A Choice That Explains Why Women Make Less Money Than Men

A lot of the research into pay disparities between genders is normative.  This means that values are put into the hypothesis before the research even looks at the data.  That has resulted in a lot of hyperbole when it comes to the conversation about equal pay for men and women.

Recently, I saw this study that was pretty hopeful to me.  No salary gap exists between women and men in tech as long as you are comparing apples to apples.  Of course, because we are looking at people, there is a lot of randomization.  How many special circumstances?  Woulda coulda shouldas?  If only ifs?

I was reading Chicago Booth Magazine and they had a snippet of a study that explains 10% of the gender pay gap.  It’s the choices men and women make for pay in the same job.

Men are much more likely than women to choose performance based pay rather than a guaranteed salary with performance benefits.  Ernesto Reuben of Columbia University, Paola Sapienza of Northwestern and Luigi Zingales of Chicago Booth did the study.

It turns out men self select into more competitive industries than women and in turn make more money.  It’s all about industry selection.

Here is a link to the entire working paper.  The formal paper shows the hypothesis, the math, the data and the conclusions.  Very important in academic research to do that so studies can be replicated.  It’s also important to show the assumptions because that’s where academics will find disagreement.

Here is what they say:

Our data on labor market outcomes displays two important gender differences. First, we find a meaningful gender gap in earnings at graduation: compared to male MBAs, on average, female MBAs earn 15% less (around $26k less per year). This gap persists, almost unchanged (13%), even when we control for the industry the MBAs chose to work in. Second, we find that men and women selfselect into different industries and this difference persists several years after graduation. More specifically, female MBAs are 8% more likely to work in low-paying industries at graduation and 12% more likely to work in such industries seven years later.

Here is some of their conclusion:

We find that, among MBA graduates from a prestigious business school, competitive individuals obtain higher earnings at graduation. Importantly, differences in taste for competition account for a significant share of the gender gap in earnings. We also find that not only are competitive individuals more likely to work in higher-paying industries at graduation, but they are also more likely to remain in these industries several years later. Finally, we find that the gender gap in industry participation arises from both the demand and supply side of the labor market.

Men willingly take more risk than women.  Taking more risk offers more return.  Perhaps what we should be doing is educating women on how to assume and take calculated risks.  Right now, we are just trying to put them in the same programs as men.

Think of it a different way.   Currently, the common theory out there is that if we have mandatory computer science education for women (and men), we will get a lot more women entrepreneurs.

Most certainly.  We will get more women entrepreneurs because we have incentivized greater volume of women going through programs that are designed to give them the basic coding skills entrepreneurs need today.  But, without also educating them about risk/reward, women will probably still choose differently than men and the gender pay gap will persist.

It’s not simply about plugging women into the same program. It’s about educating them when it comes to the topics of competition and risk.

Interestingly, I read a stat tweeted by PayPal founder Max Levchin.

“over half of the nation’s startup companies valued at $1 billion or more were founded by immigrants” https://t.co/MQa7tyYZ3h

— Max Levchin (@mlevchin) March 18, 2016

Max came from a family that emigrated to the US from the Ukraine.  He grew up in Chicago and went to the University of Illinois.

Maybe the difference is really that immigrant entrepreneurs have already assumed and learned to live with a lot of risk simply by emigrating to the US.  Children of those immigrants surely heard family stories of how they came about making the decision to leave their home country and travel across the globe to the US.  They intuitively calculated the costs/opportunity costs for their families.

Want more entrepreneurship in the US by people that grew up in the US?  Encourage people to assume and learn to live with risk.