The Economic Rationales For Narrowing The Gender Pay Gap - Section Two: The Gender Pay Gap
The Imperative for a Focus on Gender Equity
Neoclassical economists, amongst others, have tended to view gender differences in employment outcomes, including pay, as largely resulting from optimal decision-making within households. Partnered women have been seen as less attached to the labour force and their labour supply as more sensitive to wage levels and household income than men's, because they are substituting between unpaid home production and paid work. Historically, this has also been seen as the reason why women invested less than men in education (Mincer, Polachek, Becker).
This assumed specialisation of fathers as "breadwinners" and mothers as "homemakers", however, does not reflect social norms today. This paper contends that policies and practices that do not take account of the wide diversity of aspirations within both the female and male populations are, in effect, barriers to heterogeneity and the aspirations of the growing numbers of women and men who seek to balance their work and family goals.
A survey of 1,128 New Zealand parents in 2004, found considerable diversity in views about working and responsibilities for children, and around gender roles.
Two-thirds of parents (69 percent of men and 60 percent of women) indicated that they would prefer to have a job even if they had a reasonable living income without one. Fifty-nine percent preferred both parents to be in paid work, with about half of these parents considering one parent should have a less demanding job. Thirty-nine percent of parents preferred a family where only one partner has a job, with this being a more common preference for men (43 percent) than women (36 percent).
Of those who preferred both parents to be in paid work, and one parent to be in a less demanding job, 56 percent said it doesn't matter which parent has the less demanding job, of the remaining 44 percent, 37 percent believed that females should have the less demanding job, and only 4 percent thought men should have the less demanding job (Ministry of Social Development, 2006: 11, 14).
Labour Force Participation and Aspirations
The labour force participation of mothers has been rising with each successive cohort. Today, the overwhelming majority of mothers are in employment, with many of them in full-time jobs.
Notions of marriage and dependence have changed. The expectation of lifetime income sharing, that previously enabled mothers to confidently withdraw from the workforce, is less common. Divorce has increased, and post separation financial settlements tend to provide ongoing support for children, but not former partners.
Aspirations are changing. Nearly all respondents in the New Zealand Work, Family and Parenting Study (94 percent) agreed that housework and childcare should be equally shared when both parents are in paid work. Of those households with both partners having equally demanding jobs, however, equal sharing of housework only occurs in 32 percent of cases (Ministry of Social Development, 2006: 15, 16).
A substantial minority of families, however, are not achieving their preferred pattern of paid and unpaid work. A third (35 percent) of household where both parents were in paid work would prefer only one parent to be in paid work and 46 percent of households where one parent was in paid work would prefer both partners to be in paid work (Ministry of Social Development, 2006: 12). This tendency for a higher proportion of couples to prefer both partners to work than occurs in reality is also true in many other countries and Jaumotte (2003) found in Europe that mothers wanted to be in work to a greater extent than they are. Callister speculates that the reasons for unmet preferences are likely to include a lack of affordable and quality childcare, insufficient flexibility in jobs, and a lack of sharing of unpaid work in the home (Callister, 2005:7).
The dilemma facing families, and women in particular, is heightened by the long working hours of the fathers of young children. In New Zealand, employed fathers of dependent children work an average of 48 hours a week. In the OECD, only fathers in the UK work longer average hours. At the same time, an EEO Trust on-line survey indicated that 80 percent of fathers would like to spend more time with their children (Callister, 2005:14, 15). It is not known why fathers work such long hours and whether these would reduce if the average hours worked by mothers increased.
Part of the story is likely to be about maximising family income. Because men earn more on average than women, and the full-time "ideal worker"[2] is still the assumption within most workplaces, family incomes tend to higher in the short-run if women, rather than men, take on responsibilities for childcare. A review of the gender pay gap in Western Australia identified research that found that while young Australians rejected the male breadwinner and female homemaker model, their aspirations for more equal sharing of work and family were undermined by women earning lower incomes (Todd and Eveline, 2004:21).
For individual couples, the long working hours of fathers will typically increase the direct costs to mothers of women engaging in work as their partner will not typically be available to share elements of care such as being home for children after school.
Penalties from Quitting Work
This gendered division of labour in the short-term, however, leads to couples and women in particular, having lower lifetime earnings, due to the negative impact on future earnings of leaving the workforce.
Mothers who interrupt their labour force participation experience lower wages and lower levels of future productivity. One UK study estimated that, women lose over 50 percent of lifetime earnings as a result of quitting the labour market to have children, with this loss composed in almost equal parts of lost years at work, reduced hours after returning to work and lower hourly earnings as a result of quits (Joshi and Davies, 1992 cited in Rubery et al, 1999:21).
Somewhat ironically, but consistent with the hypothesis that employers regard full-time, full year workers as "ideal", men who take a break from employment experience less of pay drop. Gregg found that women who return to employment after a years absence receive a wage on average 16.1 percent less than their former job, compared with men whose pay dropped an average of 6.5 percent and married people experience a greater drop than single people (Gregg, 1998, cited in Walby and Olsen, 2002:27). Similar pay issues are likely to be experienced by middle-aged people (mainly women) who reduce their labour force participation to meet their caring obligations.
Some evidence also suggests that men are less likely to be seen as needing consideration for family responsibilities in the first place. The Work, Parenting and Family study, for example, found that 45 percent of women, but 39 percent of men, agreed strongly that their supervisor cared about the impact of work demands on their personal and family life (Ministry of Social Development, 2006:25).
From an economic point of view, the impacts of quitting work are sufficiently large that, for many women, entering into debt to fund childcare in anticipation of future higher earnings should theoretically be a good investment. Yet evidence suggests that immediate financial gain, that is the net return from employment once childcare costs have been set against a mother's net earnings, is the usual factor determining return to work post maternity leave. The net return is affected not just by wage rates, but also the direct costs of childcare as well as the tax and benefit policies, such as Working for Families, that impact on family incomes.
These factors are likely to be a key part of the explanation as to why so many families do not have their preferred working arrangements. On the one hand, some mothers may return to work full-time when parental leave expires because they do not want to face the penalties of quitting, and do not have alternatives such as returning part-time, and/or taking a longer period of leave. For those who do quit, disappointing and often low-paid job prospects, particularly if they wish to work part-time, flexible hours and/or close to home, as well as the costs of childcare and reductions in family support, may make taking on work uneconomic, and deter them from re-joining the workforce. These pay-related issues are discussed further in the next section.
Fertility Issues
Women are having fewer children and having their first children at older ages and New Zealand's fertility rate, as in most developed countries, is now below replacement level (without migration).
The inability of some families to adapt to changed aspirations and norms in ways that meet the well-being of family members, and the longer-term interest in population regeneration, has been explained in terms of household economic bargaining. Partial specialisation in household production reduces women's earning power in the market and hence their bargaining power relative to their husbands. The reduced propensity for couples to have children has been explained as a form of "prisoners dilemma" where the incentives facing individuals mean the desired outcome cannot be achieved:
Even if having a child would increase the utility of both spouses and result in a net welfare gain for the family, the decision may not be in favour of having a child if this can only be accomplished by disrupting the working life of one spouse, realistically the wife, such that her bargaining position would be significantly reduced. The new outcome may reduce her welfare below the status quo level and she will not agree to the decision to have a child. Although, in principle, the spouses could fix the future distribution and agree that they will not re-negotiate, in practice the contract is not enforceable. The woman stopping market work makes her contribution immediately and the loss of earnings is irreversible, while the husband is to contribute when the additional welfare benefits have already been obtained. If he breaks the contract then and asks for renegotiation, he can gain additional benefits (Rubery et al, 1999:8).
The drop in fertility across developed countries is an emerging issue of economic importance. The OECD warns of a fertility trap of lower birth rates and low growth in the future as working age populations decline and countries face higher costs of larger older populations (Mortvik, 2005).
Childcare and Parental Leave
Apart from some international studies that suggest small negative effects of maternal employment for very young children, both parents working is compatible with child well-being. High quality parental care, high quality early childhood education and higher family incomes for poor families are the key factors that positively affect children's development (Ministry of Women's Affairs, 2004).
A large literature examines how responsibilities for children, barriers to alternative care arrangements, and assumptions in workplaces about the need for jobs to be full-time, limit the aspirations, education and labour market choices available to women, and mothers in particular.
Women with children who live in poor households face greater barriers to labour force participation after having children, and long-term risks of poor earning potential. In poorer households, costs such as childcare and transport, as well as the difficulties in securing suitable arrangements, and lower earning potential on average, contribute to lower levels of labour force participation. International evidence suggests these women are also more likely to be vulnerable to depressed wages due to constraints on both hours and the location of work. On the other hand, higher earning women, if they have children at all, are becoming more and more likely to return to work after maternity or parental leave. In the US, married women's labour supply behaviour is becoming much more like men's (Blau and Kahn, 2005).
Countries that have implemented work-friendly family policies (maternity leave, child care etc) have had better success in closing the gender pay gap (Waldfogel, 1998) and in maintaining fertility rates (Mortvik, 2005; Jaumotte, 2003). Attitudes that keep men at work and women at home make it difficult for parents of both sexes to combine family life with other priorities, particularly gainful employment, but also education, and this in turn holds down the birth rate.
In recent decades, it is the countries where there has been a focus on women being homemakers that are having the sharpest reductions in fertility. A recent survey by the United Nations found the larger the proportion of the population that agreed "a man's job is to earn money; a woman's job is to take care of home and family", the lower the birth rate. Other OECD analysis has found that countries with higher birth rates also had more work-friendly family policies (Mortvik, 2005).
There are several economic rationales for supporting government policies that fund maternity and/or parental leave, childcare and out of school care.
One rationale is that children are "public" or "merit" goods and that government should take responsibility for childcare for the same reasons that it funds education (Folbre, 1994). Associated arguments include returns to scale, and quality assurance, from government involvement compared with the transaction costs and quality risks in setting up private arrangements. Evidence that some parents opt for low quality care, including informal and insecure arrangements, as a way to make ends meet is a further rationale. A more recent argument is that, without substantial government intervention, there will be an underproduction of care, as evidenced by declining fertility in developed countries where government support for childcare and parental leave is limited.
A further rationale is the desire to avoid the family poverty that arises when parents, and sole mothers in particular, face real barriers accessing sustainable jobs and cycle between marginal employment and unemployment.
Another set of arguments stem from examinations of the barriers to women's labour force participation in the context of maintaining economic growth with an ageing population. Maintaining an employment connection is a protective factor for mothers, and this has been a key influence in the provisions of both paid and unpaid parental leave in New Zealand. Maternity leave provisions typically increase women's labour force participation (Ruhm and Teague, 1995). International comparative studies have found the positive effects of greater labour force participation tend to outweigh the costs of up to 20 weeks of paid parental leave (Jaumotte, 2003).
Paid parental leave is relatively new in New Zealand and preliminary finding from an evaluation indicate mothers have high rates of return to employment. Early analysis of a representative sample of women who had babies between 1 December 2004 and 31 May 2005 found that 75 percent of the mothers surveyed had worked for at least six months prior to the birth of their baby, and, of the mothers who had not returned to work, 84 percent planned to return to work in the future with half planning to return in six months.
By stimulating higher labour force participation, paid parental leave and other work-friendly family policies, produce measurable benefits for firms. Kingsmill's review of pay and employment equity in the UK found clear evidence of family friendly policies increasing the return rates from maternity leave. She cited evidence from one finance firm that had increased their maternity return rate from 75 per cent to 85 per cent, and thereby made business savings of £2 million per annum (Kingsmill, 2001).
Childcare has been shown to benefit children and subsidies for childcare produce labour force participation benefits too. There is a positive relationship between lower childcare costs and labour force participation, although there are different views on the size of the effects. Studies have also found that childcare subsidies stimulate full-time employment more than part-time employment (Jaumotte, 2003:10, 13). The Ministry of Social Development's Living Standards Survey shows that high costs of early childhood services in New Zealand also present an access barrier for some parents.
Jaumotte argues for childcare subsidies to reduce the effective tax burden on mothers thus removing the distortions to their labour supply that she argues is why women's employment rates are lower than women would like them to be. Further arguments for childcare subsidies are that women cannot borrow against future earnings to finance childcare and as insurance against higher welfare spending in those cases where the absence of affordable childcare leads to withdrawal from the labour market or marginal attachment.
Reducing barriers to women's labour force participation has also been raised as a rationale for longer school hours as short school hours have also been identified as a constraint to mothers taking on full-time employment (Jaumotte, 2003:15)
Income
The most important component of income is pay, and will be discussed in the next section.
The design of tax and benefit policies also matter. New Zealand adheres to the principle of taxation being neutral to couple status. The design of family support, however, does impose high effective marginal tax rates on increases in joint family earnings for low and middle income parents. Rates are even higher if childcare costs are included in the equation. In effect, this is most likely to impact on mothers as they are more likely than fathers to change their hours of work. While trade-offs between family income support and labour market incentives are, to some extent, inevitable, the provision of an incentive for couple-headed families to be dual rather than single earners could go some way towards redressing the problem of high effective marginal tax rates.
Conclusions
Household decisions appear not to be achieving optimal decisions around work patterns and having children and caring for them, and therefore compromise the the wellbeing of both partners and the children in the present and the future, as well as fertility rates. Policies that enable parents, and mothers in particular, to reconcile employment with childcare responsibilities may also reduce the financial risks, to individuals and government, that are associated with marriage failure.
In addition to the frequently documented case for childcare subsidies, there is an emerging rationale for government to support greater equity within households through incentives for men to take parental leave. Despite statutory entitlements in New Zealand and other countries, few fathers actually access parental leave, thus reinforcing traditional gender roles within the family and perpetuating differences in labour market outcomes. The OECD has recommended that part of parental leave be available to fathers on a 'use it or lose it' basis (OECD, 2004).
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[2] The notion of the “ideal worker” is someone who “obtains relevant career credentials, moves immediately into employment and works long hours with few interruptions for periods of years or even decades” and as the group who “access rewards such as high pay, promotions and status”, in contrast to non-ideal workers who choose part-time employment (Drago et al, 2004, citing Joan Williams).
