Utopia, you are standing in it!

Late last year, the New Zealand Court of Appeal held that paying women in predominantly female occupations less than men in other occupations with similar skills and responsibilities may be illegal under the Equal Pay Act of 1972.

The Employment Court found that to assess whether a breach of the 1972 Act had occurred in a female intensive industry, it would be necessary, and within the scope of the Act to use external employers and other industries as comparators in determining what a notional male employee with similar skills and responsibilities would be paid. The comparison would not just be within the same workplace.

The Court of Appeal agreed with the Employment Court’s finding. In particular, the necessity to be able to look outside a female-intensive industry to properly ascertain what a notional male performing that role would be paid based on skills and similarities of duties where there is no appropriate comparator within the industry.

Rather than talk about this New Zealand employment case directly, my first post will be about the experiences in the USA. A later post will discuss New Zealand in more depth.

The US Supreme Court’s first decision on comparable worth was County of Washington v. Guenther. This 1981 case was about female prison guards being paid 70% of the wages of male guards in the same prison. The County of Washington did a study that show they should be paid 95% of male guards.

This particular case has a tremendous irony because it is actually reasonable to argue that male guards, and perhaps female guards in male prisons, should get danger money depending on the level of direct contact with high risk prisoners. Male prisoners are far more violent. I don’t think anyone disputes that.

Quite simply, a lot of people don’t accept that the wage setting processes results from two conditions: wages are limited from above by the workers’ marginal productivity in the job: a limited from below by the alternative job offers of other employers.

Rather than fight that battle for the 10,000^th time, a considerable amount of the economic analysis of comparable worth in the 1980s took the principle of comparable worth for granted and simply traces out the unintended consequences of implementing comparable worth.

They then go on to argue, for example, Ed Lazear, that comparable worth is never the correct remedy for wage differentials and job segregation because it makes everything worse. Rather than persuade people that markets function well, he simply points out that comparable worth turns out to be a bizarre intervention and will do many things that its supporters don’t want.

As Richard Posner observed in a 1986 US appeal court opinion, under the principles of comparable worth, a perfectly decent and honest employer who behaves with complete honour towards women and their equality will nonetheless, if they lost comparable worth litigation, would have to pay back-pay despite the fact he paid the going wage and couldn’t afford to pay more.

The practical upshot of comparable worth is to introduce occupation by occupation and job by job minimum wages for women, with the burden of proof on the employer to show that a comparable worth ruling should not apply to them.

If comparable worth were to be applied to the aged care sector, such as is proposed in New Zealand, more women would move into that sector because of the higher wages, leaving to an over qualification problem with aged care workers.

Instead of moving women into better occupations – occupational upgrading – comparable worth based wage increases will keep low skilled women in the old occupations where they were previously supposedly discriminated against.

Furthermore, to the extent that the low pay of women in the aged care work is the product of sex discrimination and occupational segregation, comparable worth does nothing to reduce the barriers to entry into male dominated, better paid occupations.

To the extent that the wage increase because of comparable worth puts women out of work, not only do they not have a job, the purported barriers to entry into the better paid male dominated occupations are not addressed in any way.

Instead of reducing occupational segregation, comparable worth would increase it. More women would enter the low paid occupations to get the comparable worth wage increase, rather than try and move up the occupational ladder.

By increasing wages in the female dominated occupation, comparable worth causes more women and men to enter these occupations, not less, and at the same time shrinks the number of jobs available by driving down demand because of higher costs of labour.

One of the responses of employers to comparable worth is to change the composition of the recruitment poor from which they hire. They will hire better qualified workers and put out of work their existing workers. This is common with the teenage minimum wage: 17 and 18-year-olds tend to lose their jobs to more mature and responsible 18 to 19-year-olds after a minimum wage increase.

The better explanation of why so many women are in a particular occupation is job sorting: that particular job has flexible hours and the skills do not depreciate as fast for workers who take time off, working part-time or returning from time out of the workforce.

• Low job turnover workers will be employed by firms that invest more in training and job specific human capital.
• Higher job turnover workers, such as women with children, will tend to move into jobs that have less investment in specialised human capital, and where their human capital depreciates at a slower pace.

Women, including low paid women, select careers in jobs that match best in terms of work life balance and allows them to enter and leave the workforce with minimum penalty and loss of skills through depreciation and obsolescence.

This is the choice hypothesis of the gender wage gap. Women choose to train and be educated in occupations where human capital depreciates at a slower pace.

Comparable worth is a very 20^th century concept:

• The wage gap in the late 20^th century was driven by the education gap; and
• In the 21^st century, it is driven by work flexibility.

Claudia Goldin has described pharmacy is the most family friendly occupation. She compares it to law. In law, if you work long hours, you are on partnership track and win the top clients. In pharmacy, the only advantage of working longer hours as you earn more money that week. Also, pharmacists are completely interchangeable. Do you care which pharmacist fills out your prescription at your local pharmacy or even know which one fills it out? Lawyers are not interchangeable: they cannot just handover a case. Detailed briefings would be required. You expect your lawyer to show up in court or at meetings on time anywhere without fail.

Claudia Goldin did a great study of Harvard MBA is using online surveys of their careers. She found that three proximate factors accounted for the large and rising gender gap in earnings:

• differences in training prior to MBA graduation,
• differences in career interruptions, and
• differences in weekly hours.

The greater career discontinuity and shorter work hours for female MBAs are largely associated with motherhood. There are some jobs that are severely penalise any time out of the workforce.

Goldin found one counterfactual that cancels out the gender wage gap amongst MBA professionals: hubby earns less! Female MBAs who’ve have a partner who earn less than them earn as much as the average MBA professional on an hourly basis but work a few less hours per week.

Interesting breakout of the gender wage gap by circumstances http://t.co/nzWiT6rXOu—
Chris (@forewit) December 11, 2014

When comparable worth was introduced by legislation in Ontario, any comparable worth wage increase was limited to 1% of the previous year’s payroll and then these payments could continue until pay equity is achieved. The pay equity legislation for the private sector in Ontario applied to any private sector employer with 10 or more employees.

A study found that the Ontario pay equity law had no effect on aggregate wages in female jobs or on the gender wage gap. Also, a lot of small firms completely ignored the law or didn’t even know about it.

The key point to make is if the New Zealand employment courts introduce comparable worth, it will be in one foul swoop with the possibility of substantial back-pay owing. If Parliament decided to act, it can introduce social reforms at a measured pace.