Thursday, 8 January 2015

Forcing firms to disclose a gender pay gap

Before Christmas there was a bill brought before parliament that would force large companies to disclose any pay gap between men and women. The bill has no chance of being implemented before the general election and so was largely symbolic. It still, though, raises some interesting questions. The law already requires that men and women receive the same pay for the same job. The purpose of this new bill was largely to try and enforce that rule. Would it work?
          I do not think so. To see why consider a hypothetical firm with the workforce summarized in the table below. There is a huge pay gap of £16,500 between the average man and woman. What's causing that? (a) Men are more likely to have 'higher' positions in the firm - senior managers are disproportionally male and cleaners disproportionally female. (b) In higher positions men get more than women - a male senior manager gets £20,000 more than a female counterpart.

          One can make the argument that both (a) and (b) are 'unfair'. The key thing I want to highlight is that (a) has a bigger effect than (b). This can create perverse incentives. Suppose, for instance, the firm was required to publish data on gender equality. A gap of £16,500 does not look good. What could the firm do?
          It could raise the salary of female senior managers to £100,000 and that of junior staff to £50,000. This looks like a good deal for women but only closes the pay gap to £12,000. The firm will still look bad.
         Suppose instead the firm hires an extra 10 women senior managers and an extra 10 women junior staff. This equalizes the number of women in higher positions and again looks like a good deal for women. But it still leaves the pay gap above £12,000!
         Finally, suppose the firm sacks 10 women cleaners and replaces them with 10 male cleaners. This closes the pay gap to £10,600. If the firm sacks 20 women cleaners and replaces them will 20 male cleaners the pay gap drops below £5,000. If the firm just hires an extra 20 male cleaners and sacks no female cleaners the pay gap still drops to £10,167.
         What this toy example illustrates is that a firm will most easily be able to make itself 'look good' by playing around with the number of low skilled staff. There is very little incentive for the firm to target what are arguably the biggest causes for concern - the low pay and low number of women in higher positions. Indeed, the easiest way for the firm to improve its image may simply be to lay off women cleaners!
         You might say that there is a simple solution to this - why not have firms publish the distribution of workers and wages, as in the table above. Well, I don't think the public or policy makers will go for that. We prefer things to be one-dimensional in order that we can have league tables and see who is best and worst. That leaves no room for two dimensional statistics.
          Attempting to reduce the gender gap through name and shame incentives seems, therefore, a bad idea to me. It will reduce the gender gap. But, likely not in a way that benefits women or men.

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