Rethinking “Gender Discrimination” at Work

Richard Epstein*

Richard Epstein

Richard Epstein

The topic of gender discrimination in the workplace is making headlines again thanks to two recent events. The first is the release of the report “Women in the Workplace 2015” by Sheryl Sandberg’s LeanIn.Org and McKinsey & Co. Sandberg, writing in the Wall Street Journal, uses the report to conclude: “despite modest improvements since 2012, women remain underrepresented at every corporate level.”

The second, well critiqued by Sarah Ketterer, is the California Fair Pay Act, now awaiting Governor Jerry Brown’s signature. That bill would make it unlawful for employers to pay men and women different wages for “substantially similar work.” Touted as an extension of California’s current Equal Pay Statute, the bill “would revise and recast the exceptions to require the employer to affirmatively demonstrate that a wage differential is based upon one or more specified factors, including a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a bona fide factor other than sex, as specified.”

Both the report and the bill assume that something is deeply amiss in employment markets, which is leading to gender discrimination. It is notable that there are no legal barriers to entry for women in virtually all professions. Indeed, a robust set of antidiscrimination laws are already on the books at both the federal and state level, which reflect a strong social sentiment against discrimination on the grounds of sex. At no point in the modern debate has anyone has claimed, let alone demonstrated, that any institutionalized animus against women or even disparate treatment of female employees exists.

Sandberg’s Wall Street Journal op-ed rightly notes that the gender differences persist, notwithstanding the large percentage of CEOs that put the goal of improving gender diversity at the top of their list of priorities. Whether one calls this smart business acumen, affirmative action, or reverse discrimination is beside the point. What remains clear is that observed differences in the types of jobs taken by men and women are not attributable to any scheme that is tolerated at the firm level, let alone imposed by government. We should hardly expect that any systematic discrimination against female employees would be tolerated now that women in large numbers have founded their own businesses and have risen in managerial ranks. The days of the all-white male boardroom are gone forever.

Similarly, in dealing with the wage gap between men and women, a careful analysis would show that the key drivers of that relate to factors that are not easily controlled within the workplace, and all of which are beyond the reach of the law. The first is the choice of occupation. More men take more training in fields involving mathematics, computers, engineering, and the sciences, notwithstanding the efforts at the undergraduate level to increase female participation in these areas. Math and science are critical to creating new technologies, so we should not be surprised if the number of male executives exceeds the number of female ones at start-up companies, where of course traditional hiring issues play no role.

The second key driver of gender differences in pay is the work–lifestyle trade off. Many women with children have a divided commitment to the work place, given their greater commitments at home. An efficient division of labor within a marriage will typically require some level of specialization between the spouses, which is reflected in the well-established fact that men tend to put in substantially longer hours in the workplace than do women.

And last there is the question of what counts as a comfortable workplace environment. Sandberg notes that both married and unmarried women “cite stress and pressure” as the main reason why they choose not to pursue top leadership roles at work. But it not possible to engineer these elements out of such positions in major firms. Senior executives have to travel a lot, spend weekends and nights on the job, and constantly negotiate with difficult adversaries. Part-time employment and job-sharing are out.

One possibility that Sandberg does not mention could help explain why men and women take different paths in the workplace: Each employee makes a choice about the kind of job and lifestyle he or she wants. This hypothesis puts a very different spin on the observed data dealing with both promotion and wage differentials. The LeanIn.Org/McKinsey report notes that at every level, the rate of expected advancement by women is 15 percentage points lower than it is for men. The report concludes that this fact “suggests that women face greater barriers to advancement” than men.

What the report misses is an alternative hypothesis for the observed trends. The report notes that women in entry and lower level positions are much more likely to choose jobs with support obligations rather than jobs with direct profit/loss responsibilities. Those choices are exactly what we should expect of women trying to balance corporate life with family life to a greater degree than men. The reason why there is little movement in the aggregate numbers of high-level female executives is that the market is already in a stable equilibrium, driven as much as by women’s choices as by firm policy.

At this point, the only way in which the numbers are likely to change is if CEOs put more pressure on their managers to promote women to higher positions, even at the cost of displacing men who are better suited for those positions. Firms have probably done this already to an extent, so that by now most of the low-hanging fruit has been picked. The effort to create proportionality by gender in the executive suite creates greater internal pressure and subsidies. Sandberg is right to insist that firms that ignore the female talent pool run the risk of falling behind. But by the same token, extra efforts to move the needle to favor female leaders could easily create performance and morale problems within firms, which in the end works to no one’s advantage. No one is safe in making general prescriptions for all women in all corporate firms. A decentralized set of decisions by individual firms that trade off the benefits of greater female participation against other firm benefits is the way to go.

It is just these decentralized decisions that are totally disregarded in the California Fair Pay Act. In a given market system, the correct way to determine fairness is to ask whether the various decisions on pay and employment were made voluntarily—that is, were they made in a competitive market in which neither force nor misrepresentation was used by any party? The term “fair” is twisted when it is used to argue that the outcomes of a fair process are unfair unless they meet someone’s preconceived external vision of what counts as a fair distribution of jobs and wages.

The Fair Pay Act shows a complete disregard of the fundamental principles of economics. It starts off with the usual overstatement of gender inequality when it notes that women in California earn 16 cents less on the dollar than men (which is a smaller gap than the national average of 22 cents). But it does not mention what corrections should be made for the variables mentioned above. It then notes that the gap is still greater for Latina women, who make 44 cents less per dollar than white men, again without any correction, including for English language skills. The bill then announces the astonishing fact that “women working full time in California lose approximately $33,650,294,544 each year due to the gender wage gap”—based on the absurd assumption that every last dollar of the difference is due to improper factors.

To attack this imaginary pay gap, the Fair Pay Act adopts an administrative quagmire that makes it possible for dissatisfied employees to compare wages not only within firms, but also across different firms, where the comparisons are much more elusive, because prevailing wages and market conditions vary widely across the state. Even the four exceptions to the law mentioned above—seniority system, a merit system, an output measure, and bona fide factors other than sex—all bristle with interpretive difficulties. Rather than face these head on, the bill dumps the matter into the California Division of Labor Standards Enforcement, which in a heavily Democratic state is likely to be stacked with pro-worker members.

The sad point is that this entire exercise is unnecessary. An employee’s wage is usually determined after the employer takes into account all of the factors that were listed in the statutory exceptions. If there is an imbalance in one market segment, wages will adjust up or down until the market returns to equilibrium. The implicit assumption of the bill is that these opportunities exist, but firms will seek to profit from them without a shove from California’s benighted legislative Solons.

One incidental tragedy of this warped legislative proposal is that it makes a voluntary job change more difficult to implement. Any change, especially one that reduces the wages of the female employee, will be routinely subject to administrative second-guessing. The bill makes explicit provision for a “civil action” which could be brought either by the Division or by a private attorney, seeking “the balance of the wages, including interest thereon, and an equal amount as liquidated damages, together with the costs of the suit and reasonable attorney’s fees, notwithstanding any agreement to work for a lesser wage.” Of course the bill contains no provision that allows a successful employer to recover its reasonable attorney fees from either the Division, the plaintiff, or his or her law firm. The asymmetrical outcomes are likely to distort labor markets further, and to give firms a strong incentive to expand their businesses elsewhere and even to transfer existing work out of the state.

The overall situation does not bode well for California. Worse still, a progressive Democratic presidential administration headed by either a Hillary Clinton or a Bernie Sanders is likely to treat the California legislation as a prototype of action that could be taken at the federal level, either by legislation or, more likely, by executive order.

It is a telling sign of today’s bad intellectual climate that proposals about how to fix the executive suite or to improve the lot of employees show no awareness of how labor markets actually work. Labor markets are still in the tank with overall participation levels lower than ever. These proposals will only make matters worse.

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.