Gender pay gaps: What are they? And why must businesses eliminate them?

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On 21 March 2018, Victoria’s Minister for Industrial Relations and Minister for Women, Natalie Hutchins, held a conference on gender pay gaps in the Australian workforce. Around 500 people attended. Ai Group’s Nicola Street and Julie Toth addressed the conference, discussing various aspects of Australia’s gender pay gaps and what businesses should do in response to them.

What are gender pay gaps?

Gender pay gaps occur when men and women are paid different wage rates for the same quantity and quality of work, or for work of equal value. Gender pay gaps also occur in aggregate across industries and occupations – and ultimately across the whole economy – because men and women tend to work in different industries and occupations and at different work levels.

Australia is not alone in facing this problem. Across all OECD countries (primarily the advanced and developed economies), the gender pay gap among full-time workers has remained unchanged at just below 15% since 2010. That is, full-time male workers earn 15% more than full-time female workers, on average, across all countries in the OECD. Less data are available for developing economies, but gender pay gaps are generally even larger in less developed and emerging economies.

Australia’s national gender pay gap has remained larger than the OECD average, at 15% to 19%, over the past two decades. As of 2017, Australia’s national gender pay gap for full-time workers was 15.3%, meaning that full-time female workers earned 15.3% less – or $253.70 per week in 2017 – on average than full time male workers in their ordinary time earnings. The gender pay gap is even larger – 22.4% – when full-time total earnings are compared, because men earn more than women on average in the form of bonuses, overtime and other extra payments.

Across Australian industries, the gender pay gap is smallest (that is, pay is more gender-equal) in public administration (6.8%) and largest in finance and insurance services (26.1%). The gender pay gap is significantly smaller in the public sector (that is, government employees) at 10.8%, compared to 19.2% across the private sector. Across the states, it is smallest in South Australia (10.3%) and largest in Western Australia (22.5%) due to structural differences in their economies (more public administration and healthcare in SA but more mining and construction in WA).

Get the data: Australia’s Gender Pay Gap Statistics (WGEA)

Why do gender pay gaps persist?

Gender pay gaps are in many ways a relic of socio-economic structures of the past. But they are proving difficult to eradicate entirely. Australia’s Workplace Gender Equality Agency (WGEA) identifies the following contributing factors:

  • Discrimination and bias in hiring, promotion and pay decisions;
  • Women and men working in different industries and occupations (sometimes called industry and occupation ‘segregation’), with female-dominated industries and jobs attracting lower wages;
  • Women’s disproportionate share of unpaid caring and domestic work, which reduces the time they have available for paid work (47% of Australian working women are working part-time);
  • Lack of workplace flexibility to accommodate family responsibilities, especially in senior roles; and
  • Women’s greater time out of the workforce reducing their career progression and opportunities.

Internationally, OECD research into gender pay gaps (published in 2017) found that:

  1. Gender pay gaps are not closing rapidly or steadily. The gender pay gap among full-time workers across OECD countries is unchanged at just below 15% since 2010.
  2. Gender pay gaps increase with age and during parenthood, but are there from the start (e.g. in graduate starting salaries). Gender pay gaps are especially large among high income earners.
  3. Much of the national gender pay gaps are due to differences in work hours (i.e. more women than men working part-time) and to occupation and industry segregation.
  4. Higher education participation for women has played a positive role in closing the gender gap.
  5. Some of the gender pay gap remains ‘unexplained’ by any other variable, which means it might be due to discrimination. Gender pay discrimination is real but difficult to measure in isolation.

Get the data: OECD Gender Data PortalThe Pursuit of Gender Equality: An Uphill Battle (OECD)

The OECD, WGEA and other data sources confirm that gender pay gaps tend to widen with age due to differences in career progression and career gaps, but they are there from the very start. Pay gaps at the start of a professional career are especially worrying since they are more likely to be due to discrimination. Initial pay for Australian graduates in STEM-related and medical professions show that male graduates are still paid more than female graduates with the same qualifications, with the single exception of a small cohort of female engineering graduates in 2017 (see table below).

Eliminating such gender pay gaps will benefit current and future employees and help lift productivity across the economy. In Europe for example, the EU has calculated that the aggregate benefit to the whole EU economy of closing its gender pay gap entirely would add between 3.4% and 5.7% to EU GDP by 2050. This would mainly be achieved by encouraging greater workforce participation by women. The European Institute for Gender Equality estimates that if women participated in work at equal rates to men then this alone would add between 3.2% and 5.5% to EU GDP by 2050 and add 3.5 to 6 million jobs. Reducing poverty rates among households headed by working women and among female retirees/pensioners would increase EU GDP by a further 0.2% per capita by 2050.

In Australia, research by Kennedy et al (2017) published in the Journal of Economic Analysis and Policy found that reducing Australia’s national gender pay gap by 10% could boost per capita output by between 1.3% and 3.0% over the long run, mainly due to the benefits of greater female workforce participation. This is a similar size to the “the positive spillover effects” associated with investing in education at a national level.

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Get the data: Graduate Employment Outcomes (QILT);
Reducing gender wage inequality increases economic prosperity for all: Insights from Australia 

Why should all businesses eliminate their gender pay gaps?

Individual businesses cannot easily influence national gender pay gaps that arise due to industry or occupational segregation (e.g. more women working in education or nursing and more men working in mining and construction) or due to wider social issues (e.g. more women than men taking on unpaid family and caring responsibilities or taking more time out of the workforce).

However, businesses can – and should – seek to eradicate gender pay gaps that occur within their own business activities, among their own employees, contractors and others. Pay gaps within businesses can arise in a variety of forms:

  • Different pay for men and women who are doing the same job and working at the same level (like-for-like pay gaps on a full-time equivalent basis, which are generally the easiest to identify);
  • Different pay for men and women in the same occupation within a business because more men than women are in higher level roles (e.g. males in the majority of supervisor or manager roles);
  • Different pay for men and women across the business due to occupational segregation (e.g. men in engineering or sales roles with higher pay and bonuses while women are in administrative support or accounting roles with lower pay and no bonuses);
  • Different pay for men and women across the business due to a ‘glass ceiling’ that keeps women out of senior manager, executive and board level roles.

As noted above, eliminating (or at least reducing) gender pay gaps brings significant benefits to individuals and to national productivity and output. Perhaps more surprisingly (to some people anyway), eliminating gender pay gaps also benefits each business itself. Recognising these benefits is helpful to building a business case for undertaking the changes that may be required to close gender pay gaps within a business. These benefits to business include the following factors:

  1. Equal and fair pay helps to attract a larger pool of job applicants and to retain staff once they are hired. Real and/or perceived pay discrimination (and other discriminatory work practices) is known to discourage high quality job applicants and to reduce high quality staff retention;
  2. For both potential and existing employees, discriminatory pay rates blunt the effectiveness of any performance-based pay systems that might be in place and, at their worst, can blunt the performance and contentment of all employees. Academic research indicates that “gender income inequality is thought to lower real output since an individual’s effort is closely related to their wage rate, … Gender income inequality discourages the lower paid gender from exerting maximum effort (Mirrlees, 1971; Katz, 1986). … [And] men are not incentivized to exert maximum effort since income is awarded on a gendered basis rather than any talent or merit.” (Kennedy et al 2017 p. 16). This research confirms that performance-based pay must be closely and honestly linked to individual effort, if it is to be effective as an incentive to work.
  3. Among executives and professionals, equal pay enables workforce diversity, including but not limited to gender diversity. This increases the range of opinions, experiences and inputs available in a business, which in turn improves its performance. This effect is especially important in decision-making, planning and strategy areas. McKinsey’s recent study of 1,000 companies in 12 countries (2018) demonstrates that “Companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to have superior value creation. The highest-performing companies on both profitability and diversity had more women in line (i.e., typically revenue-generating) roles than in staff roles on their executive teams. … Companies in the top-quartile for ethnic/cultural diversity on executive teams were 33% more likely to have industry-leading profitability. … Companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to achieve above-average profitability than were all other companies in our data set. In short, not only were they not leading, they were lagging.” Diversity in executive decision-making is clearly a winner.
  4. A final benefit to individual businesses comes from branding and public image. Businesses can advertise their non-discriminatory pay and practices to ‘virtue signal’ to potential customers.

On this last effect, the UK is especially interesting to watch right now, because large companies are being required to report their own gender pay gaps in public for the first time. The early reactions are telling. Women inside and outside these companies are questioning if “this is a company I wish to work for, that I wish to support”. The potential brand damage is already becoming evident for individual firms and for whole industries, even before all businesses have filed their pay gap reports.

According to The Guardian, ‘millennials’ are especially interested in these pay gap revelations, regardless of their own gender or background, because they are “more aware of equality issues than previous generations”. This is the next generation of workers and consumers. So they are hugely important as a future market and source of growth for virtually all businesses.

Businesses globally and in Australia are increasingly recognising diversity as a source of advantage. Actions include strategies to foster greater female participation and promotion to managerial levels. This advantage was explored in greater detail in our recent BLOG on ‘Gender equality and the future of work’.

For all businesses, some useful first steps can include a gender workforce audit and/or a gender pay gap audit. Free online tools and guides to these are available from WGEA.

Get the data: Reducing gender wage inequality increases economic prosperity for all: Insights from Australia
Delivering Through Diversity (McKinsey, January 2018)

 

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Julie Toth
Julie heads the Australian Industry Group’s economics team, producing economics research, comment and policy advice for Ai Group and its members. She is also: Adjunct Professor of Economics and advisory board member at Deakin University; panel member of the Melbourne Economic Forum at the University of Melbourne; and a member of the National Economic Policy Panel of the Economics Society of Australia.

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