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Claudia Goldin. Photo courtesy Harvard University.
Claudia Goldin. Photo courtesy Harvard University.

What explains the gender gap in jobs and wages?

Research by award-winning economist Claudia Goldin helps us understand why gender disparities persist in labour markets

One of the singular features of India’s recent growth trajectory has been the limited participation of women in it.

Very few women work in India, with the proportion of working women being lower in urban India than in rural India. Those who do work face lower wages and other kinds of discrimination. According to a recent report published by job portal Monster India in collaboration with the Indian Institute of Management, Ahmedabad, the mean gender wage gap stands at around 27% in India.

Although the tilt against women is sharper in India, they face a raw deal in markets across the world. Several economists have tried to answer why these gender gaps persist in labour markets, and one of the most prominent ones, Harvard University economist Claudia Goldin was recently awarded the prestigious 2016 IZA Prize by the Bonn-based Institute for the Study of Labor for her path-breaking research on this issue.

Goldin’s work has profound implications towards our understanding of labour markets and gender gaps.

In a 1995 paper, Goldin postulated the Inverted-U hypothesis of female labour force participation. She explained that once new industries come into existence, men will move up the ladder quickly, reducing female labour market participation.

Also, with greater urbanization, and movement out of agrarian occupations by men, more women are likely to drop out of the labour market mainly because of prevalent social norms. However, as countries become more developed, female education levels will rise, and a greater fraction of women will now enter the labour force. Gender discrimination is higher in the initial phase of development, she argues.

In a 2002 Journal of Political Economy study co-authored with her Harvard colleague Lawrence Katz, Goldin solved one important puzzle: why so many women in the US started taking more job-oriented professional programmes and married at a later age during the 1970s.

Goldin and Katz found that this phenomenon has, in part, to do with the introduction of birth-controls pills in the late 1960s. Goldin calls this a silent revolution—more and more women could take courses that helped them get jobs, and by delaying marriage, they could sustain being in the labour market.

Although the female labour force participation rate increased, the gender wage gaps prevail and are particularly large in certain high-paying occupations for a number of reasons, one of which is non-linearity in wages.

Non-linearity in wages means if someone is paid Rs1,000 for working two hours, it is possible that someone else may be paid Rs10,000 for eight hours: i.e., the wage rate is a non-linear function of hours of work. This means there are disproportionate rewards associated with working longer hours, with adverse consequences for women, who still account for a lion’s share of home-related and unpaid work in most parts of the world.

Goldin, Katz and Marianne Bertrand of the University of Chicago in a 2010 American Economic Journal: Applied Economics paper show that even though there are nearly no gender gaps in earnings at the start, wages start diverging within five years after joining the workforce. These gaps are largely because once a woman has a child, her working hours drop and the non-linearity in wages kicks in.

Goldin’s research also helps explain why discrimination is so hard-wired in labour markets, and why it is so frustratingly difficult to tackle it. As an earlier Economics Express column pointed out, the labour market is beset with different kinds of discrimination along lines of gender, caste and ethnicity.

Goldin famously enunciated a theory of pollution to explain why it is so difficult for women to break into occupations that have been dominated by men. Goldin argued that discrimination is a “consequence of a desire by men to maintain their occupational status or prestige".

“... prestige can be ‘polluted’ by the entry of an individual who belongs to a group whose members are judged on the basis of the group’s average and not by their individual merits," wrote Goldin. “Men in an all-male occupation might be hostile to allowing a woman to enter their occupation even if the woman meets the qualifications for entry. The reason is that those in the wider society will not know that the woman was qualified and might, instead, view her entry as signalling that the occupation had been altered. She will be seen as ‘polluting’ the occupation."

Goldin cited the example of firefighters to explain her theory of pollution in an interview later.

“Let’s take an example of firemen, and let’s say we begin not that long ago when there were no women who were firemen—which is why they’re called firemen. And to become a fireman you have to take a test, lifting a very heavy hose and running up many flights of stairs. And every night, the firemen get off from work and go to the local bar. Everyone slaps them on the back and says what great brawny guys they are and what a great occupation they are in, and everybody knows that to be a fireman requires certain brawny traits and lots of courage.

“But nobody knows when there’s a technological shock to this occupation. And in this case it might be that fire hoses become really light or the local fire department changes the test. There are information asymmetries. But they do note that for this ‘brawny’ characteristic, the median woman is much lower. So if we observe a woman entering the occupation and we don’t know how to judge women, we’re going to assume that her skills are those of the median woman.

“... chances are we’re going to assume that some technological shock has happened to this occupation. And so her entry into the occupation is going to pollute it. Then when they go to the bar, people will say, ‘Oh, you’ve got a woman in the firehouse; now firefighting has become women’s work.’ That’s where the pollution comes in."

What could be done to fix the gender gaps? One obvious and popular candidate is market competition. Nobel-winning economist Gary Becker famously argued that greater market competition will lead to lower discrimination. If the market is competitive, the costs of engaging in discriminatory practices are much higher.

A 2014 Journal of European Economic Association paper by Andrea Weber of the University of Mannheim and Christine Zulehner of Goethe University finds hard evidence for this particular phenomenon. They collected data on Austrian firms as well as workers for nearly 30 years (1978-2006), and examined whether the firms that had a lower share of female employees relative to the industry share had lower survival rates. They found that firms which had the propensity to discriminate against women were also the ones more likely to exit the market sooner.

In an interesting 2000 study on gender discrimination that appeared in the American Economic Review, Goldin and Cecile Rouse of Princeton University compiled information on actual audition records of major symphony orchestras. These orchestras were historically known to have very low proportions of female musicians. Between the 1970s and 1980, a lot of these orchestras shifted to blind screening to hire musicians. They found that blind-screening of candidates increased the odds of a woman being hired.

But competition may not be enough to bridge the pay gaps if the firms internalize the costs of discrimination and blind audition may not be the most practical way to hire employees. Goldin proposes that the best way to reduce gender disparities is to introduce flexibility in working hours so that remuneration structures are not influenced heavily by the number of hours’ employees put in.

“This matter is not just a woman’s issue," writes Goldin in her 2014 American Economic Review paper. “Many workers will benefit from greater flexibility, although those who do not value the amenity will likely lose from its lower price. The rapidly growing sectors of the economy and newer industries and occupations, such as those in health and information technologies, appear to be moving in the direction of more flexibility and greater linearity of earnings with respect to time worked."

In her classic 1970 book, Woman’s Role in Economic Development, Danish economist Ester Boserup had shown that it is possible for an economy to grow without making women better off. Boserup argued that female labour force participation moves sluggishly when there are too many men competing for clerical jobs and there may be direct discrimination against women.

Goldin shows, in her 1995 paper, that female labour market participation is contingent upon the sensitivity to family income. The greater the husband’s income—up to a threshold—the lower the likelihood of a woman entering the job market. Therefore, a large group of women in India, due to prevalent social norms and absence of jobs, may often be unable to participate in the labour market.

Goldin’s careful research has shown that the battle for equal wages is an important one and policies that will narrow the gap between genders are likely to make everyone, not just women, better off.

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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