Chapter 9 Gender Gap in Earnings: Explanations Two broad explanations: –Differences in skills: human capital (HK) differences –Differences in treatment in the labor market: discrimination –Both explanations rely a great deal on work by Gary Becker

Human Capital What is human capital? –Skills that workers possess and that determine their labor productivity. Workers are human capital. 5 questions to ask about HK: –1) Who produces HK? –2) What are its benefits/costs? –3) Is HK valuable? –4. How make HK investment decision? –5) Can sex differences in HK investment explain the earnings gap?

3 Main Producers of Human Capital 1) Families (thru investments of time, money, and resources); 2) Education gained in schools (K – 12 and college); 3) Skills acquired while working (via on-the-job training, or OJT). –General Training:  worker productivity at this firm as well as any other firm so worker will pay via reduced wages –Specific Training:  productivity at just this firm doing the training so firm has incentive to pay for the training.

Education as an Investment Gary Becker: any activity with current cost and future increased productivity can be analyzed like an investment. Is education a good investment? Compare costs to benefits across the entire lifetime. Costs include opportunity costs. Overall: yes college education is “worth it” (even though college costs  faster than inflation).

Important Terms Future Value: FV Present Value: PV Example if just two periods (t=2): FV t = PV * (1+r) t PV t = FV/[(1+r) t ] –R = 6%; PV = $100; FV = $106. Present value: more distant in time the $ is received, the lower its current/present value. FV must be discounted to get PV If t big like a lifetime: PV(B 1,…,B T ) = SUM T [B t \(1+r) t ] Can sum costs in same way, although mostly incurred in early periods.

Further Details Internal Rate of Return: – r* that makes present value of sum of all benefits equal to the PV of the sum of all costs. –In other words, r * solves the below expression: SUM T [B t \(1+r*) t ] = SUM T [C t \(1+r*) t ] HK investment rule compares r* to actual market r:  Yes make investment as long as r* > r.

Why Might There Be Gender Differences in HK? Two ways that HK could differ: –1) women may have less HK than men; –2) women may have same amount of HK but different kinds: a) invest in HK with high non-mkt return; b) invest in HK that will  satisfaction in work and at home; c) invest in HK with less potential for depreciation; d) invest in less of specific HK.

Earnings Across a Lifetime See Figure 9.1: –female average earnings for high school graduate and college graduate –See different pattern across lifetime. –Note that there is less wage growth across lifecycle if have intermittent work. Why intermittent work causes flatter age/earnings profiles? –1. Less OJT investment (due to less chance of return to investment). –2. Less access to occupations with much specific OJT (so women stuck in secondary sector). –3) HK depreciates during time out of LF  difficulty of mid-career re-entry

See Figure 9.2: –estimates of IRR for different lifecycle work patterns. –See lower if anticipate intermittent work; this might explain less HK investment if anticipate intermittent work.

Sex Differences in Human Capital Two key components of HK are education and experience. Education: See Figures 9.3 and 9.4 Field of Study: –1970: < 1 % of engineering degrees ; 10% of business; < 15% of physical sciences and < 15% computer sciences. –2001: 18%; 50%; 40% 30% –And now more of advanced degrees. –Still, degrees associated with higher earnings disproportionately male.

Gender Differences in Workplace Experience Overall, female work experience is growing as is their fulltime, year-round experience and continuous experience. But still lags behind that of men. Here is where sex differences appear greatest: –Females have less tenure with same employer, –Females have less overall work experience, and more intermittent work..

Evidence on Impact of HK Differences on Earnings Gap Run regressions to control for various HK characteristics (like education, OJT, experience). –Evidence suggests that about 30% to 50% of gap can be explained by differences in measurable HK. Rest of gap? –Attributable to unmeasured HK differences, discrimination, individual choices (e.g., different preferences; anticipate discrimination).

Critiques of HK Explanation for Sex Gap 1) Source of differences in HK investment: some due to pressures of society or anticipation of discrimination so not really a “choice.” 2) Is “penalty” for intermittent work greater than that justified by productivity issues? 3) Discrimination in access to HK: explained much of historical gap; not so important now except possibly for specific OJT. 4) Are individuals really as forward- looking as economic model assumes? 5) Feminist perspective: some pressures to maintain patriarchal structure.

Discrimination Becker: Economics of Discrimination 3 potential sources: 1) employers: most important source of discrimination 2) employees: who willing to work alongside? 3) customers: who willing to buy from or sit next to?

Employer Discrimination Set up discussion: –Males are majority group (M); –Females are minority group (F). –M employers discriminate against F employees. Discrimination coefficient = d = monetary equivalent of the prejudice. If actual hourly wage = w, then this discriminating employer views the wage “he” must pay as w + d. – Example: w = $5; d = $1, so employer views wage as $6, which includes monetary component plus a disutility component.

Employer Discrimination (cont.) Further details when d  0 and same for all firms: –Market will favor male employees. –F only get job if their wage (W f +d)  W m ; otherwise only men hired. But what if different employers have different d? –Employer with no prejudice has d = 0; d  for more discriminatory firms. –Then some employers will hire women. –These less discriminating employers have competitive advantage. –See Table 9.3.

Results of Discrimination Result of discrimination: –In equilibrium, women earn less than they would earn in absence of discrimination. LR:  competition should  d to 0. –Firms hiring women have lower labor costs then firms hiring just men, so firms with women have higher profits. –Discrimination is inconsistent with profit-maximization. So why doesn’t discrimination disappear? D  to 0 requires: –Enough potential firms with zero d. –Freedom of firm entry.

Professional Baseball as Example Until 1947, every player in Major League Baseball was white: –All owners had such high d’s that zero African Americans were hired. –Also had discrimination on part of “customers” so more complicated. Why persisted? –Industry lacked freedom of entry. Negro Baseball League created. In 1947, Major League Baseball race “color line” was broken: –Brooklyn Dodgers signed Jackie Robinson (BD exploited their low d). –Within 10 years—all teams integrated.

Alternative Source of Discrimination Statistical Discrimination: Because cannot observe any individual’s true current productivity nor his/her future productivity, treat this person as if he/she were the average from a specific group (such as female). Asymmetric information: worker knows his/her own productivity more than any potential employer. This is a form of market failure (I.e., results in inefficiency). Car insurance rates differ by sex due to average differences in accident propensities.