this attachment is much more permanent for younger women. The expectation in the literature is that this rise in labour market engagement would eventually close the wage gap.

But the rub is that there has not actually been as much a convergence in the actual hours of work. This is important because there is a link between pay and hours: those working longer hours get paid higher hourly wage rates.

So what has happened to the “raw’ wage and earnings ratios between men and women?

Based on average annual earnings of full-year full-time workers, women make and have long made about 70% of men, but this varies a lot. In fact the “hourly wage ratio” is often preferred and is about 85%, while at the other extreme the ratio is just 65% for annual earnings for all workers.

Interestingly, when looking at recent generations of women the gender pay ratio is actually falling, younger generations are losing a bit of ground. There has been a growth in the “unexplained” portion of this gap, that is when we account for differences in the characteristics important in determining wage rates.

This is odd, because in some measure women have closed important gaps in characteristics like education and schooling. In fact, recent research even suggests women have an advantage over men in this respect. There remains a very large, and growing unexplained component to the wage gap between men and women.

So what is going on?

Fortin moves on to look at the role of inequality in top incomes as a possible explanation. Have recent increases in top incomes led to women having to “swim upstream”, slowing progress in closing the gender pay gap?

We know that even among the top 1% earners, there is a good deal of inequality … the top 1% of the top 1% have made the big gains. In particular, does the industrial segregation of the top 1% play a role in this?

When top incomes increase, the gender composition changes: 3 men for every 2 women at the top 10% of wage rates, 4 men per women at the top 1%, and 8 men for every women earning at the top 0.1% of wage rates. There is gender parity in pay in the top 1%. Her point is that under representation of women in top paying jobs slows progress in overall trends in the pay gap, explaining about 45% of the gap.

What is to be done?

Pay equity policies are a standard response to the gender pay issue, involving equal pay for equal work. This is about “horizontal” segregation in pay. Burt Fortin suggests that it is “vertical” segregation that is driving the issue, and this motivates the use of female quotas for corporate board membership in some countries. These quotas and regulations do have a small effect on female membership. Does having more women in top jobs help women at the lower echelons? Studies seem to suggest that this does not seem to be the case.

Policy makers need to know why women fail to move from the bottom 90% to the top 10% at the same rate as men. About 3% of men do so, but only about 1% of women. This tends to happen in early career, before the age of 30. This might perhaps motivate policies that level the playing field in child care: maternal benefits, affordable high-quality care. But firms also have choices: flexible hours, child care, and any other gender preferences.

Professor Fortin also surveyed recent literature on why women tend to shy away from competition, and other theories associated with identity and social preferences to hear from men, or taking them more seriously.

[ Download a pdf of the presentation slides. ]

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