Can Wage Transparency Fix the Pay Gap?

by | Jan 4, 2023

Can Wage Transparency Fix the Pay Gap?

by | Jan 4, 2023

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Will wage transparency reduce or eliminate the pay gap between men and women?

Yes and no.

Let’s take the no side first. Wage transparency will not reduce or eliminate this pay gap because it emanates from real differences in productivity (actually discounted marginal revenue productivity, but we’re going to keep it simple, here). That is to say, there is an economic law that maintains that wages tend to reflect productivity. What is productivity? That is the amount by which you increase your employer’s bottom line for every hour you are on the assembly line, or shop floor, or driving a truck or pecking away at a computer at your desk.

Suppose that your productivity is $20 per hour. Any other wage apart from that is unsustainable, at least in the long run. If you are being paid $30 hourly, your employer is losing $10 per hour by hiring you. If this practice of his is widespread, he will tend to go bankrupt. If your pay is $15, he is profiting from your labor to the tune of $5 per hour. This, too, will not and cannot last. Just as nature abhors a vacuum, the economy abjures a profit: some other employer will offer you $16, since he can then earn a $4 profit from your work, another will up this to $17, with the intention of “exploiting” you at the rate of $3 per hour. Where will this process end? It can only culminate at equilibrium, assuming nothing else changes, at $20 per hour.

Why do women earn less than men? It is simple: they bring lower productivity levels to the market than men, on average. A century or two ago this was easy to see. Most jobs required upper body strength, and males, on average, are stronger than females. This of course applies to a far less degree in the modern era. How, then, to explain the gap that remains even to this day? The best theory out there is the marital asymmetry hypothesis: married women do the lion’s share of housework, child care, cooking, cleaning, shopping, etc. Whenever you do anything, you do it at the cost of doing something else less well. Their focus is more on the home, not the business world. Hence, lower productivity in the latter realm.

There are two bits of evidence that support this contention. One, there is a wage gap between all men and all women, but when broken down by marriage status, this divergence between never married males and females virtually disappears into thin air. Two, if women of equal productivity were really paid less than men, greater profits could be earned in industries that hire more females, and this is just plain silly: profits tend to equalize, given risk, in all areas of the economy. Any divergences are met with investment reallocations, toward high profit areas, reducing profits, and away from low profit industries, raising them there.

Here is the yes side. Greater wage transparency will make it unavoidably clear that there are indeed sexual wage gaps. Given the economic illiteracy of not only the general public but also on the part of most of the political leadership of this country, stringent laws will be enacted requiring equal pay. They will not mandate that male wages be reduced; rather that female compensation be raised. This will increase unemployment for the latter group. Returning to one of our earlier examples, if employers are compelled to pay $30 per hour to females with a productivity level of $20 per hour, they just will not be hired at all in the first place, and, if already on the job, will be fired.

A similar occurrence takes place at present with the minimum wage law. If it is set at $7 per hour, then all those with productivities less than that amount are unemployable. If it is set at $10 per hour, then all those with productivities less than that amount are unemployable. If it is set at $15 per hour, then all those with productivities less than that amount are unemployable.

I have no problem with employers and employees sharing information about salaries. It is a free country. But it is not a free country when the government compels either to do so. Will this narrow the pay gap? Of course not. Wages are dependent upon productivity. Women earn less than males because their productivity, on average, is lower. Publicizing statistics about wages will not change productivity by one iota. Therefore, it will not alter wages. Ergo, this pay gap will remain.

About Walter E. Block

Dr. Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University and a senior fellow at the Mises Institute.

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