Pay gaps

What Are Pay Gaps?

Pay gaps refer to the disparities in average earnings between different groups of workers, typically categorized by demographics such as gender, race, or ethnicity. This concept is a significant area of study within Labor Economics, examining how various factors contribute to unequal compensation across the workforce. While often discussed in the context of fairness and equal opportunity, pay gaps also reflect broader economic disparities and their impact on individuals and society.

History and Origin

The issue of unequal pay has historical roots, with formal efforts to address it gaining momentum in the mid-20th century. In the United States, a pivotal moment arrived with the passage of the Equal Pay Act of 1963. Signed into law by President John F. Kennedy, this legislation amended the Fair Labor Standards Act, making it illegal for employers to pay men and women different wages or benefits for jobs requiring the same skills, effort, and responsibility performed under similar working conditions. The Equal Pay Act was among the first federal laws specifically designed to reduce gender discrimination in the workplace, building upon earlier, less successful attempts to establish the principle of equal pay for equal work¹⁷.

Key Takeaways

• Pay gaps measure the average difference in earnings between distinct groups of employees, often based on gender, race, or other demographic factors.
• They are distinct from wage discrimination, which specifically refers to illegal practices of unequal pay for equal work.
• Various factors contribute to pay gaps, including occupational segregation, differences in work experience, education, and outright discrimination.
• Addressing pay gaps involves a combination of legislative action, corporate policy changes, and increased pay transparency.
• Closing significant pay gaps is viewed as essential for promoting gender equality and overall social impact.

Formula and Calculation

The most common way to calculate a pay gap, such as the gender pay gap, is as the difference in median earnings between two groups, expressed as a percentage of the higher-earning group's median earnings.

For example, the gender pay gap is often calculated as:

Where:

• Median Earnings of Men = The midpoint of all earnings for men in a defined group (e.g., full-time employees, specific occupation).
• Median Earnings of Women = The midpoint of all earnings for women in the same defined group.

This formula provides an "unadjusted" pay gap, reflecting the overall difference without accounting for factors like job type, experience, or hours worked. More complex analyses may use statistical regression models to calculate "adjusted" pay gaps by controlling for these variables, aiming to isolate the portion of the gap that cannot be explained by measurable factors like human capital investments.

Interpreting the Pay Gaps

Interpreting pay gaps requires careful consideration of the methodology used. An unadjusted pay gap, such as the frequently cited overall gender pay gap, represents the raw difference in average or median earnings between two groups. For instance, if women earn 82 cents for every dollar earned by men, this reflects an 18% unadjusted gender pay gap¹⁶. This figure broadly illustrates income inequality but does not explain the underlying causes.

Adjusted pay gap analyses attempt to control for variables like education level, years of experience, occupation, industry, and hours worked. By doing so, they aim to pinpoint the portion of the pay gap that might be attributable to factors beyond these measurable characteristics, such as discrimination or unconscious bias. While a smaller adjusted gap suggests that differences in qualifications and job choices play a role, any remaining gap indicates potential systemic issues. For example, South Korea has the largest gender pay gap among OECD countries, at 31.2% in 2022, nearly triple the OECD average of 11.6%¹⁵. This high figure is often attributed to its workplace seniority system, which can disproportionately penalize women who temporarily leave the labor market for childcare¹³, ¹⁴.

Hypothetical Example

Consider two hypothetical companies, Alpha Corp and Beta Inc., operating in the same industry.

Alpha Corp:

• Median annual salary for male employees: $70,000
• Median annual salary for female employees: $63,000

Using the unadjusted pay gap formula:

This indicates that female employees at Alpha Corp earn 90 cents for every dollar earned by male employees, reflecting a 10% gender pay gap.

Beta Inc.:

• Median annual salary for male employees: $75,000
• Median annual salary for female employees: $73,500

Using the unadjusted pay gap formula:

Beta Inc. demonstrates a significantly smaller unadjusted pay gap of 2%, suggesting more equitable overall earnings between genders compared to Alpha Corp. This basic calculation helps companies and regulators identify areas where further investigation into underlying causes, such as differences in roles, seniority, or productivity, may be warranted.

Practical Applications

Pay gaps are a crucial metric in various real-world contexts, extending beyond simple statistical observation. In regulatory oversight, government bodies like the U.S. Equal Employment Opportunity Commission (EEOC) enforce anti-discrimination laws, including the Equal Pay Act. The EEOC prioritizes employer practices that may "impede equal pay or contribute to pay disparities," examining issues such as reliance on salary history and policies discouraging employees from discussing pay¹². This governmental focus highlights the importance of fair employment law and practices.

Companies increasingly analyze their own internal pay gaps as part of diversity, equity, and inclusion (DEI) initiatives. Such analyses help identify potential systemic issues and inform policy changes related to hiring, promotion, and salary structures. Furthermore, investors and consumers are increasingly scrutinizing companies' pay equity performance, viewing it as an indicator of responsible governance and long-term sustainability. Market forces and public pressure can incentivize organizations to proactively address pay disparities to enhance their reputation and attract talent.

The measurement of pay gaps also informs public policy debates, leading to initiatives like mandatory pay gap reporting in some countries or the promotion of minimum wage adjustments to narrow disparities at the lower end of the income spectrum.

Limitations and Criticisms

While essential for highlighting economic inequalities, the interpretation of pay gaps comes with certain limitations and criticisms. A primary critique often centers on whether the gap is "unadjusted" or "adjusted." Unadjusted pay gaps, while straightforward to calculate, do not account for differences in factors such as job roles, hours worked (e.g., part-time versus full-time employment), levels of education, or years of work experience¹¹. Critics argue that these factors significantly explain observed differences in earnings, and that a raw number oversimplifies the issue.

Conversely, proponents of analyzing unadjusted pay gaps argue that these factors themselves can be influenced by systemic biases. For example, occupational segregation, where certain demographic groups are concentrated in lower-paying industries or roles, contributes significantly to overall pay gaps⁹, ¹⁰. Furthermore, career interruptions, often associated with caregiving responsibilities, can impact an individual's accumulated work experience and, consequently, their earning potential⁷, ⁸. Even when adjusting for numerous variables, a persistent "unexplained" portion of the pay gap often remains, which some researchers attribute to direct wage discrimination or unconscious bias⁵, ⁶.

Additionally, the focus on aggregate pay gaps may obscure variations within specific industries, occupations, or seniority levels. The reasons behind pay gaps can be complex, involving a mix of individual choices, societal expectations, and discriminatory practices, making a singular explanation difficult³, ⁴.

Pay Gaps vs. Wage Discrimination

While often used interchangeably, "pay gaps" and "wage discrimination" represent distinct concepts. Pay gaps refer to the aggregate difference in average or median earnings between different demographic groups within a larger population or organization. This is a statistical measure that reflects overall disparities, which may arise from a variety of factors, some of which are lawful (e.g., differences in experience, education, job type) and some of which are not.

In contrast, wage discrimination specifically denotes the illegal practice of paying individuals unequally for substantially equal work based on protected characteristics such as gender, race, religion, or national origin. For a claim of wage discrimination to be valid under laws like the Equal Pay Act, jobs must require substantially equal skill, effort, and responsibility, and be performed under similar working conditions, within the same establishment¹, ². Thus, while wage discrimination is one contributing factor to broader pay gaps, not all pay gaps are solely due to discriminatory practices.

FAQs

What causes pay gaps?

Pay gaps are caused by a combination of factors, including differences in education and experience, occupational segregation (certain groups being concentrated in lower-paying jobs), work hours, and direct discrimination. Societal factors, such as traditional gender roles influencing career paths or caregiving responsibilities, also contribute significantly.

Are pay gaps illegal?

The existence of a pay gap itself is not inherently illegal. However, wage discrimination, which is a practice that contributes to pay gaps, is illegal. Laws like the Equal Pay Act in the U.S. prohibit employers from paying individuals differently based on protected characteristics for jobs requiring equal skill, effort, and responsibility.

How are pay gaps measured?

Pay gaps are typically measured by comparing the average or median earnings of different groups, such as men versus women, or different racial/ethnic groups. The most common measurement is the "unadjusted" gap, which is the raw difference in earnings. More complex "adjusted" analyses attempt to control for factors like job type, education, and experience to isolate the portion of the gap that might be due to other factors, including discrimination.

What is the difference between a "raw" and "adjusted" pay gap?

A "raw" or "unadjusted" pay gap simply calculates the total difference in average earnings between two groups without accounting for any other variables. An "adjusted" pay gap attempts to control for various factors that can legitimately influence pay, such as education, years of experience, occupation, and hours worked. The goal of an adjusted gap is to highlight disparities that remain even after these factors are considered, which may point to discrimination or other systemic biases.

What is being done to close pay gaps?

Efforts to close pay gaps include legislative measures like equal pay laws, policies promoting pay transparency (e.g., requiring companies to disclose salary ranges), initiatives to encourage diverse representation in higher-paying industries, and corporate diversity, equity, and inclusion programs. Policy changes aimed at supporting work-life balance and addressing societal biases also play a role.