Yesterday’s breathtakingly dishonest graph from the AFL-CIO touched off some discussion in comments about whether the male/female wage differential could plausibly be driven by employer discrimination.
The usual argument to the contrary runs like this: If the differential is driven by employer discrimination (as opposed to, say, the abilities and/or preferences of the workers), then non-discriminating employers (i.e. those who care only about making a buck, regardless of who they have to hire to do it) would draw only from the relatively cheap female labor pool. It wouldn’t take many of these non-discriminating employers to drive women’s wages up to the same level as men’s. We don’t see that happening, ergo the hypothesis of employer discrimination is refuted.
The problem with that argument is that it assumes employers won’t ignore a profit opportunity, whereas in fact employers ignore profit opportunities all the time — by keeping on their incompetent nephews, taking Wednesday afternoons off to play golf, or, yes, hiring people they like having around instead of people who could do a better job.
To rescue the argument, you need to make it quantitative. Here’s an ultra-quick back-of-the-envelope calculation. First, suppose half the work force is men and half women. (If you think that’s off, feel free to adjust this calculation as you see fit.) Then clearly the workforce at the average firm is half men and half women. If women earn 20% less than men — and if the difference is entirely driven by employer discrimination — then a non-discriminating employer could shave 10% off his/her wage bill by firing the male half of the work force and replacing it with women. (That’s because 10% is half of 20%.)
That 10% savings all goes into the pockets of the owners (in the case of a corporation, that’s the shareholders). According to the latest GDP numbers (from page 11 of the national income accounts), employee compensation is a bit more than three times the return to proprietors and shareholders. So a 10% reduction in the wage bill translates into a 30% increase in income for the owner, or, in the case of a corporation, a 30% increase in share price.
In other words: To believe that the gender gap in wages is driven by employer discrimination, you don’t just have to believe that everyone’s ignoring a profit opportunity — you have to believe that everyone’s ignoring an opportunity to kick their profits up by thirty percent. That number is large enough to strike me as wildly implausible. Might employers ignore a profit opportunity? Sure. Might they ignore a chance to kick up their profits by thirty percent overnight? Seems bloody unlikely.