Reducing the pay gap is an issue that has been very prominent in recent years. The gender pay gap is generally understood to be the difference between gross earnings of female and male employees (Office for National Statistics 2019). The value of pay gap changes based on which adjusting factors are taken into consideration when analysing the data. Experience, education, hours worked, job type, etc., can wildly change the perceived differences in wage (Eurostat 2019). It also encompasses the more elusive problems of disparate job choice and career achievement. The issue of pay gap has been examined and documented with all of these factors taken into consideration by scientists from multiple disciplinary fields. Despite this, there are still differences both in pay and in workplace behaviour that remain unexplained. Women earn less, negotiate less, get promoted less, and get hired less (PayScale 2019). This is where behavioural economics can step in and explain judgements and behaviours that help perpetuate this disparity.
In terms of policy, there have been numerous attempts to mitigate the pay gap on the private market, national, and international level. The European Commission identified reducing the gender pay gap, including gap in occupations, pay, and decision-making, as one of their key missions (Publications Office of the European Union 2016). The British governments Behavioural Insights Team likewise took on the challenge to reduce this gap through a number of policy proposals based on behavioural theory (The Behavioural Insights Team 2019).
The issue of pay gap is fundamentally not merely a question of social equality or inclusion. It is an issue of resource management and distribution. Imperfect judgements demonstrated in this essay do not affect just women. Men also get punished in the labour market for possessing certain traits but their heterogeneous distribution combined with other inherent biases means the women get penalized more even in situations of equal or higher economic output (Risse et al. 2018). Finding the specific behavioural patterns and biases that influence our judgement can lead to increased productivity and move the market towards more effective usage of the talent pool (Behavioural Insights Team 2018).
Labour market studies show that one of the major behavioural differences between men and women is their ability to negotiate. This has major impact on their likelihood of securing a job position, getting a promotion, or the level of their pay compared to their male peers. (Eckel et al. 2008). One of the ways to test the differences in negotiation abilities is the ultimatum game (Güth et al. 1982). The ultimatum game is a popular economic instrument that can be used to demonstrate irrational decision-making. One player will be endowed with a sum of money. He has to split it in a proportion he chooses with another player, who has a choice to either accept the split or reject and nobody gets any money.
Behavioural studies that use the modified ultimatum game, such as the one by Fabre et al. (2016), have demonstrated that the differences in pay may be driven by a combination of gender related stereotypes and unwillingness to engage in salary negotiations (Heilman and Kusev 2017; Leibbrant and List 2014). If the ultimatum game is split by gender, female participants receive and accept lower sums of money. Not only are women willing to accept less, including unfair offers, but they are on average also offered lower proportion of the money from the start. This suggests that when it comes to negotiations, people already subconsciously assume that they can get away with offering women less than men (Eckel and Grossmann 2001; Solnick 2001; Solnick and Schweizer 1999; Eckel et al. 2008).
Probable sources for the disparity in willingness to negotiate and subsequent gender related stereotyping may lay in the heterogeneous distribution of the Big Five personality traits. These traits are what represents our endogenous tendencies towards certain types of behaviour (Costa and McCrae 2008). They have been identified as agreeableness (tendency to be compromising, trusting, cooperative, and unselfish), conscientiousness (tendency to be organised, hard-working, efficient, and responsible), neuroticism (tendency to be less or more emotionally stable and respond to certain feelings like anxiety), extroversion (tendency to be sociable, talkative, and active), and openness (tendency to be open to new experiences, ideas, and creativity). By observing and determining these traits we can gain insight on what motivates people towards making particular judgements and decisions. McCrae (2001) and subsequently Costa et al. (2001) have conducted studies of 26 different cultures, which show that personality traits that determine people’s behaviour in the labour market are unevenly distributed among men and women, mainly in more developed countries.
Schmitt et al. (2008) replicated the unintuitive results of these studies by gathering personality data from 56 countries and relating it to economic and social wellbeing. Their study likewise showed that women score higher in traits agreeableness, neuroticism, conscientiousness, and extroversion, while men scored higher in openness to ideas. Risse et al. (2018) suggests that the likelihood of success in job interviews or promotions is strongly correlated with low agreeableness and low neuroticism, while the actual productivity is more correlated with conscientiousness. However, this trait does not correlate with success. That would mean that while women seem to have a higher tendency towards productivity and responsibility, they are less likely to achieve career advancements. Importantly, these differences seem to be greater in wealthier and in more egalitarian countries, where there is less emphasis on traditional sex roles. Schmitt et al. (2008) suggest that in the absence of societal pressure, the gender differences in traits, and subsequently in behaviour, are more pronounced. This puts further pressure on finding the right policy to address the pay gap while keeping these innate differences in mind.
Another aspect of this issue that needs to be addressed by policy-makers, is the role of biases in decision-making and their effect on the labour market. Kahneman (2003) distinguishes between two modes of thinking. The heuristic, quick, and effortless System 1 and the slow, reasoning, and effortful System 2. Since using System 2 is much more strenuous, most of our daily decisions are made through some sort of a heuristic process. While this makes decisions much less effortful and time-consuming, it increases the probability of greater bias and incorrect judgements (Kahneman and Tversky 1974). In regards to personnel choices, that can lead to hiring certain people not based on their ability but on the perception of the group.
Bertrand and Mullainathan (2004) conducted a research that shows the usage of heuristics in hiring practices and its effect on job distribution. According to them, hiring practitioners quite often resort to using heuristics when assessing résumés, which leads to disregarding candidates based on their gender or race due to innate biases. Low agreeableness and low neuroticism result in more confident and competent look, which does not necessarily translate into actual job performance (Darity and Mason 1998; Joshi et al. 2015). Therefore, the best way to address this problem would be to create System 2 based hiring practice than can achieve higher objectivity, without trading it off for too much effort (Hoffmann et al. 2009).
Lastly, we need to consider the role of trust and fairness in socio-economic behaviour and its benefits. Fehr and Schmitt (1999) describe how even a single actor perceived as purely selfish can turn all the other, even strongly inequality-averse, players to behave in a completely selfish manner and disregard public good. In this case, the perception of fairness in terms of relative wage reward can have serious implications on employee behaviour. PayScale survey of 71,000 employees found that there is a major discrepancy between how fairly people feel they are rewarded and the reality (Smith 2015). According to their research, women are almost 20% more likely to believe they are being underpaid than men, which is strongly correlated with the likelihood of quitting or acting against the public or company good (Evans and Krueger 2009). This was mitigated by introducing transparency into the reward structure and communication with the employees.
Rotter (1966) shows that the effects of rewards or reinforcements on behaviour is greater when the individuals believe they were rewarded based on their own efforts rather than based on chance. Higher earnings and greater economic as well as personal success seem to be correlated with the sense of control over one’s own life outcomes. Studies indicate that the mere belief in largely external control of people’s lives comes with a significant wage penalty (Heineck and Anger 2010; Groves 2005). In other words, just the belief that women are being penalized by discrimination or random chance leads to them earning less. The question of pay gap is therefore not merely a question of raw monetary outcomes but also of the perception of fairness and therefore the necessity to make the system seem fairer for everyone (Rabin 1993).
As the pay disparities are a relatively extensive issue, there has been a large number of policies implemented in this area. On one hand, that provides a lot of examples to analyse. On the other hand, the number of different policies and structural factors that influence the resulting outcomes is so great, that it is very difficult to accurately evaluate their success (Dobin and Kalev 2016). Scandinavian countries, especially Sweden, are seen as the leaders in pay gap tackling policies (OECD 2012). However, the unadjusted pay gap in Sweden is still recording higher pay gap than Poland, Italy, or Slovenia. Furthermore, the Swedish pay gap is more than three times that of Romania. Also, the difference in occupation choice between men and women is greater in Sweden than in other, less developed, less equal European nations that place greater emphasis on traditional roles. Latvia, Bulgaria, Poland, Ireland, Lithuania, and others have a significantly higher proportion of women in managerial positions than Sweden, Norway, or Denmark (Eurostat 2017). This is in line with the assumptions of Schmitt et al. (2008) that gender differences in traits, behaviour, and choice get more pronounced as the country becomes more opulent. This illustrates a number of problems that policy-makers face when implementing and evaluating policy in this area.
There are many different approaches to tackling the pay gap. The European Union Strategic Engagement for Gender Equality 2016-2019 has laid out a complex framework of action aimed at reducing inequality (Publications Office of the European Union 2016). However, finding any specific solutions or economic rationale in it would be a bit of a challenge. This strategic engagement seems to be primarily aimed at achieving statistical equality while disregarding any biological or behavioural differences. Suggestions such as widespread appointment of diversity managers or pushing for equal parental leave can reduce the role of biases but will also bring large additional costs and interventions that are not likely to be readily accepted by employers (Dobbin and Kalev 2016; Behavioural Insights Team 2018). The appointment of diverse selection panels has also been identified as ineffective. While having an equal share of men and women judging candidates sounds good on paper, studies show that in some cases it can even be counterproductive (Bagues et al. 2017).
Multiple policy solutions that stem from the basic observation of disparate behaviour have been implemented or proposed. These are policies like performance self-assessments, diversity training, unconscious bias training, or leadership development training. All of these policies are aimed at modifying biased judgement and behavioural differences. All of these policies have also been identified to produce mixed results at best (Behavioural Insights Team 2018).
Diversity training and unconscious bias training are aimed at introducing participants to a wider array of diverse information and help them address and overcome their unrealized biases. However, longitudinal studies of their effects did not show any conclusive positive results. These programs did manage to raise people’s awareness but did little to mitigate what was perceived as their innate biases towards a certain gender or race (Bezrukova et al. 2016). Leadership development training aims to improve managerial skills and improve one’s self-confidence. However, as demonstrated before, projected self-confidence is largely connected to people’s inherent personality traits and studies concerning leadership development training do not show conclusive improvement in career success. They are also sometimes seen negatively, as an attempt to paint women as the problem (Behavioural Insights Team 2018).
Self-assessments, while inconclusive when it comes to improving female career opportunities, did open up some interesting insights. What they showed is that women tend to be more objective and critical towards their own past performance (Beyer 1990). Fletcher (1999) raised a point that while the greater accuracy and self-criticism of female employees is beneficial for evaluation, it can be counterproductive in today’s gender-biased systems and lower their chances of getting promoted or hired into a new occupation.
Many behavioural economists point out the numerous inherent biases, judgement errors, visceral and other factors, which impede our ability to make optimal decisions (Kahneman and Tversky 1984; Loewenstein 1996; Hoffmann et al. 2009). Evidence from these policies suggests, that it is very difficult to curb these sub-optimal decision-making processes (Behavioural Insights Team 2018). People base their decisions on limited knowledge, bound by the institutions they belong to, and influenced by their values and biases (Gigerenzer and Selten 2002). In my opinion it would therefore be more productive to address the issue of pay gap by modifying the structure of workplace evaluation and career progression to discount irrelevant behaviour, rather than trying to change human nature.
One way to address the previously mentioned problems of biased hiring practices would be to create a unified, structured hiring process. In their meta-analysis McDaniel and Nguyen (2001) demonstrate the value of situation judgement tests in personnel selection. Situational judgements test is a type of assessment that presents the respondent with a series of situations and a list of responses to these situations. It is a type of job simulation assessment that does not rely on heuristic approach to applicant’s perceived skills but actually simulates how well they would perform on the job and correlates highly with job experience (McDaniel et al. 1988). Standardizing tests for job applicants and using a point-based scale would at least partially alleviate biases and give people a more objective and fair hiring system.
Previously I have described the problems stemming from heterogeneous personality trait distribution among sexes. Namely that women tend to score higher in agreeableness and neuroticism, which makes them less likely to engage in negotiations and accepting unfair offers (Risse et al. 2018). Leibbrandt and List (2014) show in their experiment that women avoid salary negotiations partly because they do not know what a reasonable ask would be. A way to address this behaviour could be to create a system with high wage transparency to clearly show the reasonable range of negotiations. Mazei et al. (2015) demonstrated that negotiation outcomes in terms of wage favour men, even when they have reasonably similar skill sets and experience. However, these differences were reduced by introducing a bargaining range. This shows that some outcomes based on behavioural differences can be changed by modifying the structure of labour market practices (Ibid 2015). Furthermore, a similar system of transparent salary is already implemented in Sweden, which would make its adoption in other countries significantly easier.
In a similar way to hiring, the process of promotion is also affected by structural bias that favours male dominant traits (Darity and Mason 1998; Risse et al. 2018). More agreeable and neurotic people are less likely to self-promote and they will highlight their own flaws and failures, which disadvantages them in the evaluation process (Eckel et al. 2008). In a sense, the traditional interview and evaluation punishes accuracy, rather than rewarding workplace productivity (Fletcher 1999). Castilla (2015) used a longitudinal study of US-based companies to determine the effects of accountability and transparency on the levels of the pay gap. His conclusion was that introduction of a structured, point-based system of pay and rewards reduces pay gap and inequality caused by biased or sub-optimal judgements and evaluations.
Increasing transparency and promoting the idea of more objective and accountable reward system in the labour market can also have effect on happiness and job satisfaction. This essay summarized the role of trust and fairness in labour relations. Believing in own control of one’s career and the fairness of life outcomes can reduce the pay gap on its own (Heineck and Anger 2010; Groves 2005). However, if we accept the premise that individuals experience greater levels of cooperation and achieve more success if they perceive the playing field as fair, implementation of transparency policies can have greater effect than just economic welfare (Rotter 1966; Rabin 1993). The growing field of happiness economics also found connections between relative income and life satisfaction. Reducing the pay gap through transparency can therefore not only improve the economic status of women but also increase their overall happiness (Clark et al. 2008).
Author: Igor Bubeník
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