An equilibrium analysis of the gender wage gap

Within a two-sector general equilibrium model, women’s productivity in the marketplace decreases with the amount of household work they perform at home. Assuming that men’s and women’s household labour inputs are complementary here we prove the existence of multiple equilibria. In some, men and women allocate their labour equally and earn identical wages. In others, they allocate labour differently and earn different wages. In this context, beliefs about the inferiority of women’s productivity are shown to be self-fulfilling. By use of numerical examples, we show that welfare is highest when spouses allocate labour equally and suggest policy recommendations. emale labour-force participation has increased substantially during the past F half century in advanced economies (Fullerton, 1999). In addition, women’s educational achievements are rising. In the United States, women have overtaken men as the most educated sex since the mid-1990s (Freeman, 2004). Nevertheless, despite these advances in women’s labour-force position, and * Columbia University, email: [email protected]. ** University of Copenhagen, EPRU, and FAME, email: [email protected]. Many thanks to the editor and anonymous referees of the ILR for helpful comments and suggestions. Also many thanks to Christian Groth, Christian Schultz, Mich Tvede, and seminar participants in the EPRU seminar at the University of Copenhagen and at the 2004 annual DGPE workshop for their helpful and productive suggestions. The research was supported by the Danish Social Science Research Council, by the Danish Ministry for Food, Agriculture, and Fisheries, and by the Danish Agricultural and Veterinary Research Council. The authors thank the Program on Information and Resources (PIR) at Columbia University for supporting this research and Dr. Frederiksen’s visit to Columbia University. Correspondence: Elisabeth Hermann Frederiksen, Department of Economics, University of Copenhagen, Studiestræde 6, 1455 Copenhagen-K, Denmark. Email: [email protected]. Responsibility for opinions expressed in signed articles rests solely with their authors and publication does not constitute an endorsement by the ILO. Copyright © The authors 2008. Journal compilation © International Labour Organization 2008. 298 International Labour Review despite the adoption of “equal work/equal pay” regulations in many countries,1 women do not seem to be earning the same pay as men. Ever since women entered the labour force, the gender wage gap has been closing.2 In the United States, the gap narrowed in the 1980s after a stable period following the 1960s (Blau and Kahn, 2000). Since then the convergence of male and female wages has slowed. In the United States, the gender wage gap has remained almost constant since the early 1990s (Blau and Kahn, 2006). Similar findings are presented for other advanced economies, such as Sweden’s (Edin and Richardson, 2002) and Denmark’s (Datta Gupta, Oaxaca and Smith, 2006). In the OECD countries, on average, women earn 84 per cent of men’s hourly earnings (OECD, 2002).3 Concurrently with the gender wage gap, today’s division of labour between spouses within the household appears surprisingly traditional. In advanced economies, time-use studies consistently show that wives spend relatively more time in home production than do husbands, and that husbands spend relatively more time in the workplace than do wives (Bonke, Datta Gupta and Smith, 2005; Freeman and Schettkat, 2005; Short 2000). In their elaborate empirical study, Davis, Greenstein and Gerteisen Marks find that “with no exception in all 28 nations women perform more household work than men” (2007, p. 1259).4 As shown in table 1, women do 2–3 times more household work than do men in modern societies, a ratio which is confirmed by Coltrane (2000) and others. Yet, men and women roughly spend the same total amount of time on the two activities – market and household work – taken together (Freeman and Schettkat, 2005). Figure 1 is a scatter plot of the wage gap against the (self-reported) male share of household work across a sample of advanced economies. The plot suggests a negative correlation, albeit not a significant one.5 The less men participate in the household work, the greater the difference between male and female pay in the market place. The purpose of this article is to propose a theory that can explain the persistence of male–female differences in wages and time allocation in modern societies and to examine its welfare properties. We build on the strand of litera1 The ILO’s Equal Remuneration Convention, 1951 (No. 100) has been ratified by 162 countries (http://www.ilo.org/ilolex/english/convdisp2.htm). In the United States, some states have enacted equal pay legislation (for example, New York), but the country as a whole still does not have an equal pay law. 2 In general, the gender wage gap is a rough estimate that includes both differences in earnings across “male and female occupations” and differences in male and female earnings within the same occupation. One should therefore be careful when comparing wage gap estimates from different sources. 3 There is some evidence, however, that new cohorts of women fare better than previous ones (Blau and Kahn, 2000). 4 Davis, Greenstein and Gerteisen Marks (2007) base their empirical findings on data from 17,636 respondents in 28 countries. 5 The intercept estimate is 25.95 (2.97) and the slope estimate is –0.29 (–1.08) of the corresponding regression, the numbers in parentheses being t-statistics. The fraction of the variation in the wage gap explained by the regression is 8 per cent (R2 is 0.08). An equilibrium analysis of the gender wage gap 299 ture which includes Becker’s (1985) seminal work on sexual division of labour, Chichilnisky (2005) and Chichilnisky and Eisenberger (2005). In Becker (1985), as a result of increasing returns to specialization gains in at least one sector, spouses gain from a division of labour between employment and household work. This leads to a gender wage gap, which is Pareto efficient. Chichilnisky Table 1. Allocation of daily work hours between the home and the workplace