Wage differences between men and women – sexist or functional?

There is no denying that women get paid less for doing the exact same jobs as men. Ample research has persistently shown that the wages of women, irrespective of qualifications and experience, are lower for the same kind of work. The only thing to be debated is “why?”

Some researchers have suggested that people who conclude from this finding that women are discriminated against jump too hastily to that conclusion, because the underlying reasons could be more complex and subtle than that. We should be more cheerful, and not immediately make such sinister inferences.

The story of firm specific skills

Instead, their explanation hinges on “firm specific skills”. With firm specific skills we mean the experiences and qualifications that employees may build up over time that are particularly valuable to the person’s employer, because it concerns knowledge about its specific product portfolio, a technology particularly crucial for the firm, relationships with its most important customers, etc. These firm specific skills are very important and pivotal because if this person (who has accumulated this knowledge over the course of his or her tenure at the firm) were to leave, the firm could not just find a replacement somewhere on the job market, because they are by definition not skills anyone can pick up at school or at some other employer. Firms, who are afraid that women are more likely than men to resign from their job at some point (to give birth and take care of children) are more reluctant to assign jobs that lead to such firm specific skills to women. Therefore, on average, women build up less of those crucial firm specific skills. Therefore, they earn less money for what seems to be the same job.

I found this an appealing explanation. Because I guess it might be true that employers make the assumption that women are more likely than men to drop out of employment at some point. It also seems quite possible that two people having the same function might not get paid the same salary because – although we cannot observe this directly from their resumes – one of them might have built up more of those important firm specific skills, which employers reward in the form of a higher salary (because they are more afraid to lose them). So, intuitively appealing indeed, I thought.

Clever research: Temporary employees

But, in spite of its intuitive appeal, no-one has actually provided any evidence for it… And that is because it is incredibly difficult to research; it is just very difficult to measure such firm specific skills, whether certain jobs are associated with more of them than others, etc. Basically, all we can measure is someone’s sex, their job status, and their salary – and not much more.

But sometimes that is enough, if you choose your research setting in a clever way. And clever is exactly what Isabel Fernandez – my colleague at the London Business School – is. She decided to examine and measure wage differences between men and women in the temporary employment sector. And why is this so clever? Well, because by definition, firm specific skills do not matter much in this industry. Temporary employees, employed by staffing firms, are meant to be transcient and hopping between jobs. Firm specific skills are all but irrelevant for the kind of work they do. If Isabel were to find equal wages between men and women in this sector, it would be strong evidence that gender pay differences in other sectors are likely due to firm specific skills, and not some evil discriminatory attitudes amongst employers. On the other hand, if she’d even find wage gaps here, it would be convincing proof that we cannot simply attribute gender differences to firm specific skills (which men might have more off) and justify them in that sense. Then, something else (perhaps more sinister) must be going on...

Thus, Isabel talked a staffing firm – specialized in high skilled IT related contractors – into providing her with their internal databases: resumes, client information, demographic data, project characteristics, prices, and so on. Subsequently she compiled an extensive and detailed database on 250 of its temporary employees who, over a period of several years, jointly were involved in 1462 projects across 462 different companies. She measured their hourly pay rate and statistically corrected the differences between them for things such as years of education, specialist training, experience, project characteristics, and so on. Until there was only one variable left to examine: gender.

And she found that, even in temporary jobs, women get paid substantially less than men, for the same type of work. Women earned an average of $25.08 per hour while men, for the exact same job with the same qualifications, would earn an average of $29.66. And we can’t blame that on firm specific skills.

Hence, “firm specific skills” are a nice story – but not much more than that. They belong to the greater works of fiction. Because, as Isabel showed, they do not explain the difference between male and female wages. And that is rather unfortunate, because it leaves us with the nasty but inevitable conclusion that the world of business does on average still discriminate against female employees. And surely we cannot be cheerful about that.