Sunday, April 29, 2007

AAUW Got It Wrong: There is No Pay Gap

The American Association of University Women Educational Foundation released a study last week claiming that just one year after college graduation, women earn only 80% of what their male counterparts earn. Ten years after graduation, women fall further behind, earning only 69% of what men earn. The organization further claims that the pay gap is "disturbing," since it can only exist because of sex discrimination. It is hard to take claims like this seriously, and here are the reasons why:

1. Sex discrimination is illegal under the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. If the AAUW allegedly found thousands of cases where women make 80% of what men make one year out of college with the exact same credentials, and thousands of cases where women make 69% after ten years with the exact same qualifications, why not bring legal action to correct this discrimination? Would thousands of organizations really engage in that much illegal discrimination and expose themselves to litigation where they would clearly lose? Not likely.

2. If profit-seeking corporations can hire women with one year experience for 20% less than equally-qualified males, or a women with ten years experience for 31% less than equally-qualified men, they would have to be blinded by sex discrimination to pass up the opportunity to save 20-30% on their labor costs. They would hire ONLY women, and NO men. The wages of women would then get bid up. Corporations are often condemned for being greedy and motivated solely by profits, so how could they pass up an easy opportunity to save 20-30% on their costs of doing business? And how could men command a 20-30% wage premium that is unjustified by their productivity in a competitive labor market?

Analogy: Think about two gas stations (like a male and female worker competing in the labor market) competing on the same corner offering the exact same product (same credentials), and Station A (male worker) sells gas for $1 per gallon, and Station B (female worker) sells gas for 70 cents. Cost-conscious consumers (employers) would obviously shop only at Station B (hire only female workers), and Station A (male workers) would either be forced to lower its prices (wages) or go out of business (remain unemployed). The only explanation for persistent price (wage) differentials between Station A (male workers) and Station B (female workers) would be differences in the quality of the gas, differences in service, or differences in credit terms, etc. In other words, some differences in wages can be explained by differences in labor services provided by male and female workers.

Wage differentials not explained by differences in productivity or the quality of services provided could not exist and persist in a competitive labor market. Greedy employers provide a sure solution to sex discrimination and lower wages for women: they will hire only women, which will then bid up their wages.

3. Here is one example of differences between male and female workers that would explain differences in pay: A year out of college women in full-time jobs work an average of 42 hours a week, compared to 45 for men. In other words, men work 7% more hours per week than women. More hours translates into more pay.

4. Ten years after graduation, 39% of women are out of the work force or working part time -- compared with only 3% of men, mostly because of marriage and motherhood. When these mothers return to full-time jobs, they naturally earn less than they would have if they had never left. And given the fact that women expect to spend time out of the work force for child-raising, they may naturally select college majors and careers that don't penalize them for gaps in employment and the possible "depreciation" of one's skills. For example, if you planned to be out of the labor market for 10 years, there is probably a significant difference in the depreciation of the skills of a grade school teacher compared to a computer programmer, electrical engineer or accountant.

5. The AAUW report did acknowledge that college-educated women tend to go into fields like education, psychology and the humanities, which typically pay less than careers preferred by men, such as engineering, math and business.

For example, 13% of the bachelor's degrees earned by men are in the relatively high-paying field of engineering, vs. just 2% of women earning college degrees in engineering. Conversely, 12% of bachelor's degrees earned by women are in the relatively low-paying field of education, compared to 5% of men.

In the chart above, note that the average salary of a liberal arts major (which includes the fields identified by the AAUW as preferred by females) is $31,333 which is only:

58% of the average salary for engineering majors
62% of the average salary for finance/economics
63% of the average salary for computer science/MIS
66% of the average salary for accounting majors

Since women are disproportionately represented in majors/fields that pay less (education and humanities), it would be natural for some salary differentials to exist.

6. Most studies that control for all factors that affect earnings show that motherhood and marriage explain almost all of the "pay gap." For example, research shows that:

a. There is no pay gap among single, full-time workers age 21 to 35, who live alone.

b. Among people ages 27 to 33 who have never had a child, the earnings of women are about 98% of men's.

c. Never-married women in their 30s who have worked continuously earn slightly higher incomes than their male counterparts.

d. Men spend only 1.6% of all potential work years out of the workforce, while women spend 14.7% of potential work years away from work.

e. A woman's lifetime earnings are lowered 13% by having her first child, and 19% by having her second.

Bottom Line: Here is what the AAUW didn't report: Median annual earnings of men and women age 25 to 34 with bachelor's degrees in the same field are roughly equal. In other words, there is no "pay gap," once you control for ALL factors that affect earnings, and compare apples with apples.


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