Female and Male Wage Gap and Endogeneity Problems

Some friend of mine requested I comment on an article about the pay gap between men and women written by Ramesh Ponnuru for Bloomberg

Ponnuru is an editor at the conservative/free market leaning magazine the National Review. I start with this because the free market model of wage discrimination goes something like this. If men and women are equally productive workers, but some firms choose to pay women less than men then women will go to firms that pay them equally (or those firms can pay women slightly less making the women friendlier firms more profitable and all the discriminating firms will go out of business). Of course this assumes that not all firms are discriminating and that those discriminated against have the ability to open up their own business. For example if we take advertising agencies like Sterling/Cooper/Draper/Price it is likely that both African Americans and Women were discriminated against in terms of pay and job prospects in 1960s New York and did not have the resources to open ad agencies thus their salaries and opportunities were held down.

One point that the article makes is that the often quoted statistic that women make three-fourths the average wage that men do, but when you compare women and men in the same profession or number of hours that the wages are much closer (looking around estimates range from 85-95 depending on the industry).  In other words Ponnuru believes that the gap is overstated because women choose jobs with lower salaries and fewer hours.  He believes other things still create a gap.

However, as one economist (Sarah Miller*) pointed out the choice of a job is endogenous to the wage. This is a very key term in economics and needs explaining. If we try to control for job choice when looking at the wage gap we might underestimate that gap if women avoid fields were they are underpaid relative to men or experience worse discrimination.

So what is an economist to do? Typically we look for things that would influence women's decisions that are not determined by wages one example  might be policy changes that are not determined by the wage. This article by Jane Waldfogel in the Journal of Economic Perspectives, while a bit old is very readable (like most articles in the journal). It suggests that countries with better maternity leave policies have lower wage gaps, but that could be endogenous in that perhaps those countries with low wage gaps would be more likely to produce these types of policies. However, Japan and the United States passed new legislation and by comparing women who had children before and after the new policy and their wage gap, the hypothesis that better maternity coverage lowers the gap is supported.

Granted I'm only citing one paper, but I get the sense from googling around that a pay gap still exists, in part that is due to job choice, but figuring out how much is very hard.

* I discovered Sarah Miller's research via twitter yesterday, very interesting stuff on ER use when health insurance is provided and Prosper loans, I look forward to reading it and writing about it.