You have to ignore many variables to think women are paid less than men. California is happy to try.
by Sarah Ketterer • Wall Street Journal
When it comes to economically foolish laws, California is second to none. A good example is the California Fair Pay Act, which Gov. Jerry Brown is expected to sign in coming days.
This bill, which the California senate unanimously passed in August, is a state version of the Paycheck Fairness Act that the U.S. Congress rejected in 2014. Like its national counterpart, it is an aggressive attempt to eradicate a wage gap between men and women that is allegedly due to discrimination in the workplace. But this wage gap is illusory, and the legislation will have unintended consequences, including for women.
The Fair Pay Act will prohibit employers from paying men and women different wages for “substantially similar work.” At first glance, this prohibition might appear reasonable: Government data for 2014 show that women in California earn, on average, 84 cents for every dollar earned by men. (Nationally, women earn about 79 cents for every dollar earned by men.)
But a closer look reveals a different picture. The Bureau of Labor Statistics (BLS) notes that its analysis of wages by gender does “not control for many factors that can be significant in explaining earnings differences.”
What factors? Start with hours worked. Full-time employment is technically defined as more than 35 hours. This raises an obvious problem: A simple side-by-side comparison of all men and all women includes people who work 35 hours a week, and others who work 45. Men are significantly more likely than women to work longer hours, according to the BLS. And if we compare only people who work 40 hours a week, BLS data show that women then earn on average 90 cents for every dollar earned by men.
Career choice is another factor. Research in 2013 by Anthony Carnevale, a Georgetown University economist, shows that women flock to college majors that lead to lower-paying careers. Of the 10 lowest-paying majors—such as “drama and theater arts” and “counseling psychology”—only one, “theology and religious vocations,” is majority male.
Conversely, of the 10 highest-paying majors—including “mathematics and computer science” and “petroleum engineering”—only one, “pharmacy sciences and administration,” is majority female. Eight of the remaining nine are more than 70% male.
Other factors that account for earnings differences include marriage and children, both of which cause many women to leave the workforce for years. June O’Neill, former director of the Congressional Budget Office, concluded in a 2005 study that “there is no gender gap in wages among men and women with similar family roles.” Time magazine reported in 2010 that in 98% of America’s largest 150 cities, including my hometown of Los Angeles, single women under 30 actually earned, on average, 8% more than their male counterparts.
Ms. O’Neill and her husband concluded in their 2012 book, “The Declining Importance of Race and Gender in the Labor Market,” that once all these factors are taken into account, very little of the pay differential between men and women is due to actual discrimination, which is “unlikely to account for a differential of more than 5 percent but may not be present at all.”
What California’s Fair Pay Act will do, however, is make the state, already notorious for regulation and red tape, a more difficult place to do business. Companies must now ensure that every penny of wage differential between the men and women they employ is attributable to bona-fide differences in education, training, experience, quantity or quality of work, and so on. Referring to the countless factors at play, Harvard economist Claudia Goldin has said “it’s not checkable.” Yet even attempting to do so will only add to companies’ already substantial regulatory-compliance budgets.
Some of these factors—quality of work, for instance—are inevitably subjective, yet trial lawyers will swoop in to turn every conceivable pay difference into a lawsuit. Employers who cannot “prove” objectively that one employee’s work was better than another’s may face costly penalties. Many will surely pay to settle these lawsuits instead of taking them to court.
All of this money would be better spent by businesses to hire more workers or raise wages, including for countless women. Ms. Goldin has even suggested that women’s employment could decline.
Such are the unintended consequences that may accompany this feel-good but ultimately foolish law. As Gov. Brown prepares to sign the California Fair Pay Act, he should ask himself a simple question: Does he really want to put women at an actual disadvantage while attempting to eliminate an imagined one?
Ms. Ketterer is the co-founder and chief executive officer of Causeway Capital Management.