Why do women still earn less? Opportunity costs and rational economics

Henry Hazlett, in his classic book Economics in One Lesson, stated that "The bad economist sees only what immediately strikes the eye; the good economist also looks beyond." This is good advice for anyone studying economics, but particularly when the theories of economics appear to stand at odds with conventional wisdom.

According to survey data discussed in a paper cowritten by Lesley Mace and Ken Linna, women who work full time are still earning only about 80 cents for every dollar a man earns. This discrepancy seems to defy the message many teachers try so hard to instill in students: that education and a commitment to the labor force pay off. Women now earn nearly 60 percent of all bachelor's and master's degrees, and also earn more PhDs than men, says the U.S. Department of Education. In 1950, only one in three women was in the labor force. The U.S. Bureau of Labor Statistics  (BLS) now puts that number at just over 60 percent. If higher education and labor force participation are important in increasing income, women should be rapidly closing the gap. Instead, according to Mace and Linna, the gap has closed by only 15 cents in the past 40 years.

What's causing the gap?
Conventional wisdom points to discrimination as a possible cause, but in the 21st century, this rationale is less credible than in decades past. After all, if women were as equally qualified for a job as men but were simply paid less, employers could gain a competitive advantage by hiring only women. Instead, a little help from Economics 101 is all that is needed to solve the mystery.

Basic economics teaches that all participants in an economy are rational. That is, they make choices by weighing the benefits and costs of a particular action, and choose the one that makes them best off (maximizes their utility). Every choice that an individual makes comes with an opportunity cost, which is the value of the next-best alternative that the person gives up when making the choice. We can assume that women are rational economic participants who make choices based on costs and benefits with full knowledge of the opportunity costs. And here we have the beginning of our look beyond.

When speaking to audiences about his book Why Men Earn More, Warren Farrel divides the audience so that women are sitting on one side of the room and men are sitting on the other. He then reads a list of several job situations and asks audience members to stand if they have had a similar job. Typical questions include whether they work in a job that requires frequent travel, work more than 40 hours per week, have more than 20 years of experience in a job, have a long commute, or work in hazardous conditions or inclement weather. The activity's point becomes clear long before Farrel has finished his list: women and men often do not work the same types of jobs.

According to the BLS , among the lowest-paying jobs are those usually classified as "women's work": maids and housekeeping, child care workers, and kindergarten teachers. Each of these occupations has a workforce that is more than 90 percent female. Male-dominated fields such as law, engineering, and computer science are among those with the highest annual earnings. In fact, the occupations of airline pilot and petroleum engineer—both of which the BLS data show are in the top 20 occupations for annual earnings—did not even have enough women workers for the BLS to gather earnings data.

The data reveal that a similar pattern holds both across and within industries: both education and health care are industries in which the workers number more than 70 percent female. However, men make up the majority of more highly paid postsecondary teachers, physicians, and surgeons, while women dominate the lower-paying fields of teacher assistant, dental hygienist, and home health aide. Computer and mathematical occupations and jobs in architecture and engineering earn the highest median weekly earnings, yet they employ only 25 percent and 13.3 percent of all female workers, respectively. While food preparation and serving occupations earn the nation's lowest wages, the statistics from this male-dominated industry may be misleading. Men make up more than 80 percent of the chefs and head cooks, who earn the most in this category, while women make up more than 70 percent of the industry's lowest-paid: counter attendants, cafeteria, food concession, and coffee shop workers.

Closing the gap?
Some evidence shows that women are increasingly entering once-male-dominated fields and changing their courses of college study. For instance, the incoming freshman class at Georgia Tech  in fall 2010 boasted a record number of female students (36 percent). An August 2010 article in USA Today found that women aged 25 to 39 currently hold 47 percent of all science and engineering degrees and about 48 percent of all business degrees—more than twice that of older women. While a reduction in occupational segregation could possibly lessen the gender wage gap, women still may also be rational if they remain in lower-paying female-dominated fields. Occupations such as teaching, for instance, have a particularly family-friendly schedule that accommodates child care and family responsibilities. Elementary teaching, a field that is 97 percent female (according to the USA Today article), is an area where career interruptions may not erode skills as much as other high-tech fields.

A Federal Reserve Bank of Atlanta 2002 working paper by economist Melinda Pitts found that the wage differential was also lower in female-dominated fields than in male-dominated fields. In addition, tastes and preferences are important factors that cannot be dismissed as mere socialization.

Choosing between life balance and higher wages
Mace and Linna suggest that women are also more likely than men to leave the labor force, taking a career break for motherhood or for other family caretaking responsibilities. During these breaks, skills and contacts may possibly erode, and reentry at the same level may be difficult (although researchers have found conflicting evidence for this skill erosion). Women may also lose valuable experience and seniority during these breaks, and resulting wage penalties may be difficult to recover. These factors lead men and women of similar ages and educational backgrounds, who initially have similar earnings, to see these earnings diverge with time as a result of their differing work experience.

A May 2010 Economix blog post in the New York Times reported that only 32 percent of people at work at 7 a.m. were women. Men were far more likely to work jobs that required early arrival or late departures, suggesting that women and men also work different hours. Women are also less likely than men to work overtime and more than twice as likely as men to work part-time, according to a BLS article . Working a schedule that allows time for family and child care may be more of a priority or even a necessity for some women, at the opportunity cost of higher wages and career advancement.

Current research in labor economics has discarded the "gender gap" phrase and replaced it with a more descriptive moniker: the "family gap." Several leading researchers in the field of labor economics have identified that it is not necessarily gender that causes wage penalties but the sacrifices and choices that women may make when they become mothers. The U.S. Department of Labor reached this same conclusion in a 2009 review  of more than 50 peer-reviewed articles on the subject. The review says "differences in decisions made by women and men in balancing their work, personal and family lives" accounted for nearly 75 percent of the gender wage gap. As women make different choices, they also get different outcomes. Another Economix post , this one in July 2010, reported that women under 35 who work full time suffer only a 10 percent wage gap, and a Wall Street Journal article noted that single childless women between 22 and 30 earned more than men in most U.S. cities. Atlanta topped the list, with women earning 21 percent more on average than men, with similar results in other southeastern cities: Birmingham, Nashville, Miami, Jacksonville, Orlando, and Tampa-St. Petersburg.

Instead of being evidence of sexism and discrimination, the gender wage gap is largely a reflection of the utility-maximizing behavior of women. Accommodations made for child rearing and family responsibilities reduce work experience and in many cases commitment to the labor force, which often leads to lower wages. What is yet to be determined is whether the increased educational attainment and labor force commitment of younger women, along with greater opportunities for flexible work schedules and entry into once male-dominated fields, has the potential to remove the "gender gap" from the workplace vocabulary.

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By Lesley Mace, economic and financial education specialist, Jacksonville Branch
February 28, 2011