Gender Wage Gap Kid And Cat Looking Out The Window

The Solution To The Gender Wage Gap

in Financial Planning by

Claudia Goldin, a Harvard economist and leading scholar on women and the economy, recently published a thought-provoking study in the American Economic Review on the gender wage gap in the United States. She reminds us that women earn around “77 cents on the dollar” of what men do. Based on a careful review of the wage data across professions, Professor Goldin reveals a startling discovery. The wage gap is not because women are in different professions – but rather, because they are paid less in the same professions.

As a son, brother, and partner, these statistics were troubling to read. My mother worked tirelessly to help raise my sister and I so we could go to college. My sister is starting her career over again after staying at home to take care of her son for nine years. Meanwhile, my partner is absolutely the most hard working, detail oriented, results driven – not to mention the kindest person I know. When she was passed over for a promotion and a raise a year ago, we were both disappointed and angry. Eventually, the firm rectified their decision, but it was maddening to have to fight for equality as a top performer.

In her study, Professor Goldin departs from some traditional “solutions” to the gender wage gap. She says, “The solution does not (necessarily) have to involve government intervention and it need not make men more responsible in the home (although that wouldn’t hurt).”  So what is her answer? She suggests changes in the workplace. Not just more flexibility, but less incentive to pay those who work long hours disproportionately.

As the CEO of my media business, I’d like to provide some observations from my experience on why the gender wage gap occurs and propose a new alternative solution that accounts for employer incentives. Read on to see how my solution could help to stamp out potential biases and focus solely on the business aspect of hiring and pay.

WE HIRE WHO WE KNOW AND TRUST

First, let’s review how hiring actually works. It’s hard to resist hiring people who look like you, talk like you, and act like you. It turns out, people are looking for “the same commonality they might find when choosing friends or romantic partners,” according to a recent study by Lauren Rivera, Kellogg School of Management professor of management and organizations.

Communities of homogeneity are prevalent throughout all time periods across all countries based on anthropological studies. How else do you explain the Little Italy’s or Chinatowns across our nation? Why do jocks sit on one side of the cafeteria and thespians sit on the other side of the cafeteria? Why is the largest percentage of marriages between the same race? People just like to be around more people like themselves.

If your new CEO came from Chico State, you can bet that other Chico State alumni will soon follow, even if Chico State isn’t on the list of target recruitment schools. If the new VP of Sales at Yahoo came from Google, surely more Googlers will follow as well. Race and gender tend to be the two predominant factors for engendering trust, followed by common interests, education, and work experience.

If you don’t happen to fit the interests and similarities of the person paying your salary, it’s not like you will be burned at the stake like the witches of Salem’s past for being misunderstood. You may simply not be taken care of as much as others, or as much as you think you should. What’s worse, if the powerful people that you observe act nothing like you, a self-forming glass ceiling might be created.

But given my experience as a business leader – and a writer – I understand the value of diversity in opinions, perspectives and experiences. I’ve seen these benefits come to life in the workplace – not just diversity by sex, but also by race, age, and beliefs. And I believe that even small steps toward a more diverse workplace can have huge benefits. Seeing someone like you in power is hopeful.

But introducing more diversity in the workplace is much easier said than done. Let’s move on to something more concrete and actionable.

Gender Wage Gap Chart

IT’S JUST BUSINESS AND NOTHING PERSONAL

I’m going to ask you to join me in a hypothetical hiring scenario. You are the CEO a tech startup that raises just enough money to last for only one year. It is do or die at your one chance at mega riches and glory. As the leader of the company, one of your key responsibilities is to hire the right people, women and men, who can put in 100%+ effort into making your company a success. You’d give employees a competitive salary and a piece of the pie to align their interests.

You would also need to find a balance between working your employees to death and making your company a success. Push too hard or pay too little and your employees will quit for greener pastures. Ideally, you would want to hire employees who can deliver more production for a set wage, i.e. you want the best bang for your buck.

However, one of the main things a man cannot do that a woman can do is give birth. Given women have been giving birth since the beginning of time, it’s fair to reason there’s a chance your female employee(s) might give birth at some point in her career and need to take leave. This likelihood may subtly impact the perspectives of some hiring managers, especially those at companies that demand a lot of hours over many years from employees (like tech startups).

As the manager , if you felt you couldn’t “get” 12 months of production, what would you do? Rationally, you might figure out a way to align salary with production, i.e. reduce wages. On the other hand, if an employee is demonstrating more than 12 months worth of production, you might increase their compensation.

THE SOLUTION TO NARROWING THE GENDER WAGE GAP

Applying Professor Goldin’s framework to my hypothetical scenario, my solution would be twofold. First, I would promote work practices and a culture where there is flexibility on where and when work is done. Second, I would make sure that I hadn’t erred to far in paying people for working around the clock – asking myself tough questions like “does face time exist at my company, even though I might not see it?”

But I’d ask you to consider an alternative solution.  That is, parental leave. Let’s start with some facts: the average maternity leave is 12 weeks in America, 14 weeks in German, Japan, and New Zealand, and 52 weeks in Canada, Croatia, Denmark, and the UK (unfortunately, there’s no dispute that the US is one of the weakest developed countries in providing women and new mothers support entering motherhood).

What if there were a law that requires all companies grant the same amount of parental leave for women AND men? In other words, if a mother gets three months maternity leave, then the father would also get three months paternity leave.

Granted, the father doesn’t have to go through nine months of pregnancy, surgery, and pain, gets to take the same amount of time off. After all, maternity leave really is considered short-term disability by a majority of firms.

But in my view, a good husband will be there with the mother throughout the entire nine months. I’d even go as far as to say he should be waiting on her hand and foot, attending classes, and caring for her every need. A good father will worry just as much, if not more for his child because he might feel helpless since he cannot take away his wife’s discomfort or breastfeed his child. A good father would love to spend as much time with his new born as well.

So my solution? Eradicate the term maternity leave, and start using the words Parental Leave so that both the father, mother, partner can be treated equally.

Parental Leave By Country Chart

EVERYTHING IS ALIGNED

How does this solve the gender wage gap? It fixes incentives. As a hiring manager, once you realize there’s now a more equal chance both males and females may take Parental Leave, you might have a lower propensity to institute pay discrimination, whether consciously or unconsciously.

Although it’s certainly possible that my solution could drive productivity losses in the United States, it’s likely that it will significantly narrow the gender wage gap. There are other positive externalities as well: 1) Potentially healthier children, 2) happier marriages, and 3) fewer divorces.

The happiest countries in the world consistently hail from Europe. Is there a coincidence that places such as Norway, Denmark, Sweden, Norway and the Netherlands also have some of the longest maternity leaves in the world? Of course not. The Europeans are experts at “work / life balance.” They might not be as innovative as Americans, but being happy is what it’s all about. Europe’s gender wage gap is about 16.3%, roughly 4% better than the US’s gender wage gap.

If you’d like to narrow the gender wage gap, please speak to HR or your boss and propose equal Parental Leave for men and women.

Questions To Think About

Male readers: Would you like to have more paid time off to take care of your baby and support your partner in motherhood? Do you want your mother, wife, sister or daughter to receive equal pay?

Female readers: Would you like to have your partner help change more diapers, wake up in the middle of the night to calm the baby, help you run errands, make you feel better when you aren’t well, and experience your newborn together?

Hiring managers: Would you like to have happier employees who are more loyal, more appreciative, and more productive? Wouldn’t you like to have the same benefits as well? 

Everyone: Who pays for gender income equality? Is pay discrimination purposefully done or unconsciously done? Why would someone not be in favor of equal parental leave?

Photo Credit: Kong-Savage Arthouse

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Financial Samurai

Sam is the former Managing Editor of the Daily Capital blog. He worked in finance from 1999-2012 before deciding to focus full-time on his online endeavors - FinancialSamurai.com and the Yakezie Network. Sam is an avid tennis fan who loves to travel. He received his BA from William & Mary and his MBA from UC Berkeley.

13 comments

  1. Untemplater

    I see women get paid less a lot and it’s not a good feeling. I used to think I would get a raise if I worked hard. I’ve learned that isn’t always enough. It takes asking for a raise a lot of the time or at least being very clear and open about what you want for career advancement and compensation during talks with senior management.

    I think it’d be great for both parents to get the same amount of time off for the birth of a child. I don’t have any kids, but I can only imagine how much work is involved in the first 3-6 months and having both spouses at home would be so helpful.

    Equal parental leave sounds like a great way to help lessen the wage gap. It won’t be easy to get companies to implement nor a fast change, but the more we can think outside the box the more change we can bring. Great thinking!

    Reply
    • Financial Samurai

      Unfortunately, working hard is not always enough. One has to develop a strong network of supporters and subtly, but effectively toot their own horn. “The squeaky wheel gets the grease” as they say.

      I’m just impressed with Europe’s generous parental leave vs. ours. Amazing. Back in finance, one would have to take a 3-6 month gardening leave if they were to join a competitor. In the US, the gardening leave is only 1 month in finance!

      Reply
    • James

      Well, that’s just life. Men have to ask for raises, too. You might be able to find anecdotal counterexamples, but ask any hiring manager, and they’l tell you that the trend is that the vast majority of men negotiate their pay, and the vast majority of women take what they’re offered.

      Know what you’re worth, ask for it, and be willing to walk away if you don’t get it. That’s the only way to make it happen.

      Reply
  2. Linda

    Genius solution Sam!

    I think pay discrimination is mostly subconscious in nature. I’ve been working for 15 years in a big corporation and I’ve never seen or experienced purposeful pay discrimination. Salaries are set and dependent on years of services for example.

    Having more time off for both parents would be wonderful, especially for baby # 1. But who will invent the next Google, Facebook, Apple, or Twitter if both parents are always away?

    Reply
    • Financial Samurai

      I haven’t noticed overt pay discrimination either. But if you gather the statistics from millions of people, clearly there is a gap, for whatever reason. I’ve just provided one viewpoint in this post, and a solution. I’m not saying this is the right solution. But I do believe equal parental leave makes sense.

      If we didn’t invent FB, Apple, Twitter, and Google, I’m sure some other country would!

      Reply
  3. Colleen

    Great idea of equal parental leave for both sexes. Probably won’t be accepted for the next 300 years, if at all–but this would also be a way of showing how a company values family and how both partners are equally important in raising of a child. That it’s not simply “women’s work.”

    Reply
    • Financial Samurai

      Most definitely. I think this proposal for equal parental leave, or some variation of it could have a positive knock-on effect for attitudes towards child-raising, roles, teamwork, and so forth. I’ve spoken to over 200 people about this proposal, and everyone was incredibly enthusiastic.

      Whichever firm can adopt equal parental leave I think will become one of the best places to work for, and receive incredible positive attention. The company signals the importance of family to their employees, which I think will make employees work harder for the company ironically because they appreciate their flexibility. Loyalty should also increase as well.

      One day! And it could be tomorrow.

      Reply
  4. Anonymous

    I think this article does a great job of laying out the problem and coming up with an innovative and fundamentally sound solution. I think that you provide a lot of examples that people can easily relate to, such as Little Italy and the jocks/thespians example that immediately made me think of the movie Mean Girls.

    One thing that I find interesting is that you talk about how a self-forming glass ceiling might be created by having workplaces that aren’t that diverse. I think it could be reasoned that some of the people most motivated to make their organizations more diverse are the ones who might fall victim to the self-imposed glass ceiling. Who’s more likely to hire a diverse team: a manager who got his job through an “old boys network” or a manager who was able to break through the self-imposed glass ceiling and recognize the benefit of an incredibly diverse team? How do organizations ensure that they’re putting employees in managerial positions who recognize the benefit of diverse teams?

    One thing that some companies do that I’m not sure if Wall Street/finance firms in general do is use personality tests when recruiting. I think this would be a good way for hiring managers to identify who is more inclusive and thrive in a diverse workplace and who might not. Some of the companies I know that use personality tests are General Mills and Procter & Gamble, two companies with significantly different corporate culture than any bulge-bracket bank, but I wonder if the banks and financial firms could take a page out of GM or P&G’s book.

    I really like the solution you’ve come up with, and I’m shocked that America is the only country that has no parental days paid. That seems incredibly backwards to me, especially considering some of the countries on the list that have parental days paid are often referred to as emerging markets here in America.

    All in all, I thought it was a great read. Extremely unbiased and factual, and had some really hard-hitting facts.

    Reply
    • Financial Samurai

      Personality tests are always interesting because they seem like they can be easily gamed by the applicant who thinks s/he know what the firms wants to hire. There were no personality tests on Wall St., just straight up interview after interview. I had 55 interviews over 6 months before I was given an offer. But I was a below average candidate, hence why they had to keep on questioning me.

      No mandated paid parental days in the US is surprising, given how generous all those other countries are as shown in my chart. However, I don’t know many companies who don’t provide any pay for parental leave. The US has the FMLA (Family Medical Leave Act):

      The FMLA entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.

      Eligible employees are entitled to:

      Twelve workweeks of leave in a 12-month period for:
      the birth of a child and to care for the newborn child within one year of birth;
      the placement with the employee of a child for adoption or foster care and to care for the newly placed child within one year of placement;
      to care for the employee’s spouse, child, or parent who has a serious health condition;
      a serious health condition that makes the employee unable to perform the essential functions of his or her job;
      any qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on “covered active duty;” or
      Twenty-six workweeks of leave during a single 12-month period to care for a covered servicemember with a serious injury or illness if the eligible employee is the service member’s spouse, son, daughter, parent, or next of kin (military caregiver leave).

      It’s the fear of losing one’s job for having children which needs to be eradicated. That’s just not right or fair.

      Thanks for your comment!

      Reply
    • Turc1656

      I have to disagree with this whole line of thinking. No doubt the pay gap exists. Many studies have shown it does. But I think everyone incorrectly attributes the cause. First people said it was gender discrimination. Now people are saying it has to do with maternity leave – not just here, but I’ve seen it written about elsewhere many times. It seems to make economic sense when you think about it, and I’m sure there are some cases every year for which it is the cause.

      But the numbers, when broken down by age group as well show the SAME pay gap for women who are no longer in their baby-making years. If maternity leave and related time was really the cause, we wouldn’t expect to see this.

      I firmly believe that the cause is actually that women are far more likely to NOT negotiate a salary when accepting a position. Studies and surveys have been done to back this up so there are actually numbers behind my claim. On the anecdotal side, just ask any hiring manager or anyone who handles that part of the negotiation process for a company of any reasonable size. They will tell you that women are far more likely to simply accept the offer rather than try to negotiate for more.

      Anonymous – why should America legally require paid parental days? Why shouldn’t it be handled by the employment market just like other time off is handled? Companies can compete for the best workers by giving them some extra time off as an added benefit to entice them to work there. Look at the countries that have such laws. They tend to be the same countries that support massive social welfare programs (like Canada which has 52 weeks maternity leave and socialized healthcare) that disincentivize actual work. Upper management in my own company has told me our international offices have this problem and the execs hate it. Laws in those countries make it near impossible to fire anyone except the absolute worst employees. The answer is most definitely to leave the government out of it.

      Reply
  5. NZ Muse

    My organisation uses the term ‘parental leave’ and at first it sounded quite strange to me, but I think it’s fantastic. Although we have a majority female staff using the neutral term (“Jane will be on parental leave from July”) feels like another step down the equality path.

    Reply
    • Financial Samurai

      From the American’s point of view, everything coming from New Zealand and Australia sounds fantastic! You guys know how to live a more balanced life than we do.

      And, I’m impressed Australia has a $400,000 average inheritance vs. $180,000 in the US.

      Reply
  6. Rudy

    Wouldn’t not giving women ANY maternity leave, like men be more equal?

    So your concept is giving paid paternity leave, which devalues men’s work to a company, which reduces the gender income gap. That is so crabs in the bucket thinking, if men make more than women we should reduce how much they make, instead of trying to help women make more money.

    Reply

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