A discussion of “The Role of Firms in Gender Earnings Inequality” and “Ranking Firms Using Revealed Preferences”
Do women earn less than men because of discrimination? Or are they making choices that lead to lower pay?
Why on earth would someone choose lower pay? Because the lower pay may come with other benefits such as scheduling flexibility, less overtime hours or other quality of life options.
Sorkin (2017) says that men earn more than women because they are more likely to work in higher wage industries, and within those industries, they are more likely to work at the higher wage firms.
He examines two theories to explain the observed pay gap between men and women.
- Discrimination Explanation: Women would like to work where there are higher wages but men are preferentially hired over them.
- Preference Explanation: Women are choosing the lower paid options because of “nonpay characteristics.” That is, money is not the deciding factor for them and they are choosing jobs with these other benefits.
Knowing why there is a pay gap is the first step to addressing it. If it were discrimination, then laws and regulations to address it could work. But they will not help if that is not the cause.
If it is due to choices women make, then maybe there are other ways to address these “nonpay characteristics” so they can take the high paying route as much as men.
Status Seeking Competition Created Gender Gap
Of course, individuals should be free to make the choices they want in life regardless of what group they are in so there may not be anything to fix. However, research like this could allow us to see if there are any problems to solve that could help. And it could stop us from applying remedies that are not going to work.
The Model
I have to confess at this point that I had to find another paper of the author’s where he went into more detail to understand what he was doing. (Sorkin 2018)
Most economic models of this sort would have a list of nonpay variables to include. However, as he notes, that approach requires the economist to know and measure all the nonpay variables that could be at play.
For this model then he is using something called revealed preferences. We do not have to know what the specific nonpay characteristics are, but we can see by the choices made that they are revealed.
…suppose there are two firms: A and B. Suppose that the firms do not tailor their offers to specific workers, and workers have common preferences (up to an idiosyncratic utility draw). Suppose also that both firms are initially the same size and make the same number of offers to workers at the other firm at random. If more workers accept A’s offer than accept B’s offer, then we can infer that workers prefer firm A to firm B. If it also turns out that B is higher-paying than A, then we infer that B offers worse nonpay characteristics than A (since workers prefer A to B despite the lower pay). Hence, compensating differentials explains why B pays more than A. This example incorporates the two building blocks as follows. It relies on revealed preference because it uses the information in workers’ choices between A and B. It entertains the possibility of utility dispersion because it allows us to conclude that from the workers’ perspective, one firm is better. (Sorkin 2018, p. 1332)
Back to the main paper for this article, Sorkin is using a search model that will allow him to see which explanation is at work.
The preference explanation is that men and women rank firms differently, and so, given the same set of opportunities, would end up in different firms. The discrimination explanation is that men and women receive a different set of offers, and so, given the same preferences, end up in different firms. (p. 384)
With the preference explanation, we see the disparity in outcome as a result of different choices among equal opportunities.
With the discrimination explanation, we the disparity in outcome as a result of not getting the same opportunities.
To determine the forces at play, the author estimates the model separately for men and women. This allows each group to face their own distribution of opportunities, preferences, and earnings.
He finds about 25% of the pay gap is due to sorting across firms and 50% is due to sorting across industries. (p. 386)
That just confirms that women are at worse firms and worse industries based only on pay but not the reason for being sorted that way.
He then measures the value of being employed at a firm as a summation of the pay and the nonpay aspects. (p. 386)
He says once you account for the differences in nonpay characteristics across firms, they “almost completely outweigh the difference in pay.” (p. 386)
- With nonpay characteristics included, the gap drops to near 0 across firms
- With nonpay characteristics included, the gap drops to near 0 across industries.
Thus, without considering the nonpay characteristics, women are working at lower paying firms and in lower paying industries. But when value is placed on things other than pay, this seems to disappear. Total compensation is equal, once you move beyond money.
Conclusion
What I like about this paper is it allows people to want different things.
While on the one hand it can be seen in the data that as a group women face a pay gap, this paper shows that if you consider the value of a job to be a combination of pay and nonpay factors, the differences across genders disappears.
What this paper does not address is what are these nonpay factors? Likely for many women, it is balancing more childcare and home responsibilities.
Is there a role for policies to address such issues? I am not sure.
I think we may be bumping into scarcity, a fundamental concept of economics.
Our resources are limited. There are only 24 hours in a day. If you choose to use them one way, such as more time with family than working, then you prefer the nonpay characteristics of a job more than higher pay. If higher pay is more needed, then you can choose that, but you have to give up time spent on other things.
What about women who have to work, perhaps they are the sole income, and also want to have time with the family? Policies that make childcare cheaper would help them work but it would not solve their wish to be with their family more. They feel the bite of scarcity more than most, but I do not know how to solve that with economic policy.
References:
Sorkin, Isaac (2017). “The Role of Firms in Gender Earnings Inequality.” American Economic Review: Papers and Proceedings, 107(5): 384–387.
Sorkin, Isaac (2018). “Ranking Firms Using Revealed Preferences.” Quarterly Journal of Economics, 133(3): 1331–1393.
By Ellen Clardy, PhD on .
Exported from Medium on December 15, 2022.
