A Choice That Explains Why Women Make Less Money Than Men

A lot of the research into pay disparities between genders is normative.  This means that values are put into the hypothesis before the research even looks at the data.  That has resulted in a lot of hyperbole when it comes to the conversation about equal pay for men and women.

Recently, I saw this study that was pretty hopeful to me.  No salary gap exists between women and men in tech as long as you are comparing apples to apples.  Of course, because we are looking at people, there is a lot of randomization.  How many special circumstances?  Woulda coulda shouldas?  If only ifs?

I was reading Chicago Booth Magazine and they had a snippet of a study that explains 10% of the gender pay gap.  It’s the choices men and women make for pay in the same job.

Men are much more likely than women to choose performance based pay rather than a guaranteed salary with performance benefits.  Ernesto Reuben of Columbia University, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth did the study.

It turns out men self select into more competitive industries than women and in turn make more money.  It’s all about industry selection.

Here is a link to the entire working paper.  The formal paper shows the hypothesis, the math, the data and the conclusions.  Very important in academic research to do that so studies can be replicated.  It’s also important to show the assumptions because that’s where academics will find disagreement.

Here is what they say:

Our data on labor market outcomes displays two important gender differences. First, we find a meaningful gender gap in earnings at graduation: compared to male MBAs, on average, female MBAs earn 15% less (around $26k less per year). This gap persists, almost unchanged (13%), even when we control for the industry the MBAs chose to work in. Second, we find that men and women selfselect into different industries and this difference persists several years after graduation. More specifically, female MBAs are 8% more likely to work in low-paying industries at graduation and 12% more likely to work in such industries seven years later.

Here is some of their conclusion:

We find that, among MBA graduates from a prestigious business school, competitive individuals obtain higher earnings at graduation. Importantly, differences in taste for competition account for a significant share of the gender gap in earnings. We also find that not only are competitive individuals more likely to work in higher-paying industries at graduation, but they are also more likely to remain in these industries several years later. Finally, we find that the gender gap in industry participation arises from both the demand and supply side of the labor market.

Men willingly take more risk than women.  Taking more risk offers more return.  Perhaps what we should be doing is educating women on how to assume and take calculated risks.  Right now, we are just trying to put them in the same programs as men.

Think of it a different way.   Currently, the common theory out there is that if we have mandatory computer science education for women (and men), we will get a lot more women entrepreneurs.

Most certainly.  We will get more women entrepreneurs because we have incentivized greater volume of women going through programs that are designed to give them the basic coding skills entrepreneurs need today.  But, without also educating them about risk/reward, women will probably still choose differently than men and the gender pay gap will persist.

It’s not simply about plugging women into the same program. It’s about educating them when it comes to the topics of competition and risk.

Interestingly, I read a stat tweeted by PayPal founder Max Levchin.

Max came from a family that emigrated to the US from the Ukraine.  He grew up in Chicago and went to the University of Illinois.

Maybe the difference is really that immigrant entrepreneurs have already assumed and learned to live with a lot of risk simply by emigrating to the US.  Children of those immigrants surely heard family stories of how they came about making the decision to leave their home country and travel across the globe to the US.  They intuitively calculated the costs/opportunity costs for their families.

Want more entrepreneurship in the US by people that grew up in the US?  Encourage people to assume and learn to live with risk.

 

  • Joesph Constable

    Well then, if immigration is so good then lets import ten million more Mexicans and a million more Middle Easterners over the first term of the next president.

    • I don’t think I said that. I think what I said was that immigrants already understood how to take a lot of risk. Knowing how to assume risk means that you might have a tendency, or an appetite to take a job that offers more upside, while at the same time having a downside.

      • Nat Rev

        You’re being way too polite. Joseph has a reading comprehension problem.

        And, FYI, I’m slightly to the right of Attila the Hun on immigration (and everything else.)

    • orbicularioculi

      I think you missed the point.

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  • The_Invisible_Hand

    Interesting piece. Life is So Grand!

  • orbicularioculi

    Excellent article.

  • onlyabill

    “It’s the choices men and women make for pay in the same job.”

    “Men are much more likely than women to choose performance based pay rather than a guaranteed salary with performance benefits. ”

    “It turns out men self select into more competitive industries than women and in turn make more money.”

    All of these are good points and in part highlight both the differences between men and women and the different things that men and women want. Your comments up to now are understandable, reasonable and valid. Then you go and say:

    “But, without also educating them about risk/reward, women will probably still choose differently than men and the gender pay gap will persist.”

    If we understand that men and women are different and want different things, even after “ensuring” that women know and understand risk/reward they may still choose differently. In fact, what makes you think that they don’t already understand the risk/rewards AND are still choosing as they are?

    Also, there is no pay gap. There is an earnings gap but that earnings gap is based on life style choices. What do you want money or time, money or flexibility, money or better benefits, money or a job you enjoy, money or a safe job, money or fixed hours and no overtime requirements? There are in fact industries where women out earn men, that also does not get much attention.

    No one complains that there are not enough male nurses or male grade school teachers. No one complains that there are not enough female garage men or women explosive experts or tunnel rats or oil rig workers. The only fields where there are “issues” with too few women are the “professional” fields.

    Sorry but life is an endless series of choices and we all make different ones for different reasons. Many of these choices result in salary affecting consequences. For studies that have controlled for time in position, within rigid industry categories, any “wage gap” between the sexes is statistically non-existent. The main driving factor for wages is time in industry/time in position. Sorry but the reality is, if a woman wants to earn the same as a man don’t get pregnant and don’t take time out of the work force. Time is a much stronger indicator of earning rate (time in industry) than worker sex. That may not be “PC” but it is true and that issue will not be solved by legislation.

    If there truly was a “gender wage gap” all of the “smart” entrepreneurs would only hire women, save a boat-load of money and crush their competition (either through lower prices or a larger staff). That does not happen. If there was a “gender wage gap” why are women owned businesses not staffed 100% with only women that are paid exactly what the men would be paid? That also does not happen. Additionally, there are already laws enforcing equal pay for equal work and actual remedies if women feel they are not paid equally. People are [generally] paid what they are worth, man or woman. Any actual pay gaps are better explained as a “negotiating skills” gap than anything else. If you want to close that “small” gap, teach women how to negotiate.

    • Carol Wojtyla

      On the incumbency problem. …if women had children earlier, then attended started a career when the children enter grade school by the time the kids were in HS/college they would be of a similar age with their male peers and have no career interruption. But hey suggest that to most women and they’ll go completely spare try to claim you hate women etc. Simply put women are biologically made to like babies and the best time to have one is when you are young.

    • My point is men are socially conditioned to take more risk. Educating women on how to take risks will cause them to make different choices narrowing the earnings gap. There will always be an earnings gap between the sexes that can be chalked up to children, and education.

      • onlyabill

        Where is your evidence that women do not already understand risk/reward and continue to make the career decisions that they are? You seem to believe that their choices are wrong (not wrong but not “best”?) and that this can be fixed through learning. I don’t. I believe that most women want the same general things which in this case are all of the benefits available from a job other than maximum salary: softer (more care oriented, less confrontational) careers, greater time flexibility, more stable income, less risk of physical injury, less risk of extended hours, etc.All of these are a trade off of a higher raw salary.

        This is not by any means universal as we have women in all fields and women excel in many like law and medicine which are both high pressure and confrontational.Generally though women want to have the time and space to have a family. Generally men want money and lots of it, in part to be able to afford a family. Both genders will do much to achieve their primary goals. This is reality.

        • Nope, women should be free to choose. That being said, there are fewer women in entrepreneurial roles than men. The study pointed out women make different choices-and choose less competition. One reason could be that they don’t calculate risk/reward the same way. Similarly, European sales people take salaries where American counterparts take commission.

          • onlyabill

            “Nope, women should be free to choose.”

            Where have I ever said they should not have a choice? I am saying they have already made it. Part of your position is that women would make “better” choices if they understood risk/reward. I say they already do and the general choices they make are just different from the general choices men make due to different goals. I am saying this difference is not a problem that needs fixing.

          • Maybe, but maybe not.

  • Mastro63

    ” The Congressional Joint Economic Committee claimed the percentage of female engineers in the workforce went from 5.8 percent in 1980 to 14 percent in 2012.”

    14 percent. Must be discrimination! **I’m joking**

    My brother’s father in law nudged/forced his daughters to study engineering- thinking they would always have a job. That is where my engineer brother met his wife. She’s not an engineer anymore- she went into teaching.

    • She made a career choice that was best for her, and what she wanted to do. Nothing wrong with that at all. As long as women (and men) are free to choose we shouldn’t care.

  • Whiggish Boffin

    Define aggressiveness as the propensity to impose one’s will, even at the price of enduring and inflicting pain. One’s will may be self serving, or may serve a purpose higher than oneself. By this definition, it makes sense to speak of an aggressive surgeon, inventor, or civil-rights activist.

    Men are more aggressive than women. The cause is biological — the prenatal testosterone dose produced by the XY fetus. It is not a social construct, never ws, never will be. There is some bell-curve dispersion in aggressiveness, so the most aggressive men are much more aggressive than average men or the most aggressive women.

    In competing for positions of power, wealth, and fame, if other qualities are equal — talent, intelligence, self-control — the more aggressive competitor wins the prize.

    Aggressive, smart, self-disciplined people become CEOs. Aggressive, stupid, impulsive people become prison inmates. Men are the vast majority in both populations.

    The big social problem is not women underrepresented in STEM fields. It is to connect the aggressive energy of young men to a purpose higher than themselves.

    (See Steven Goldberg’s 1968 book, The Inevitability of Patriarchy, revised in 1993 as Why Men Rule. Its thesis has been ignored by feminists because it can’t be refuted.)

    • Or Aggressive Impulsive Stupid people become commodity traders.

      • Whiggish Boffin

        Isn’t there some overlap?

  • 2+2=4andalwayswill

    There’s about a 2% pay gap if you control for various choices including staying home with the kids, working part time, taking less stressful work, etc. That 2% probably correlates to women being a little bit less assertive than men for one reason or another. You could probably start a big government program to give women that extra 2% of assertivness. But why bother?

  • Micha_Elyi

    I haven’t met a young man yet whose life plan includes marrying a woman who’ll support him for the rest of his life so he can fulfill himself as a homemaker.

    There’s the root cause of your risk-taking and pay gaps. Want to ‘cure’ them? As a prominent feminist once said, women must not be allowed to make such choices.

  • Honordads

    Risk-Reward is at work in the public vs private sector dynamic as well, with government jobs trading lucrative salary for stability, little risk of job loss, and good benefits. It’s no surprise that about 44% of all federal jobs are held by women.

    • Deoxy

      Except that today, public jobs have all those benefits AND pay more than the comparable private job.

  • Robert

    You mean there are no participation trophies in business?