When Women Earn Less Than Men

This past week, the Trump administration rolled back an order that the Obama White House put into place to collect information about various disparities in labor markets. Last year, the Obama administration issued a “Fact Sheet” grandly titled “New Steps to Advance Equal Pay,” which contained a proposal “to annually collect summary pay data by gender, race, and ethnicity from businesses with 100 or more employees.” In total, the proposal would cover some 63 million people. The purpose of collecting the data was to provide “better insight into discriminatory pay practices across industries and occupations,” which would in turn give “women additional tools to fight pay discrimination.”

The data do indeed reveal persistent pay differentials between men and women, which the Obama White House attributed largely to illegal discrimination. Under its view, progress in this area requires removing or reducing these pay differentials by coercive action if necessary.

One measure of the size of this supposed problem is that across all industries, white female wages are on average 82 percent of those of white male wages, according to Pew Research Center. Asian women earn about 87 percent of what white men earn, black women 65 percent, and Hispanic women 58 percent. Asian men, however, earn 117 percent of what white men earn. The common, but by no means universal, conclusion is that some large chunk of these differentials is the product of employer discrimination.

The recent decision by the Trump administration to challenge that consensus makes good economic sense given the serious gaps in reasoning and evidence behind the costly and counterproductive Obama initiative. Let’s start with the basic question of whether discrimination on the basis of sex and race can persist in competitive markets. In 1957, the economist Gary Becker first published his book The Economics of Discrimination, which argued correctly that discrimination could survive in markets in which firms possessed monopolistic power, but not in competitive markets where free entry and exit are possible. The logic here is that a monopolist is in a position to engage in discrimination with respect to prices or terms of service because its customers have few if any other options. Hence, from the earliest days, the law imposed duties on common carriers and public utilities to supply services on a fair, reasonable, and nondiscriminatory basis because of their market power.

There are, however, virtually no monopolies in labor markets, so here the possibility of entry and exit makes it difficult, if not impossible, for any firm to discriminate against workers who have alternative options. Today, labor markets are more diverse than ever on the employer as well as employee side. It is virtually impossible to imagine how any major firm could survive by engaging in discriminatory practices. New firms would enter the market to target the highly skilled workers that were overlooked or underpaid by existing firms. Current firms are aware of this risk and must adjust their practices to forestall massive exit. Hence, the observed wage differentials could not survive in competitive markets unless they were cost-justified by productivity differences.

In fact, any firm that paid less productive workers the same wages as more productive workers would be subsidizing inefficiency. As a theoretical matter, it is wholly implausible to think that in transparent and competitive markets, pervasive discrimination could survive. It does not take all firms to transform labor markets. It just takes enough firms at the margin to bid up the wages of underutilized workers.

In an effort to deal with these theoretical points, the defenders of the Obama directives point to empirical evidence that shows the various wage differentials are indeed the product of some unconscious form of discrimination. But here, the efforts to show market imperfections unravel. Virtually all of the studies that find discrimination do so by inference, not by producing direct evidence of discrimination. These studies try to control for some variables—such as education levels and working conditions, which tend to reduce observed wage gaps—but the research is imperfect and the list of variables is incomplete. Some significant portion of those residual gaps is then attributed to discrimination. Unfortunately, this common methodology systematically overestimates the extent and durability of discrimination, and may in fact overlook the distinct possibility that the figures can be explained by innocuous factors such as the preferences of women and minorities in the workforce.

Read more of this article by Richard A. Epstein in the Hoover Institution’s Defining Ideas journal by clicking here.