Thinking about Wage Gaps

Over the last few days, two new items have been making their way around the Internet: one, a video with Kristen Bell by the Huffington Post discussing the female wage gap, and two, a report by the Economic Policy Institute on the increasing black-white wage gap .  In both cases, the creators/authors attribute the gap to discrimination.

Discrimination certainly is possible, but is it a likely explanation for these gaps?  From an economic point of view, it doesn’t make sense.  If we assume that firms are profit-maximizing organizations, then we could reasonably conclude that if wage gaps did exist, and were not some statistical aberration, then firms could easily lay off white men and hire females and minorities to perform the same work for far less, thus increasing profit (indeed, this is suggested as a reasonable course of action in Ms. Bell’s video).

And yet, this does not happen.  Why?  It certainly is possible that a chauvinistic attitude is rampant throughout the United States and that it is so powerful as to override the profit motive.  Were that true, our initial assumption that firms are profit-maximizers would not hold true and would make any policy designed to end this gap difficult to implement since the firms’ operators have a high cost tolerance to the point of sacrificing profit.  I suspect that, as the Department of Labor showed some time ago, much of the wage gaps are due to different characteristics and preferences among people.

To the extent that the wage gaps do exist, I suspect they are largely due to policy as opposed to outright discrimination.  Policies nominally in favor of women, such as maternity leave or special health benefits increase the cost of female employees relative to men (this is true even if the policy is gender-neutral, but more likely to be used by women). Given the relative cost, men are more attractive to potential employers at a lower price point.  Women, to remain competitive, then need to lower their salary expectations.*

There is a similar situation with black-white wages, but this comes about more due to policies like minimum wage.  Walter Williams (who is a professor of mine at GMU), has done extensive research on black-white employment and wages since the Bacon-Davis Act (the Act that effectively established a minimum wage).  In the decades prior to the Act, unemployment rates and wages were similar among black and white workers.  Since the Act, the black unemployment rate has skyrocketed, and with it came falling wages.  Since the minimum wage limits teenage unemployment for blacks (a time where valuable skills are learned which do have a dramatic effect on future earnings potential), it trickles down into adult earnings, leading to the gap.

Of course, pure discrimination could be the answer here (although if it were, it’d violate several laws already on the books.  Considering no lawsuits have been filed, I doubt it).  But, as an economist, I look at things from the point of view of economics: I assume people are, generally speaking, rational, profit-maximizing, self-interested individuals.  This assumption is useful enough, and broadly true for the whole population on a number of issues.  Furthermore, the idea of price theory (discussed in this post in terms of the cost of discrimination) is broadly true.  For either of those assumptions to be overturned, we’d need very compelling evidence.  Unfortunately, there mere existence of a wage gap is not compelling enough.

*As an aside, this also makes the cost of discrimination fall.  These sorts of policies make it easier for hiring managers to discriminate since there is less of a cost to do so.  This is also true for racism.

2 thoughts on “Thinking about Wage Gaps

  1. Here’s one thing to consider. Let’s say a hiring manager is under the assumption (perhaps mistaken) that blacks are less desirable workers ON AVERAGE than whites even given exactly identical credentials and attributes (other than race). For example, perhaps the hiring manager is under the (perhaps mistaken) impression that because of Affirmative Action, colleges admit blacks who are ON AVERAGE not quite as intelligent, hardworking, etc.

    Let’s also say the hiring manager gets a huge number of resumes for each position to be filled and that he can somehow determine from the resume and things like facebook the race of the applicant. And finally, let’s say that in some initial state there was absolutely no wage gap between blacks and whites of equal credentials.

    Though his assumptions may be mistaken, given those assumptions, in order to reduce his workload at no cost to himself or the company, and in fact to save the company money (it costs A LOT to screen and interview applicants), it would indeed make sense to simply filter out black applicants. That in turn would drive black wages down relative to whites, even for truly excellent applicants. The problem with things like Affirmative Action, if you’re gonna do them at all, is that they have to carried through to the very end and that includes enforcing them in the work place.

    For a while, I only hired people for my robotics company from MIT. Is that discrimination? 🙂

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  2. When I was hiring entry level retail sales clerks, I discriminated against men. I found that women were much easier to motivate and retain in those jobs than men.

    Wasn’t there a fairly famous paper by a couple economists a few years ago who sent out hundreds of identical resumes for various job openings? I think the results were that the exact same resume was 50% more likely to result in an interview if it carried an ethnically white first name than an ethnically black first name.

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