Companies with a gender wage gap cannot grow!?

Irrational gender wage gap

Political measures for working women have been launched one after another in Japan. For example, the Act on the Promotion of Female Participation and Career Advancement in the Workplace was enforced in 2016, and the Basic Policies for Women’s Empowerment and Gender Equality 2022 was recently released by the Kishida cabinet. However, if you see them just as measures for women, you will overlook an important point.

The workforce in Japan is now in a declining phase, and it is expected to continuously decrease in the future. In order to maintain productivity of companies, the standard of living, and the safety net, such as the social security system, under such a situation, it is essential to effectively utilize the potential workforce that is currently unused, namely women.

Unfortunately, Japan is internationally known as a country with a large gap in wages between men and women. Obviously, this gender wage gap could be the result of ineffective use of female workforce. However, it should also be noted that the opposite causal relation, where the wage gap inhibits effective use of the female workforce, is also true.

If women get paid less than men, they will lose motivation and fail to fulfill their potential. In the worst case, they may even quit their job. In short, the female workforce may not be used effectively in a society with a gender wage gap.

Of course, the wage gap is not always bad. “Human capital” is an important keyword in economics and refers to skills and knowledge related to work. People with rich human capital have a higher level of productivity and contribution to production activities of their companies. Therefore, even if they get paid more than those with less human capital and productivity, most people would accept this. This means that the wage gap caused by differences in the amount of human capital has a rational aspect. Actually, there are still some differences in the amount of human capital between men and women, and it cannot be denied that a part of the gender wage gap could be due to these differences.

However, what if there is a wage gap between a man and a woman who are equal in the amount of human capital and productivity? This gap cannot be considered rational.

We can find out whether this kind of gap really exists or not by analyzing the data using a method called decomposition.

Decomposition is a method to divide the observed gender wage gap into “a wage gap explained by gender differences in human capital (explained gap)” and “a wage gap caused even between those with the same human capital (unexplained gap),” that is, an irrational gap. In other words, it is a method to divide the gap into an explained one and an unexplained one, so that you can find out the proportion of the unexplained one to the wage gap.

In Japan, decomposition using the data in 2015 has shown that 54%, or more than half of the gender gap in mean wages was the irrational gap. Why has this gap been generated?

Decision making based on the statistical information that is not necessarily rational

Economists have been examining the reason why this unexplained gender gap occurs since long ago. Among some economic theory models to explain this reason, I will use the theory of statistical discrimination as a basis for the following discussion.

First, let me explain the theory of statistical discrimination by using an example.

Let’s say a company is trying to promote someone to a managerial position. There are two candidates: male employee A and female employee B. The two candidates are equal in human capital, including age, academic background, length of service, and so on. Their track records are also the same. Now, which employee would this company eventually give a promotion?

As a managerial position is an important role to support the organization, the company cannot make a decision with no reason. Therefore, some criteria for judgement are required. However, the difference between A and B is only gender.

Now, focusing on the gender, the company would find that most of male employees continue to work there until the retirement age. On the other hand, many female employees leave mid-career. As such, the company would consider it better to give a managerial position to a man, who is likely to stay with the company, than a woman, who are likely to leave. As a result, a rational decision for the company would be to promote a man instead of a woman, or A instead of B.

In this way, based on the statistical information, or information about average models of men and women, women could be treated differently than men even if they are equal in human capital. This is called statistical discrimination.

Consequently, A, who got promoted, would get paid more, while B, who was not promoted, would end up with a low wage. This would result in the gender wage gap.

It is impossible for companies to fully understand characteristics and future action patterns of their employees. In other words, companies face the incompleteness and uncertainty of the information on their human resources. In such cases, it is no wonder that companies refer to their currently available information to make decisions on their future actions.

However, while the turnover rate of female employees may be higher on average, B herself could continue working there until her retirement age. In short, the average model of female employees may not necessarily be a true representation of each female employee. That is, the company’s decision is based on the statistical information, but this information can be wrong.

Moreover, it is often the case that such a stereotype is behind the belief in the wrong information without doubt.

From the standpoint of B, she was judged based on the information that has nothing to do with her. This would be unacceptable for her and lower her motivation to work.

It would be a great loss for the company as well because the stereotype stops them from effectively using a part of its human resources that are equal in the level of human capital and contribution.

In today’s world, where effective use of human resources is essential, companies with such a great loss would not be able to survive, let alone grow.

Influence of gender norms

In addition, influence of gender norms cannot be ignored. Social norms define values or desirable behaviors that are shared within society. Social norms related to gender are called gender norms. For example, “men should work outside the home, and women should run the household.” Such a concept of traditional gender roles is one gender norm.

The results of the international World Values Survey show that Japan is one of the countries with strong gender norms in the world.

In a society with strong gender norms, decision making in companies can also be affected by those gender norms. For example, “women’s role is to run the household, not to work outside the home, so they are not suitable to work outside.” This is a bias toward women that could be generated unconsciously. Based on this bias, companies may not assign important tasks to women, or they may unconsciously undervalue women’s performance in their personnel evaluation. This could result in wage disparities between men and women with the same productivity.

For a sustainable society and companies

As discussed above, stereotypes and unconscious biases of companies toward women can cause the irrational gender wage gap. If these factors are eliminated, this gap should be further reduced. In order to do this, we need to improve our work style in society as a whole.

In the current Japanese society, companies tend to highly value those who work long hours or in a fixed location as well as a work style that can accommodate unexpected situations. While men can work in such a style, it is often difficult for women as they have many roles in the household. This causes women to receive a poor evaluation and hence low wages from their companies. The companies also continue to have stereotypes and biases toward women.

On the other hand, a work style that has more flexibility in terms of time and location is friendly to women because it allows them to easily balance work with housekeeping and childcare. If this flexible work style becomes more prevalent in society and typical for both men and women, there will be no gender gap in evaluation, and stereotypes and biases should be eliminated accordingly. Furthermore, needless to say, this work style is also friendly to men.

In short, we need to change the employment system itself in order to eliminate the gender gap and realize a society where women can be motivated to work.

Last of all, let me share some recent news. In July 2022, the system related to the Act on the Promotion of Female Participation and Career Advancement in the Workplace was revised. Large companies with 301 or more regular employees are now required to disclose information about their gender wage gap. This new system has put a heavy burden on companies.

However, for companies that can take this not as a burden but as an approach for effective use of human resources, it can be an opportunity for their future growth.

By eliminating the gender gap, these companies can avoid losing motivation of female employees they hired and assign appropriate tasks to them. This should bring about positive effects on production activities of the companies. Elimination of the gender gap is beneficial not only to women but also to companies and their male employees. With this in mind, companies should make further efforts.

* The information contained herein is current as of August 2022.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

Information noted in the articles and videos, such as positions and affiliations, are current at the time of production.