The Economics of the Wage Gap Explained

In the same year, Wheel Of Fortune darling Vanna White was born, 13-year-old Bobby Fisher became chess champion, Physicist Gordon Gould invented the laser, and Nobel Prize winner Gary Becker wrote The Economics of Discrimination. In his book, Becker argued that discrimination as a result of prejudice by employers leads to economic inefficiency; therefore, the more competition and free market behavior, the less likely employers would be able to get away with discriminatory hiring practices. That was back in 1957.

Today, America continues to be a country of high-stakes competition, strategy games, and the litigious long haul (Gould spent thirty years fighting the U.S. Patent and Trademark Office to obtain patents for his laser and related technologies). Women in all professions have fought prejudice and lower compensation for decades. If Becker is correct, shouldn’t the inefficiency of a gender-biased wage gap have been eradicated by the market long ago?

Alas, gender bias is still pervasive in America. According to a study conducted by The Women in Law Committee of the State Bar of California, 85 percent of female lawyers surveyed noticed a slight but persistent gender bias in their position, and nearly two-thirds of surveyed female lawyers agreed that they were not accepted as equals by their male colleagues.

The effect of such a bias is great. Women comprised less than one third the total number of legal professionals in the U.S. in 2009, although they accounted for nearly half of all J.D.’s awarded for that same year, according to the American Bar Association. Furthermore, women accounted for a mere 15 percent of General Counsel in Fortune 500 Corporations and 24.7 percent of District Court Justices in 2009. Finally, gender bias places women in law, like many other industries, at the losing end of the wage gap.

Both female equity and non-equity partners are compensated less on average than male partners, despite operating at equal productivity levels, according to a Temple University Legal Studies Research Paper. However, this discrepancy is not limited to partnerships. The study found women in the legal industry in general, regardless of their position, were all paid less than their men counterparts.

Since law firms are more common than Starbucks these days, in a competitive market, the demand for employees who cost less but produce more should be growing. At least, that’s what Becker would opine:

For example, a biased monopolist might hire a more expensive white worker even though a cheaper black one was available and up to the job. But if another firm entered the market, it could produce its goods more cheaply by hiring the black worker that the monopolist had turned down. By discriminating less, it could undercut its blinkered rival. Mr. Becker did not argue that competition would get rid of bias or even necessarily reduce it. Rather, he argued that competition could greatly soften the economic effects of a given amount of bias on the part of employers. His model also implied that competition would have a greater effect where the existing degree of bias was greatest. “Race and red tape: One unsung benefit of financial deregulation is greater colour-blindness”

                Nov 13, 2008 from the Print Edition of The Economist

An especially distressed economy becomes rife with competition. Among law firms, competition exists for penny-pinching clients. Among associates, competition exists for a limited number of jobs against an overabundance of candidates. Once law firms realize the market has undervalued the price of female attorneys, the demand for them will only increase. As this demand is filled, the price (think, salary) of female attorneys will increase. To compete, men will have to settle for lower compensation, thus (in theory) decreasing the wage gap between male and female lawyers.

Sadly, Becker is right—economics alone cannot eliminate prejudice. But, in a recessed economy where the bottom line matters most, perhaps economics can at least give the appearance of gender equality and impartiality until societal mores catch up. So… here’s to hoping.

For more information, please read:

  1. Statistical Evidence on the Gender Gap in Law Firm Partner Compensation (Marina Angel et al.) – September 9, 2010 (report).


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