18 October 2018

Why the gender pay gap is only part of the story


Much angst is expended on the idea that we’ve got a gender pay gap. A closer examination of the subject suggests that we’ve not actually got one. Indeed, that if there is one it might well be in favour of women. This, of course, depends on exactly what it is that we’re calling a pay gap so let’s explain our definitions here.

Women get paid less than men. In general that is, across the economy as a whole. This is what is known as the raw, unadjusted or gross gap. But we’re in a market economy. People who work different jobs, work different hours or stick with the same career path for longer are naturally going to be paid different amounts. That there is some variation is to be expected.

In fact, once we correct for all of these factors we find that, for people doing the same job in the same organisation, the gender pay gap falls to about 0.8 per cent, the sort of figure we might ascribe more to a rounding error rather than anything more sinister.

It is also true that fewer women reach the top of the greasy pole. That might be because of discrimination, career breaks or just not thinking the game is worth the candle. We could say that female-dominated firms pay less because of that discrimination, or women cluster in the firms which pay less. The reason for these differences is still a matter of debate between those who insist, as I do, that this is the way market economies work and those who insist it is down to the oppression of the patriarchy.

But in fact, if we consider a fuller picture, there may well be no “pay gap” at all. Or rather, no compensation gap — and it is that word “compensation” that is the key here, for the same reason that it is the total cost of employing someone, rather than just their salary that influences a company’s hiring decisions.

No one hires based solely on what will appear in their employee’s wage packet. They look instead at the total cost, including taxes on employment (such as employers’ national insurance) and other costs – sick pay, maternity pay, training costs, and, crucially, pensions. Pensions are particularly important because, as we all ought to know, vast swathes of British industry are going bust thanks to their pensions deficits.

Once we include all of these things – and I’ve not seen any proper calculations of a gender compensation gap – it’s moot as to whether there actually is a gap at all. In terms of direct costs to firms, maternity pay isn’t all that large, given that 90 per cent of the cost of statutory pay is picked up by the state. But such things as flexible hours, the ability to take time off at short notice (say, for a sick kid) and job security – that is, the difficulty of getting fired — also add to employers’ costs. These might be things available to all employees but, given that women take on more parenting responsibilities than men, they are more likely to take advantage of these options.

Employers, especially smaller firms on tight budgets, are naturally hesitant to offer such perks because of the costs to them. And pensions are of course the biggest liability when taking on a new member of staff. As the TUC itself rightly argues, a pension is simply deferred pay.

The key thing to note is that women, even given equal retirement ages, tend to receive their pensions for about three years longer than men. Where there is still a gap in retirement ages based on gender this gap expands even wider. But also women are also disproportionately represented in the public sector, the one remaining place where the very much more valuable defined benefit pension still exists. There are reasonable estimates that such pensions add as much as 30 per cent to public sector pay. Or, using our above definitions, to public sector compensation.

If we add all of these parts of compensation together then the gender gap might start to look rather different. It is possible that we find women are getting a different compensation mix, on average, to men: greater job security, greater flexibility, possibly better pensions, all at the cost of some cash in their monthly pay packets. That would go part of the way to explaining the existence of a pay gap, even if there is no deliberate discrimination.

Exactly what the difference between compensation for men and women is unclear. But it seems uncontroversial to note that pay is not the only part of compensation, that women do on average receive lower salaries, but that some of the shortfall is likely to be made up for by greater compensation in other forms.

What we’d really like to know though is whether this is the whole story. And at least as far as I know, we don’t yet know. There are still no population-wide measures of compensation, as opposed to pay, listed by gender. If there were they would certainly make interesting reading.

Tim Worstall works for the Continental Telegraph and the Adam Smith Institute