What Causes the Wage Gap?

This post is the fourth in a series that provides deeper context for the findings of the 2020 Status of Women and Girls in Minnesota report, a research collaboration between the Women’s Foundation of Minnesota and the Center on Women, Gender, and Public Policy. The data show that the wage gap between women and white men in Minnesota is twice as large for Hmong, Native American, and Latina women, nearly that for African American women, and 2.5 times greater for Somali women. Here, University of St. Thomas economist Deborah Rho explores the upstream racial and gender inequalities that give rise to the wage gap.

The headlines are stark: “How the Pandemic Is Breaking Women,” “The Economy Could Lose a Generation of Working Mothers” and, bluntly, “Primal Scream.” The COVID-19 pandemic has amplified longstanding inequities in American society, with particularly alarming implications for the progress of gender equality in the labor market.

According to a study by the U.S. Census Bureau, in July 2020, one in five working-age adults said that the reason they were not working was because of the disruption of childcare arrangements due to COVID-19. Of those not working, women were nearly three times as likely as men to not be employed as a result of childcare demands. Despite progress in equality within the household, gender norms and expectations continue to contribute to differences in labor market outcomes of men and women, exemplified by the gender wage gap.

Flexibility vs. Higher Wages

Even before the pandemic, in Minnesota, women made $0.79 for every dollar made by men. While many factors contribute to the gender wage gap, including discriminatory practices, research suggests that time away from employment, occupational clustering, and the time demands of jobs explain much of the difference in wages between men and women. Traditionally, many women dropped out of the labor force for some time in their childbearing years. Though there have been significant changes in this pattern in recent decades, women often do not have the same continuity of work experience as their male counterparts, which contributes to lower wages.

Additionally, women’s expectations about their careers may affect their educational and occupational choices, which greatly affect earnings. Women are overrepresented in low-earning occupations, such as cashiers, administrative assistants, and childcare workers.

Women may be pushed into these occupations through discrimination, which excludes them from higher paying occupations, or socialization, which makes them more likely to seek these jobs. One study finds evidence of a “care penalty,” when workers in jobs that require higher levels of caregiving earn lower wages than workers with similar skills in jobs that involve less caregiving. This penalty disproportionately affects women.

Although these are important considerations, recent research suggests that the wage gap can be attributed more to differences in pay within occupation than across occupation. One study finds that only 15 percent of the gender wage gap would be eliminated if men and women were equally represented in each occupation, but 85 percent would be eliminated if they were paid equally within each occupation. This is in part because even within occupations, women disproportionately seek positions that lend themselves to family responsibilities, jobs that are more flexible in the timing of work hours and less likely to have weekend and evening obligations.

These positions pay less than more inflexible jobs within the same occupation, especially in higher paying fields such as law and finance, where employees face many deadlines, develop close relationships with clients, and work in specialized teams. In such jobs, workers are not as easily substituted for one another, which makes flexibility in the timing of work costly to the firm. Within an occupation, men are more likely than women to be willing to take a job with long and inflexible hours and receive the corresponding higher compensation.

The number of hours of work also appear to affect the hourly wages of low- and moderate-income workers. However, rather than receiving a pay premium for working long hours, workers are penalized for working fewer hours. Both men and women experience a large hourly wage penalty for working less than 40 hours a week, but women are more likely to work part-time and therefore are affected to a greater extent.

To the extent that women are more likely than men to seek particular work arrangements because they are expected to take on greater family responsibilities, it is unlikely that the wage gap will be eliminated until gender equity is attained within the home. For instance, there is growing evidence that parents’ gender attitudes affect the labor supply of daughters and the women their sons marry. Even if parents do not intentionally transmit gender stereotypes within the family, children develop attitudes and norms by observing gender roles at home and in society.

Racial Pay Disparities Compound the Gender Gap

In addition to differences between men and women, a closer look at earnings reveals dramatic disparities in wages across race. Economics research has typically considered the gender wage gap separately from racial wage gaps, but this may miss important dynamics between gender and race in the labor market. While on average, a white woman in Minnesota earns $0.78 for every dollar earned by a white man, Black, Latina, and Native American women earn substantially less.

Minnesota Cents on the Dollar: Average Wage and Salary Income Relative to White Men

Black and brown women are not only affected by a gender wage penalty but by racial disparities in the labor market. This difference is more troublesome given that African American and Native American mothers are more likely to be the primary breadwinner in the family and more likely to be single parents.

A Significant Portion of Minnesota’s Mothers Are the Primary Breadwinner

There is much evidence of unfair treatment of minority workers. Researchers have conducted experiments in which they send fictitious resumes to real employers using the name of the applicant to signal race. The quality of the resume is held constant so any differences in callback rates across race can be interpreted as discrimination. One such study found that white sounding names received 50 percent more callbacks for interviews than African American sounding names. Using a similar methodology, my coauthor and I found that in the Twin Cities, employers were less likely to call back applicants with names that sounded African American or Somali American than they were to call back those that sounded white.

Experiments like these are designed to parse out whether unequal labor market outcomes are a result of employer discrimination or because of differences across groups in characteristics such as level and quality of education, which are themselves impacted by discrimination. In the United States, compared to white students, Black and Hispanic students are more likely to drop out of high school and less likely to attend college given that they graduate. Unsurprisingly, disparities in “premarket factors” such as education also contribute to income inequality.

Early Childhood Investments Can Level the Field

There are no simple solutions to these longstanding disparities. But among family policies, access to high quality early childhood programs can be one way to help address both gender and racial inequality. A growing body of research has established that early childhood environments greatly influence later life outcomes. Numerous studies show that programs that have targeted disadvantaged children in their earliest years have had large positive impacts on earnings and education. Given that children of color are more likely to be living in poverty, programs that focus on quality care and education for children of low-income families will contribute to diminishing the racial wage gap.

In addition to benefiting the children who participate, high quality early childhood programs may also be a way to support working mothers. Affordable childcare is especially important for single mothers to remain in the labor force. Unfortunately, Minnesota is the fifth least affordable state when it comes to center-based childcare. While there is mixed evidence on the impact of government subsidized childcare on maternal labor force participation in general, recent research suggests that such programs increase the employment of single mothers. The expansion of programs that have proven to be valuable to disadvantaged children could contribute to diminishing the gender wage gap by helping mothers stay in the labor market.

The pandemic has revealed the crucial role childcare plays in the careers of parents. In addressing the current crisis, policymakers have an opportunity to invest in better, more equitable early childhood spending that will have an impact for years to come.

Deborah Rho is an associate professor of economics at the University of St. Thomas. This post was originally published by the Gender Policy Report on February 24, 2021.