Mark Perry and Andrew Biggs argue in the Wall Street Journal that
These gender-disparity claims [the claims that women are paid 23% less than men for the same work] are also economically illogical. If women were paid 77 cents on the dollar, a profit-oriented firm could dramatically cut labor costs by replacing male employees with females. Progressives assume that businesses nickel-and-dime suppliers, customers, consultants, anyone with whom they come into contact — yet ignore a great opportunity to reduce wages by 23% [by hiring women instead of men].
Well, first of all, even if we take the gender disparity claims at face value, this doesn’t add up to an opportunity to reduce wages by 23%. Only about half the work force is female, so the average firm, if it replaced all of its men with women earning 23% less, would reduce its wage bill by only about 11.5%.
Beyond that, the Perry/Biggs argument appears to founder on the observation that lazy and incompetent managers do in fact manage to ignore profit opportunities all the time. Why, then, is it so hard to imagine that they’re ignoring this one?
Fortunately, I’m here to fill the gap —- by figuring out just how big a profit opportunity we’re talking about.
Continuing to take the alleged gender disparity at face value, a typical firm pays about 77 cents to female employees for every dollar it pays to males. (This uses the observation that there are roughly equal numbers of males and females in the work force.) This adds up to a total wage bill of $1.77 per dollar paid to a male employee
Next it’s helpful to know that, as a general rule of thumb, wages soak up about 2/3 of company revenue. The remaining third is paid out to bondholders and stockholders.
So for every $1.77 paid to the workers, about half that much — call it 88 cents — is paid to the capitalists. Some quick Googling (and a more careful Googler in the audience might want to refine this calculation) suggests that, in the U.S. (and hence at the average American firm), about 40% of that 88 cents goes to bondholders, which means the stockholders get about 53 cents.
Now: What about that profit opportunity? If you replace your male workers with females, you save 23 cents per dollar paid to a male. That 23 cents, of course, goes to the stockholders. (Where else could it go?). The return on your company’s stock, and hence the value of that stock, just went up from 53 cents to 53 + 23 = 76 cents — an increase of about 43%.
So, yes, lazy and incompetent managers overlook small profit opportunities all the time. But do they overlook opportunities to increase their companies’ share prices by a whopping 43%? That pretty much strains credulity to the breaking point — and makes the gender disparity claims just about as implausible as Perry and Biggs say they are.
I agree with your arithmetic but disagree with your conclusion. Most American firms are controlled by male stockholders, even if they don’t own a majority of the capital. Male stockholders are willing to give up a third of their earnings for the pleasure of discriminating against women. Thus, the male owners of a firm with only female employees will replace some of them with men, pay the latter more and enjoy the ensuing humiliation of women.
I remember hearing those wage comparisons when I was younger. I always assumed that those numbers were controlling for things like employment history, education, etc.
I remember being flabbergasted when I learned where those numbers came from, and thinking just how dishonest those numbers are.
I hadn’t heard that.
1. Clearly the rule of thumb is pretty rough. It would seem to imply that a firm’s sole operating costs are finance and wages.
2. Even if we refine this rule of thumb, doubtless it would vary by industry. It would be interesting to see if firms that have a disproportionately high dividend/stock gain are also firms that hire a higher proportion of female employees.
@3
I think that’s certainly true (Landsburg did a back of the envelope calculation), but then you get into controlling for industry, location, and a whole host of other things. By implying that firms leave a big pile of cash on the table in order to discriminate, we lose a lot of our assumptions about how firms seek to maximize profit. Maybe a firm forgoes 15% profits because it likes being on an odd avenue vs. an even one.
“Male stockholders are willing to give up a third of their earnings for the pleasure of discriminating against women.”
Finally we have proof of reincarnation. Andrea dworkin has returned to haunt economics blogs.
“As a general rule of thumb, wages soak up about 2/3 of company revenue. The remaining third is paid out to bondholders and stockholders.”
Does that include wages indirectly paid to employees of the firms supplying the inputs?
Otherwise, I don’t get this. I’d imagine Walmart pays, say, 80% of its revenues directly to the makers of the products it sells, no? I would imagine General Motors pays a substantial portion of its revenues to its own suppliers, as well as steelmakers, etc. And similar for almost any firm I can think of.
Feminist,
Clearly you have never met a male share holder.
Here’s an interesting paper relevant to this discussion:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1653087
For those who can’t read it, the basic idea is that there’s systematic discrimination against women in major Korean companies (the chaebols). Multinational companies have identified this and are selectively recruiting underpaid and underutilized female talent in South Korea, and gaining a significant competitive advantage in the Korean market by doing so.
I should think it would be natural for an economist to presume that if women are paid less, it’s because they’re worth less (to the firm). After all, women are more likely than men to become pregnant and cut their careers short, or at least take family leave. Training new employees is costly, because it ordinarily takes a new employee a quite a while to get up to speed and become productive.
In the last few decades, legislation in the U.S. has shifted even more of the burden of family leave from the employee to the employer. Doesn’t that bit of social policy have to be reflected in the price of women’s wages?
‘Next it’s helpful to know that, as a general rule of thumb, wages soak up about 2/3 of company revenue. The remaining third is paid out to bondholders and stockholders.’
How do they pay their other costs then, say raw materials suppliers, or utility bills?
“I agree with your arithmetic but disagree with your conclusion. Most American firms are controlled by male stockholders, even if they don’t own a majority of the capital. Male stockholders are willing to give up a third of their earnings for the pleasure of discriminating against women. Thus, the male owners of a firm with only female employees will replace some of them with men, pay the latter more and enjoy the ensuing humiliation of women.”
Those male-chauvinist firms would still be outcompeted by firms controlled by women or by non-discriminating men, though.
@ #8
No, the legislation you reference was intended to help women, not merely force them to take non-wage benefits in lieu of cash. It can’t possibly be affecting their wages. QED
Uh, it might have that tendency. Which might explain the rationale for public policy intervening to prevent such discrimination.
You may be surprised to learn that, among women who get pregnant, a high percentage did so with the participation of men. So why should women bear a disproportionate cost of pregnancy?
Now, there may well be more efficient means to socialize the cost of pregnancy than wage parity policies. But if we want domestic procreation (which is an open question), we arguably should have some mechanism to socialize more of the costs.
I‘m getting confused – are we now labelling as “discrimination” even cases where we agree a disparity is justified by actual cost / productivity differentials?
In that context, I tend to think people make choices about changing or delaying careers based on what they think will make them happier. Some women enjoy a disproportionate benefit of having / raising / bonding with a child. Not clear why we ought to expect they be made whole on their lifetime earnings as well.
[BTW I also tend to think we can appreciate procreation but be best served by neither subsidizing nor discouraging it. Monkeying around in such matters usually seems like a dangerous game.]
What may seem unfair is that some women who may not (think they will) want to have children get lumped into the same (rational) probabilistic pool.
At the risk of sounding whatever, I’ve wondered about the result of a probably untestable proposition – what would the pay disparity be for women who could upon entering the workforce somehow provide employers with proof that they are / have taken measures to be infertile?
At any rate this provides an interesting perspective:
http://www.chicagobooth.edu/magazine/32/2/facultydigest/facultydigest1.aspx
Money quote: “The reason for the income gap may thus be the opposite of prejudice. It is that women are judged by exactly the same standards as men.”
Jeff S:
I should think it would be natural for an economist to presume that if women are paid less, it’s because they’re worth less (to the firm).
And indeed it would. But in talking to a broader audience, assuming one’s conclusion is generally a poor way to communicate.
@9, nobody.really:
I had already suspected that men were somehow complicit in these pregnancies, but I admit it never occurred to me that might be a reason to socialize the cost of pregnancy. Do we also get to socialize the benefits? Many very traditional deals involve giving up one’s first-born child.
More seriously, a marriage between a mother and father (or more generally, another parent) is an arrangement for the mother not to bear a disproportionate cost of her pregnancy. But if we did want to socialize the cost of pregnancy on a larger scale (which is an open question), then Steve’s argument on this blog about the minimum wage applies here: We should pay any subsidy out of the general fund, not as a tax on employers who employ women. So, no wage-parity rules.
We already have such a subsidy in the U.S. — the tax benefits of having children.
“Female White House staff members make 88 cents on average for every $1 male employees earn, … But instead of becoming defensive and trying to explain away the discrepancy, Mr. Obama should simply say the White House has to do better and present the lag for what it is: more evidence that the problem persists even in workplaces committed to equal treatment.”
http://www.nytimes.com/2014/04/10/opinion/the-truth-about-the-pay-gap.html
@10, Greg Heslop
“Those male-chauvinist firms would still be outcompeted by firms controlled by women or by non-discriminating men, though.” Not as long the male-chauvinist firms keep prices at a competitive level. Being price-competitive, they are less profitable in terms of dividends. But male stockholders remain loyal for misogynistic satisfaction.
@7, BPC
“Clearly you have never met a male share holder.” I have met several. One of them explained to me that he purposefully invests in male-chauvinist firms despite knowing that they have sub-par price-earnings ratios.
@9, nobody.really
“You may be surprised to learn that, among women who get pregnant, a high percentage did so with the participation of men. So why should women bear a disproportionate cost of pregnancy?
Now, there may well be more efficient means to socialize the cost of pregnancy than wage parity policies. But if we want domestic procreation (which is an open question), we arguably should have some mechanism to socialize more of the costs.”
I agree. We shouldn’t fall into the trap of letting the parents negotiate how to share the costs of pregnancy. As we all know, domestic fights do not end well for women.
A boss who offers health benefits is wise not to hire women who are pregnant or who have kids. The boss who doesn’t offer health benefits still has to deal with FMLA and all those sick days a woman spends tending to sick children.
Indeed, in the past it was wise for a single, childfree woman to announce that fact at the job interview, so that the boss has every incentive to treat her like a man.
Any women can compete fairly with men if she takes jobs on a non-benefited 1099 or even W-2 contract basis. And a bonus is that she will earn far more hourly pay than her captive peers, who are partly paid in “benefits.” An employer who hires by contracts lasting less than a year has no Obamacare mandate problem.
@feminist, #17
When I google a firm’s business and stock statistics, I don’t seem to be able to find a male chauvinism indicator. P/E? Yes. Beta value? Yes. I can’t find your MCI statistic anywhere. How does one determine whether one is a shareholder at a chauvinist firm?
But all joshing aside, with regard to
“Not as long the male-chauvinist firms keep prices at a competitive level. Being price-competitive, they are less profitable in terms of dividends. But male stockholders remain loyal for misogynistic satisfaction.”
it would be literally impossible for a firm to stay price competitive in the long run if they pay out more in wages because of discrimination. Pure misogynist spite does not pay the bills, and that is a good thing.
@ 18, Feminist
@ JeffS #15
Wouldn’t the plan to tax the bejesus out the child’s future earnings count as socializing the benefits of having kids? That’s the beauty of socialism. It can be so all encompassing.
@22, Scott H.:
I’m not sure what “socialism” means in this context. I agree that, at least in developed countries, the net present value of future taxes a child will pay — and that child’s descendants — is part of why children are a huge positive externality for society. Only part.
@20, suckmydictum
“it would be literally impossible for a firm to stay price competitive in the long run if they pay out more in wages because of discrimination.” I refer you to Landsburg’s arithmetic.
“When I google a firm’s business and stock statistics, I don’t seem to be able to find a male chauvinism indicator.” You can instead google for firms that discriminate against women. Quite a few come up.
I am beginning to see a pattern of anti-women sentiment in the comments of suckmydictum and others. You guys start expressing hate in blog comments and end up investing in male chauvinist firms. Not that I am surprised.
——
And I finish here. I have been kidding the whole time! ;)
Feminist I was on to you from #1 — the stereotype was a tad too shallow (but sadly only a tad)
“the net present value of future taxes a child will pay … is part of why children are a huge positive externality for society.”
How can that be? The taxes that child will pay are just a transfers from one party to another. In and of itself, there’s no way to say that that is a net positive for society. Of course that’s not to say children aren’t a net positive for society, just that whatever those positives are, the taxes they’ll pay are not part of it.
r/16 “At the press conference, Mr. Carney said that men and women who work the same White House jobs make the same salaries. The pay difference results from the fact that women outnumber men in the administration’s lower-level jobs, he said. Some studies have shown that women are more likely than men to take jobs with flexible or part-time hours and with low wages.” (http://www.csmonitor.com/USA/USA-Update/2014/0408/Does-White-House-have-a-gender-pay-gap-How-the-numbers-stack-up.-video)
So, apparently such explanations are fine at the White House, but not for businesses.
@24
Well-played. I agree with iceman that the character was only a little overstated. As this is landsburg’s blog, the trough where people feed from outrage, I hope you can understand my being taken in.
I know you are being facetious, but I just want to state for the record that the historical average profit margin for a US business is about 6%.
29/Henri Hein: I heard 8 percent profit margin, but that just covers the stockholders, not the bondholders.
If one-third of revenues go to the stock- and bondholders combined, that’s 17 to 19 percent of revenues paid out in interest. That seems high, intuitively, but perhaps my intuition is wrong.
Ah, wait! I forgot depreciation! If you add that back in as returns to the stockholders, it probably works out.
Borrow $20K at 10%. Add $20K stockholder money. Buy a machine for $40K. Rent it out for $15K a year. It depreciates to 0 in four years.
The $15K is: $2K interest to bondholders. $5K returned to bondholders in depreciation (repaying principal). $5K returned to shareholders in depreciation (returning their capital). $3K profit to shareholders.
Profit is 20% of revenue, but including everything, shareholders and stockholders receive 100% of revenue.
So a firm would never forego a large profit opportunity due to cognitive or social bias?
If that’s your premise, it’s pretty bold. The banks and law firms that spent decades refusing to hire Jews provide one obvious counterexample.
For the record regarding Feminist: It is an exceedingly rare event for me to disapprove a comment (largely because I’m blessed with such thoughtful commenters) but I’d probably have disapproved these as being entirely non-constructive, except for the fact that the commenter’s email address (which is visible to me but not to the rest of you) revealed him/her to be someone who is habitually quite thoughtful, and hence had to be joking. I figured I’d let it play out.
Phil: Profit margins have been edging towards 8% lately, but there is a lot of debate about whether that will continue. That is why I said historical.
I don’t know why we should include the bond-holder’s take when calculating profit margins. Sure, they benefit from the business, but lots of participants benefit. Employees, partners and suppliers all benefit, as well as other creditors. From payroll and sales taxes, even governments benefit. I don’t know why you would single out bond-holders. They aren’t particularly interested in profit margins or ROE, just solvency.
@26, Brian:
The definition of “externality” divides the world into givers and takers, just like the transfers you describe. If a person imposes costs on other people that he doesn’t pay for, that’s a negative externality. If a person confers benefits on other people that he doesn’t charge for, that’s a positive externality. The usual objection to externalities is not that a transfer happens from one party to another, but that the incentives involved lead people to make inefficient choices. However, even if the transfer is perfectly efficient — meaning no net change if you add up everyone — it’s still an externality.
So, in considering the birth of a child, the “net externality” would be measured for everyone except the child, and any taxes paid by the child make the externality more positive (or less negative). The meaning of “net positive for society” seems ambiguous to me, but I do believe a higher population tends to make the world wealthier.
Henri Hein/33: I wasn’t trying to include the bondholders’ take when calculating profit margins. I was trying to wrap my head around Dr. Landsburg’s point that only two-thirds of revenues go to labor. I hadn’t realized that bondholders claim so much of revenues, and I had forgotten that most of the cash flow after paying employees and bondholders goes to replacing capital.
“Feminist”‘s hoax became obvious to me when I read the second half of post 17.
Just for those scoring at home. Or if Feminist wants to update for his or her future attempts.
Unless I’ve missed something, this entire post and ensuing discussion is based on the fallacy that the entire wage gap comes from men and women doing the same job at the same company and getting paid at this 100%:77% ratio. If it really were that simple, it would probably also be as implausible as our host thinks it is.
———-
I’ll illustrate a hypothetical just to show on of the multiple ways in which the reality of the wage gap is more complex than this implausible fantasy:
Imagine an industry with a large number of companies, a few big ones many medium and small ones. In this industry, it is necessary for companies to spend on both marketing and personnel/”human resources” to succeed.
For social reasons somewhat outside these companies’ control (or that they’re unaware of their influence on), women gravitate to the HR roles while men gravitate to marketing, and eventually the professions acquire reputations. Women don’t go into marketing in this industry much because it’s so male dominated and the culture makes it uncomfortable for them; fewer men go into HR because the culture gives them the impression that because it is “feminine” it is a lower status profession.
Salaries in marketing are significantly higher than in HR for people with the same levels of responsibility and education and experience. How did this come to be? Probably in parallel to the reasons that men in this industry have been avoiding HR – broader social reasons that value mens’ professions at a higher rate
It’s hard for anyone to make a direct comparison of how much a company *should* be spending on a good HR person vs. a good marketing person; it’s very hard to accurately measure their direct impact on the company’s success in financial terms. Since their contributions are indirect and interrelated (like, how do you know that your great marketing team only got gathered at this company as a result of your great HR team?), evaluation of their value is very biased.
But it doesn’t even matter: A company can’t individually do anything about it. They can’t hire a lot more women for marketing to save money because a) there aren’t many women available for those jobs and b) they’d demand the same salaries as the men anyway. And there’s no need to pay the women in HR more, because they wouldn’t get more at other companies, anyway.
No individual company is overlooking a profit opportunity, yet without some systematic concerted action, the wage gap is going to persist.
———-
I do not mean to say that the above is *the* explanation of the wage gap and you can now find a simplified idealized form of it and analyze that and claim you’ve solved the problem again. I mean it as just one example of how an ill-informed analysis of a problem you don’t understand, may end up bearing almost no applicability to the actual problem.
In other words, I mean it as yet another example of what I think of as a broad indictment of the entire profession of economics, which I see behaving this way over and over. Incurious about actual reality, as long as you can find interesting math to play with, and then believing that explains the real world.
Cos: I realize you are offering your story as only one of many possibilities. But it’s worth noting that in this story, “Equal Pay for Equal Work” laws, if accurately enforced, will have no effect on the distribution of income. In order to justify such a law, you need at least one plausible story under which the law has a desirable effect.
Cos: Let me add to my reply above. It’s not clear in your scenario that there even *is* a social problem, in the sense that it’s not clear there’s any unexploited opportunity to improve welfare. And again, even if there were, it’s pretty clear that the sort of laws being proposed to absolutely nothing to addres it.
In other words, I mean it as yet another example of what I think of as a broad indictment of the entire profession of economics, which I see behaving this way over and over. Incurious about actual reality, as long as you can find interesting math to play with, and then believing that explains the real world.
Part of what economists do is to try to construct stories that match their intuitions about what’s wrong with the world and how it can be fixed. When we discover that we’re unable to construct a coherent story, we learn that there’s likely to be something wrong with our intuitions. Your own inability (demonstrated in this post) to construct a coherent and relevant story would have taught you something if you subjected yourself to the sort of intellectual discipline that economists insist on.
I was not presenting this illustrative example to say “here is what a particular law can fix”, I was presenting it to say “here’s one way to show you that it’s possible for a wage gap to exist in ways that your analysis would be totally inapplicable to.” It’s not exhaustive, it’s just a simplified sample of one kind of thing you could be missing; there are plenty of others.
I very explicitly said that I do not believe my illustrative example somehow fully explains all the ways in which the wage gap works in the real world, so I don’t understand why you want to ding my comment for somehow being “wrong”.
What you seem to miss is that your post was not about explaining “here’s a specific law and why it won’t help”, your post was about arguing “there can’t be a wage gap because if there were this analysis claims it wouldn’t make sense”.
If that isn’t actually what you meant to write, you need to write a new post and retract this one.
However, I really really really wish that “the intellectual discipline economists insist on” were what you describe it to be. Economists are constantly applying inapplicable models to analyse real world facts and constantly boldly concluding those real world facts must not be true because the analysis shows it. In reality, it is usually the case that the economists’ way of modelling reality is misled and misleading and economists should be concluding that their model is wrong, but they hardly ever seem to say that.
In contrast, I quite explicitly said that I’m giving one simplified example of a wide variety of real world complexities of the wage gap, without claiming to explain it or understand it fully. I accept real world information but am not pretending I know all that’s needed to know to analyse it. It’s what I wish economists did more of.
So, it’s very telling that you immediately assumed that I’m doing what economists do all the time: That by giving an illustrative example to show you how you may be missing some things, I’m actually pretending to have a complete model.
Interesting, some people do not get sarcasm. Perhaps they do not want to.
Cos: I did not misread you. You gave one example to illustrate that men’s and women’s wages can differ for reasons other than pure discrimination. This was pretty much unnecessary, because the entire point of the original post is that discrimination is an implausible explanation for the wage gap, which already implied that the reason must lie elsewhere. If you think you’re refuting something, then it’s you, not I, who hasn’t bothered to read before responding.
Re intellectual discipline—part of intellectual discipline is the willingness to recognize the difference between a relevant and an irrelevant model. Yes, your model makes perfect sense. But it adds nothing to the analysis, and that isn’t changed by the fact that it’s only one of many other irrelevant models you could have offered.
Coming very late to this party. Steve says that the wage gap in Cos’s example was not because of discrimination – but what other reason is there? Lets state that in the model the value added by HR is the same as that added by marketing, but the wage difference persists. It persists only because women’s work is valued by society generally (including by women) as lower than men’s – that is discrimination surely? It is based on an irrational assumption and is actually false.
In basic economic models the wages of each group would be dictated by the value added to the company. The condition of the example is that the value of each group is equal, and therefore the wages should be the same. In the example men are paid more than the value they add at the expense of women who are paid less. Steve suggests that this is not a problem, since all parties are happy to continue with this state of affairs.
An equal pay for equal work would in fact correct this erroneous assessment of the value of women’s and men’s work and return the situation to that dictated by the economic model. Each person would then get what they “deserved” in terms of value added.
If there were no corresponding change towards rationality, this arguably “fair” distribution would be economically harmful, since incentives would no longer align with expectations. Men would believe themselves to be underpaid in marketing. Over time, it would likely result in more men going into HR and more women going into marketing, and would I think lead to a move towards a rational position.