7 August 2018

Forcing small firms to publish their pay gap wouldn’t help women


Last week a group of MPs recommended that all firms with more than 50 employees should be compelled to report their gender pay gaps. That constitutes a sizeable reduction on the current threshold of 250 employees.

The Business, Energy and Industrial Strategy Select Committee’s proposal would have a number of highly undesirable consequences, not the least of which would be a breakdown in pay secrecy, damaging our ability to interact on equal terms outside professional settings.

But what would its impact be on the position of women in the labour market? Given that requiring firms of only 50 or so employees to report gender pay gaps would create perverse incentives for firms to avoid hiring young women employees in sectors traditionally dominated by men, it might not be as helpful as the committee thinks.

In ordinary parlance, a gender pay gap means men and women not being paid the same for the same work done equally effectively. Equal pay legislation has existed for four decades, but the fact there are laws against discrimination will not, by itself, altogether rule out discrimination any more than laws against burglary altogether rule out burglary. Assuming that we want to maintain equal pay legislation, it is in principle of interest to understand to what extent anti-discrimination laws are complied with as opposed to being broken in invisible or insufficiently countered ways — just as one would with any other law.

Gender pay gap statistics are surely widely regarded, in the broader public, as an attempt to do just that. And so most people think that the existence of a gender pay gap of, say, 10 per cent means that there is residual pay discrimination on quite a large scale.

Of course, gender pay gap statistics tell us no such thing. Indeed, they aren’t really about whether there is equal pay for equal work at all — they tell us next to nothing about that.

In particular, they tell us next to nothing about what we’d really like to know, which is whether a young woman entering the labour market today should, across her working life, expect to be paid on an equal basis with a man that did the same work with equal effectiveness.

Rather, what they tend to tell us is two things. First, that more women work part-time. That’s interesting and there are all kinds of things one might discuss about whether that’s a good or a bad thing, but it doesn’t tell us whether women are underpaid. Indeed, part-time women are paid more than part-time men, not less.

Second, not as many women who entered the labour market 35 years ago have risen to senior positions as men have who entered the labour market 35 years ago, so older men have higher pay than older women. There will have been lots of reasons for that at the time — relative education of boys and girls, attitudes to women in the workplace, attitudes of women to careers. It’s an interesting historical study, but it doesn’t tell us much about young women’s prospects in the labour market today. There’s virtually no pay gap at all for women aged 22 to 39.

This second factor means that mandated gender pay gaps reporting will not merely be misleading. It will actively discourage firms from hiring young women in sectors traditionally dominated by men. Why? Well, imagine a firm in a sector traditionally dominated by men, with 50 employees. Let us suppose that it has two categories of staff: senior staff (with 20 years or more experience), who are on an average of £50,000 per year, and junior staff (new entrants to the sector) who are on an average of £20,000. Imagine there are 10 seniors and 40 juniors.

Next, suppose that 20 years ago very few women worked in this profession, so there is only one senior woman staff member. And suppose there are four female junior staff. Then at present the average woman is paid £26,000 (one paid £50,000 and four paid £20,000) and the average man is also paid £26,000 (nine paid £50,000 and thirty-six paid £20,000) — a gender pay gap of zero.

Now, suppose this firm believes that, with a concerted recruitment campaign (at the point of staff turnover), it could increase its number of high-quality young female applicants, getting itself to eight junior women. What would happen to its gender pay gap?

Well, there would then be eight junior women and one senior, so the average woman’s pay would fall to £23,300. Meanwhile, there would be nine senior men and 32 juniors, so the average man’s pay would rise to £26,600. There would be a pay gap of 14 per cent.

Mandated gender pay gap reporting might then lead to highly adverse publicity for this firm, on account of its large rise in its gender pay gap. For instance, it’s not hard to imagine campaigns arguing for boycotts against firms with a pay gap over a certain size. It’s therefore possible that, thanks to the obligation to report the firms gender pay gap, the policy of seeking to increase recruitment of young women ends up coming at a commercial price.

Gender pay gap statistics do not tell us whether men and women are paid equally for equal work. They are, at best, at attempt to model some indicators of that, and are highly imperfect for that task. When considered in more detail, the gaps data are dominated by backwards-looking features of labour markets, education and social attitudes from decades ago.

Mandating the reporting of gender pay gap statistics will have particularly perverse effects in sectors that were traditionally dominated by men, and thus where there are inevitably more senior men at present and for some time to come, because reporting gender pay gaps will tend to discourage firms from hiring young women at entry level. That simply cannot be a pro-woman policy.

Andrew Lilico is an economist and political writer.