16. The gender wage gap and the role of firms

Alexander Hijzen

Abstract

This chapter first shows some trend data on the gender wage gap in OECD countries. It then presents new evidence on the gender wage gap among men and women with similar skills in selected OECD countries, and analyses in particular the role of firms. The analysis is based on “linked” employer-employee data derived from administrative records of the tax and social security systems for 16 OECD countries. Upon presenting the findings, the chapter discusses different elements that policy packages could include to successfully reduce gender pay gaps. The chapter concludes with a summary of policy implications.

Key findings

The gender wage gap remains stubbornly wide at 12% when measured at median earnings of full-time workers. The bulk of the gender wage gap is concentrated within firms. About three-quarters of the gender wage gap between similarly skilled men and women concern differences within firms. This mainly reflects differences in tasks and responsibilities and, to a lesser extent, differences in pay for work of equal value. The remaining one-quarter of the gender wage gap results from the concentration of women in low-wage firms and low-wage industries.
The gender wage gap within and between firms tends to increase over the working life. The age-profile of the gender wage gap reflects to an important extent gender differences in the nature and incidence of for job mobility within and between firms. Women are more like to work part-time and part-time workers are less likely to be promoted. Women are also less likely to change firms than men, and when they do this is more likely to be for family reasons than career considerations.
Career breaks around the age of childbirth account for an important fraction of the “motherhood penalty”, i.e. the shortfall in wage growth following childbirth, and shape the evolution of the gender wage gap over the life-course.

The gender wage gap has decreased slowly over time but remains wide

In many OECD countries the gender wage gap has been on a downward trend for the past decade (Figure 16.1), as related to marked gains in educational attainment and increased female employment participation, and slow but noticeable progression of women in leadership positions (Chapters 8, 13, 17 and 18). Nevertheless, the gender wage gap remains stubbornly wide. Across the OECD on average, it stood at 12% in 2021 when measured at median earnings for full-time workers (OECD, 2023[1]).

Many factors drive the gender wage gap. One major barrier is the enormous inequality that exists in the distribution of unpaid work hours (OECD Gender Data Portal, 2021[2]). Women do much more cooking, cleaning, looking after the elderly, and childcare than men, which, in turn, limits both the time women can spend in paid work and their possibilities to make career progression (OECD, 2021[3]; 2017[4]; 2017[5]) (Chapter 13). This has negative implications for their pay, particularly in jobs with inflexible work hours (Goldin, 2014[6]). Discrimination is another important issue. Discrimination is hard to quantify, but has been identified through, for example, randomised field experiments where researchers create fictitious job candidates applying for jobs by correspondence, with exactly the same applicant credentials except for the gender of the applicant. These studies found discrimination against women both in the hiring process for higher-paid jobs and in the starting salaries that are offered (Blau and Kahn, 2016[7]), and this has downstream effects on the gender wage gap over the life course (OECD, 2021[8]). The remainder of this chapter focuses on the role of firms in the gender wage gap. Since women now have similar or even better qualifications than men in most OECD countries, gender wage differences largely reflect the differences in the type of work men and women do and in the way they are remunerated.

Using linked employer-employee data derived from administrative records of the tax and social security systems – available for 16 OECD countries – allows for an analysis of the role of firms, and in particular how they remunerate men and women with similar skills (OECD, 2021[9]; 2022[10]).

Figure 16.1. Progress in closing the gender wage gap has been slow

The gender wage gap and the role of firms

The bulk of the gender wage gap is concentrated within firms

About three-quarters of the gender wage gap between similarly skilled men and women reflects differences within firms (Figure 16.2). More detailed analysis in OECD (2021[9]) suggests that in most countries, this mainly reflects differences in tasks and responsibilities, whereas differences in pay for work of equal value tend to be relatively small in most countries. Consequently, the key priority for policy is how to promote access for women to better jobs within firms.

The remaining one-quarter of the gender wage gap results from the concentration of women in low-wage firms and low-wage industries. The between-firm gender wage gap reflects both the degree of gender segregation across firms and industries paying different wages and the importance of wage differences between firms and industries for workers with similar skills. The concentration of women in low-wage firms may be the result of discriminatory hiring practices by employers or the preferences of women for firms with flexible working-time arrangements. Firms that are more likely to offer part-time work arrangements also tend to offer lower wages (OECD, 2021[9]). It is also important to note that female dominated industries may be paid less because they are undervalued, and not because they are inherently less valuable, which stresses the importance to recognise the value of female dominated industries and to improve the pay and conditions in these industries. The concentration of women in low-wage industries may also reflect the role of past educational choices and gendered socialisation processes earlier in life (Chapter 9).

Figure 16.2. The gender wage gap is largely concentrated within firms

Gender wage gaps tend to increase with age due to gender differences in job mobility

The gender wage gap within and between firms tends to increase with age, at least until the typical age at which women have their first child. Indeed, in most Western European countries as well as Japan, the gender wage gap tends to increase with age until retirement (Figure 16.3, Panel A). This reflects growing differences in pay both between and within firms. A possible explanation is that men increasingly sort into high-wage jobs as they advance in their careers, while women stay behind or may even be constrained to move into lower-wage jobs, which offer more flexible working time arrangements. In Central and Eastern European countries as well as the United Kingdom, the gender wage gap increases between the ages of 25 and 35, but then declines (Figure 16.3, Panel B). In Denmark and Costa Rica, the gender wage gap is broadly stable until the age of 45 – with only a tiny increase in the mid-thirties – and a more significant decline thereafter (Figure 16.3, Panel C).

Figure 16.3. The gender wage gap between and within firms tends to increase over the working life

The tendency of the gender wage gap to increase with age reflects significant gender differences in upward mobility within and between firms. The bulk of the increase in the gender wage gap within firms can be attributed to gender differences in the probability of being promoted. In part, this may reflect the role of part-time work and career breaks which reduce the chances of getting promotions. A substantial part of the increase in the gender wage gap between firms is driven by gender differences in the extent and nature of job mobility across firms. Women are not only less likely to move between firms than men, but when they do, this is less likely to be associated with significant wage increases. In other words, women change jobs to a lesser extent for wage and career considerations and more often for personal reasons (e.g. having more flexible working-time arrangements, working closely from home, following a partner) (OECD, 2018[11]).

Career breaks around the age of childbirth contribute to the motherhood penalty in wages

Career breaks around the age of childbirth account for a large fraction of the “motherhood penalty”, i.e. the shortfall in wage or earnings growth following childbirth, and as a result play an important role in determining the evolution of the gender wage and earnings gaps over the working life. Career breaks around the time of childbirth are measured by non-employment spells in the data. Differences between skills groups are relatively small. Importantly, career breaks carry considerably earnings losses (Figure 16.4). These mainly reflect lower wage growth within firms due to missed experience or human capital depreciation. While most women return to the same firm after a career break, in some countries (e.g. Germany), many women switch to part-time work, further reducing their earnings. This tends to be particularly common among women with low to medium levels of skills.

Figure 16.4. Career breaks around the age of childbirth carry significant wage losses

A policy package to curtail gender wage gaps

Tackling gender wage gaps requires a comprehensive approach that combines policies targeted at households with policies targeted at firms.

Policies targeted at households to mitigate the motherhood penalty

The increase in the gender wage gap with age – particularly around the age of motherhood – reflects to an important extent reflects the uneven sharing of household responsibilities among parents and demonstrates the importance of gender-sensitive family policies.

Promote a more equal uptake of parental leave by fathers and mothers

In recent years, policy reforms across many OECD countries has sought to encourage fathers to take up parental leave (Chapter 23). As a result, the gender division in the use of parental leave has tended to become more even and is even approaching 50/50 in some countries (Iceland, Portugal and Sweden). However, most countries still see significant gender inequalities in the use of leave (OECD, 2022[12]). A key priority going forward will be to establish an individual right for each parent to parental leave for a meaningful duration where this is not yet the case.

Provide early childhood education and care for all young children

A comprehensive Early Childhood Education and Care (ECEC) system is key to facilitate an earlier return to work and particularly the option to take on full-time work for both parents (Chapter 24). Across the majority of OECD countries, enrolment in ECEC among both 0- to 2-year-olds and 3- to 5-year-olds has increased since 2010 and many countries now have close to 100% enrolment for 3- to 5-year-olds. Nevertheless, a number of countries could do more to improve enrolment rates of young children by expanding its availability through investments in infrastructure and enhancing its affordability.

Reduce financial disincentives to work for (female) spouses

Financial disincentives to work for second earners should be removed. Household taxation can reduce the overall tax payment for the family but will increase the marginal tax rate for the lower-earnings partner and weaken incentives to work (Chapter 25). Countries where the tax system favours single-earner or main-earner households might consider changing their systems to become either neutral on a household basis or – even better from the perspective of gender equality in the household – implement individual taxation. To avoid that some families lose out, individual tax rates could be adjusted or more transparent family supports be put in place.

Policies targeted at firms

The bulk of the gender wage gap is concentrated within firms, highlighting the importance of paying more attention to policies targeted at firms. Such policies can complement equal pay laws and anti-discrimination laws, which are crucial for establishing workers’ rights, but, in practice, place the onus on individual workers to ensure that employers adhere to equal rights law.

Promote pay transparency measures to provide objective data, better inform evaluation of competence and pay and mainstream gender sensitive thinking

To reduce persistent gender wage gaps and more specifically raise awareness about systematic pay differences within firms, pay transparency measures have gained momentum in policy packages over the past decade (Chapter 27). Different types of pay transparency measures could potentially contribute to narrowing gender pay gaps, including job classification systems to provide benchmarks and correct for potential gender bias in job valuations; non-pay reporting of gender-disaggregated information; and regular gender pay reporting, with or without audit. A key value of pay transparency measures is to provide aggregate statistics as benchmarks against which employees can compare their own pay packages. Sharing information about the average wages of men and women within firms can support underpaid workers to negotiate up their wage (Baggio and Marandola, 2022[13]; OECD, 2021[8]).

Wage-setting institutions can help reduce the gender wage gap between firms

Strengthening wage-setting institutions in the form of minimum wages and collective bargaining can help reduce the between-firm gender wage gap by compressing wage differences between firms (Chapter 27). Differences in pay between firms (unrelated to worker composition) in countries with more centralised collective bargaining arrangements are about half that in countries with more decentralised ones (OECD, 2022[14]). Similarly, introducing and raising minimum wages can also limit wage differences between firms and reduce the gender wage gap between firms among low-wage workers.

Continue to use quotas and soft measures to help breaking the glass ceiling

Various countries have introduced mandatory quotas, voluntary target setting and/or a range of other measures such as disclosure requirements, capacity-building actions, certificates and awards (OECD, 2017[5]) (Chapter 17). Targets and quotas can help address gender gaps in the short and medium term, but they are not a sustainable solution in themselves. The key to sustainable success the development of a gender-balanced cohort of competent employees for promotions into senior positions within companies and across sectors. A more gender-balanced workforce throughout organisational hierarchies is key to narrowing gender pay gaps within-firms and between sectors.

Key policy messages

Policies targeted at households to mitigate the motherhood penalty and support the careers of mothers by promoting a more equal distribution of household responsibilities. This includes measures to promote equal use of parental leave policies by fathers and mothers (Chapter 23); invest in the capacity and quality of ECEC and out-of-school hours services (Chapter 24); ensure that tax/benefit systems give both partners in a couple family equally strong financial incentives to work (Chapter 25).
Policies targeted at firms can help to promote access for women to better jobs within and across firms and reduce gender wage gaps. This includes pay transparency measures such as disclosure requirements and gender equality audits (Chapter 27); the use of voluntary target setting and mandatory quotas for women in higher-level positions or company boards (Chapter 17); as well as wage-setting systems that limit the extent that firms can compete on the basis of low wages.

References

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