Do gender equality laws help?

Juan Dolado 12 June 2007

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President Sarkozy´s appointment of seven women, out of sixteen members, in the new French cabinet follows the path initiated by Spanish Prime Minister Rodriguez-Zapatero and Chilean President Michele Bachelet who gave half of the ministries to women. The EU share of female ministers is below 25% with only Finland, France, Spain and Sweden having a share close to 50%. These news have put again on the table the issue of whether these “affirmative action” policies are appropriate. In my own country, a new law on gender equality passed by the parliament in march 2007, goes beyond the EC Directive by imposing at least 40% of each gender in the electoral lists and in the corporate boards of firms, plus the obligation of implementing equality plans in the collective bargaining of firms with more than 250 employees. This has raised the standard complaints among some pundits arguing that this kind of laws are highly detrimental. Firms are profit making entities is argued, and policies which limit their freedom of choice in maximimizing profits will end up hurting those individuals suppossedly benefited by the reform. What firms should do is to treat men and women with an equal standard: bring in more revenue, and this is gender neutral.

Economics has dealt extensively with this issue and has done so discarding the view that there are large differences in the skill distributions across genders. One of the most influential views is Gary Becker´s observation that a small initial comparative advantage of women in household production (e.g., in bearing and nurturing children) can lead to full specialization if - due to learning-by-doing and to the effect of household work on the marginal disutility of market work- the comparative advantage can grow over time.1 However, as these papers point out, huge improvements in medical and household technologies (plus less need of physical strength in most jobs) have rendered this comparative advantage unimportant and yet gender differences in the division of labour still persist. In view of this puzzle, there is a growing literature that studies the joint determination of gender differentials in earnings, promotions and in the household division of labour under identical ex-ante distribtion of talents.

Several explanations have been provided. They rely upon incentive problems in the labour market leading to self-fulfilling prophecies even when comparative advantages are fully absent. The idea is that the entrenched expectations by firms that women will spend more time than men undertaking household work leads to earnings differentials in favour of men. Hence, since perceived lower wages imply that the expected opportunity cost is lower for women, they devote more time to household work, validating in this way firms´ beliefs and giving rise to gendered equilibria. For example, Stefania Albanesi and Claudia Olivetti propose an explanation for this phenomenon that stems from the way in which firms are subject to incentive-compatible constraints stemming from the unobservability of two variables: effort at work (a moral hazard problem), and hours devoted to household work (which affect the marginal utility of effort and thus pose an adverse selection problem).2 Likewise, Patrick Francois, and Kjell Erik Lommerud and Steinar Vagstad propose explanations based on the assumption that there are two types of jobs: fast track and slow track jobs.3 Workers get placed in the fast track, if their firm pays a fixed investment. Since effort is not observable, firms only place workers in the fast track jobs if their expected output is large enough to recoup the investment cost. If women have traditionally been the ones exerting primary major responsibility at home and wages are non-contractible, in equilibrium they will predominantly follow “mommy tracks”. Sara De la Rica, Cecilia García-Peñalosa and myself propose an alternative logic behind self-fulfilling prophecies that is based on a framework without a moral hazard problem.4 Instead, statistical discrimination against women arises from different perceptions by firms about the distribution of shocks like willingness to work irregular hours, unexpected events requiring parental leaves, etc. that affect productive men and women equally once they have been trained for a job. If future wages cannot fully respond to these shocks, then the expected job quit rate will differ across genders, inducing differences in labour market participation to depend on expected wage gaps.

The economic logic in all these explanations account for the main facts of gender participation and wage gaps. A first look at cross-country evidence seems to support the empirical predictions. Figure 1 shows the relationship between the gender participation gap and the residual wage gap for workers aged 25-54 in 2001. 5 Here the residual gender wage gap is that part of the gap not explained by differences in workers observable characteristics (like age and education), which is bound to capture some sort of discrimination. As the figure shows, higher participation gaps are associated with higher wage gaps.

Figure 1: Relationship between (residual) wage and participation gaps

Figure 2 looks at the issue from a different angle, showing the relation between the participation gaps and the proportion of GDP devoted to family aid expenditure, including maternity. The correlation is clearly negative implying that more generous family policies give rise to lower participation gaps and, in view of Figure 1, lower wage gaps. As is well known, Northern European countries have low gaps and high family expenditure shares; Southern-Mediterranean nations exhibit high gaps and low expenditure.

Figure 2: Relationship between family aid expenditure and participation gaps

The theoretical arguments discussed above confirm that there is a solid economic logic behind the belief that affirmative action policies can move the economy from the gendered equilibrium to the ungendered one. This is in line with the standard claim by Steve Coate and Glenn Loury that this kind of policies may be effective in fighting ethnic discrimination. When black workers know that they have higher promotion probability (conditional on getting the appropriate educational attaintments), they will invest in human capital, and when employers discover that black workers are more productive than what they originally thought, they will revise their beliefs and this will end the need for affirmative action. However, in contrast to the temporay nature of these policies, once beliefs have changed, policies may have to be permanent in the case of gender equality. This is so since, as someone has to take care of the children, once the policy is lifted any belief one may have about women´s role in the household will be linked to rational beliefs about to men´s performance in the labour market. For example, if men are more productive in the labour market when their wives exert more effor at home, then the economy is likely to revert to the gendered equilibrium.

In sum, Bachelet, Rodriguez-Zapatero and Sarkozy may be right after all, at least if their policies in this matter survive when they leave power.

References 

1. Becker, G. (1991): A Treatise on the Family. Harvard University Press.
2. Albanesi, S. and C. Olivetti (2006) “Home production, market production and the gender wage gap: Incentives and expectations”, mimeo.
3. Francois, P. (1998) “Gender discrimination without gender difference: Theory and policy responses”. Journal of Public Economics, 68, 1-32; Lommerud, K. and S. Vagstad (2007), “Mommy tracks and public policy: On self-fulfilling prophecies and gender gaps in promotion”, CEPR DP 2387.
4. De la Rica, S., Dolado, J. and C. García-Peñalosa (2007) “Gender participation and wage gaps: On the role of family aid and affirmative action policies”, mimeo. http://dolado-research.blogspot.com/
5. Data from the OECD Employment Outlook.

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Topics:  Labour markets

Tags:  Labour Markets, gender equality, affirmative action, gender wage gap

Professor of Economics, EUI and Universidad Carlos III de Madrid; and CEPR Research Fellow

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