How Do We Measure Women’s Inequality in the Workplace?

Recently, there has been a lot of buzz about the underrepresentation of women in certain professional settings (CEOs, STEM, venture capital, entrepreneurship).  As a society, we want to ensure that institutional barriers (stemming from both policy and culture) do not prevent capable women who want to from entering these realms.  However, the removal of all barriers will not result in equal representation.  So we have two options: be prepared to accept some underrepresentation in the statistics or ignore the statistics in favor of other assessments of equality.

Equal representation is certainly a poor benchmark. A recent Inc. article revolved around the question, “[If] women comprise 50 percent of the population, why don’t they launch half of the country’s new companies?”  The short answer: “For reasons related to the fact that men don’t give birth to half  of the country’s new babies.”  I know this sounds glib, but it reflects the economic theory of comparative advantage as well as the principle of individual freedom of choice, and it explains certain patterns of underrepresentation of women in the workforce.

 According to the Bureau of Labor Statistics (BLS), women make up only 46% of the labor-force (those who have a job or want one), and 47% of employed individuals.  To an economist, women’s under-participation in the labor market is perfectly reasonable.  Individuals choosing whether or not to seek employment balance the benefits—wages and personal fulfillment—against the costs—what will I have to give up or stop doing if I work at a company instead of staying home?

 While home production is not included in GDP, activities done by non-professional workers (ones who aren’t paid for their output) create social value in addition to the value they provide to those individual’s families.  It is estimated that the value of home production in the US was 26% of GDP in 2010—that’s 3.8 trillion dollars of value added to the 14.6 trillion dollars of GDP generated in the market.  The choice to stay home can be both individually beneficial and socially optimal—i.e. good for the economy.

 So it makes sense for some people to not work, but why are these people disproportionately women?  While some home production activities can be done equally well by men and women, men are imperfect substitutes for women in other activities.*  For example: men and women, on average, should be equally able to do laundry or change a diaper; men cannot breastfeed, but they can bottle-feed; men cannot gestate a child.  Because women have a comparative advantage in home production, it makes sense for them to spend less of their time working outside the home than men do.

This argument plays out in the BLS data, not only in terms of labor-force participation (compare women’s 58% to men’s 70%), but also in hours worked—women make up only 43% of individuals working full-time (at least 35 hours per week).

How much of the statistics reflect individuals making optimal decisions vs. how much is due to barriers women face in the market?  It is impossible to know for sure.  Using statistical outcomes in an attempt to measure equality of opportunity is, therefore, not very effective.

For the sake of argument, let’s use women’s representation in full-time employment (43%) as a benchmark.  Global Entrepreneurship Monitor reports statistics on new business ownership—percentage of the population ages 18-64 who own a business less than 3.5 years old—and nascent entrepreneurship—percentage of the population ages 18-64 who are currently setting up a business that hasn’t made money yet.  In 2012 in the US 41% of entrepreneurs (individuals falling into one of these two categories) were women.  When compared to equal representation, it seems we have quite a ways to go.  But compared to the full-time employment benchmark, we are doing pretty well.

 Yes, women are underrepresented in many professional occupations; they are also overrepresented in home production.  What are we saying when we judge those statistics negatively?

Productivity is raised when 1) an individual’s activities better match with his or her talents and 2) and individual’s activities align with his or her passions driving him or her to work harder.  While we absolutely should eliminate the barriers that prevent talented and passionate people from pursuing the work they are best matched with, we should also acknowledge that this unencumbered match may not be completely representative in every activity.

 There are women (and men!) who find full-time parenthood very gratifying, just as there are women (and men) who are passionate about starting a company.  I, for one, would not tell someone who loves what they do, whether that person is a stay-at-home mom or a male entrepreneur, to quit for the sake of statistics.

 

*Here is a great academic paper on women’s labor and family choices given that men are imperfect substitutes for them at home.

Online Markets: Bad for Goods Sellers, Good for Skill Sellers

Online markets reduce frictions, but there is a key difference between labor markets and the market for goods that implies that an improvement in available information will impact price differently in these two types of markets—in the market for goods prices go down; in the market for labor prices (wages) may go down or up.

In a market for goods, consumers have preferences over price and quality and will choose to purchase the good that maximizes the difference between the utility they get from the quality of that good and the price they must pay for that good.  A seller can only hope to get customers if his price-quality pair is at least as good as the other options those consumers have.

So, if there are many other options (the seller is not monopolistic), and the consumers have perfect information about each seller’s price-quality pairs, then sellers will be driven to push their prices down.  Therefore, prices will be higher than the competitive rate when 1) there aren’t many sellers and 2) information about a) price and b) quality are not readily available.

When it comes to the market for goods, the internet has done an amazing job solving these 3 issues.  The internet has reduced barriers to entry (a seller no longer has to physically set up shop, for example), thus more sellers are entering the market.  It has become much easier for consumers to locate the lowest price for a specific good they want to buy (old version: `Should I buy this blender at the department store I am at, or should I drive across town to see whether the other store’s price is lower?’; new version: ‘Amazon says there are 3 sellers of this blender, and I see seller A has the lowest price. Click.’).  And finally, reviews!  Consumers no longer have to take risks when choosing between products–there is plenty of information available about the quality of goods, which means consumers won’t overpay for low quality merchandise.

The market for goods is a one-sided search (consumers are looking for goods).  Because better information availability benefits searchers, the demand-side of the goods market, the consumer, benefits from the online market.  The labor market, on the other hand, is a two-sided search (companies look for workers AND workers look for jobs), so increased information could benefit either side.  This means that, like in the goods market, the demand side (employers) benefits, but increased information also helps the supply side (workers).

When it comes to information about price, the labor market differs from the goods market in two additional and important ways.  First, in the labor market, prices are set by the demand side (an employer offers the worker a wage) rather than the supply side (a store posts the prices for its goods).*  So the demand side in the labor market isn’t really ‘shopping for the best price’.  Second, while recruitment is costly for employers, the relative cost for workers (perhaps going unemployed) is much greater.  So a worker is under more pressure to take the offer in front of him instead of continuing the search for a better wage.  These two facts together imply that workers, rather than firms, would benefit more from better labor market information.

Hunter Walk recently wrote a post about situations where online markets’ improved information about quality led to increases in wages.  His two examples illustrate the importance of information about quality to both sides of the market.

Demand-side quality:  Online markets allow workers to more easily find jobs that fit their skills the best.  A better fit means that a worker will be more productive, which allows him to command a higher wage.  In addition, increased information about demand-side quality can provide workers with benefits beyond pay increases: they can more easily find jobs they enjoy as well as jobs that can increase their skills, making them more marketable in the future.

Supply-side quality:  In the traditional labor market, employers can’t observe how productive an employee will be before hiring him.  Wage offers, then, will be based on the average productivity of the labor market.  Furthermore, once an employer finds out who his high productivity employees are, he has an incentive to be secretive about that information because these employees are under-priced.  Therefore, the reduced information in the offline labor market helps employers keep wages down, particularly for high performers.  Reviews and ratings in online labor markets can help high-performing workers capitalize on their skills.

Online markets decrease frictions by making information more readily available.  A reduction in frictions usually means more competition, which in the goods market drives prices down.  But in the labor market, there is competition and a need for information on both sides of the market.  Economics shows us that there are several ways that this increase in information can increase wages for workers participating in online labor markets.

Information technology is transforming labor markets in ways that will help individuals better market and profit from their skills.  This, in turn, will change the way we invest in ourselves, pursue careers, and take control of our futures.  Specialized online labor markets are just the tip of an iceberg we should be ready to jump on and conquer.

 

 

*Food for thought: wages are most closely associated with the characteristics of the job being offered, rather than the characteristics of the worker’s skills that the wage is supposed to be paying for.

Some Value Added

This blog has been living in my brain for almost two years, and living (empty) on the internet for about a year.  In the spirit of bringing together ideas from the culture, psychology, and economics of work, I’ve finally decided to put aside my perfectionism in favor of actually producing something.

Here you will find commentary, on popular topics in the workplace and labor market, that reveals the economic forces behind trends, behaviors, and institutions.  Among other things, I will investigate the rise of boundary-less careers, the (seemingly) peculiar behavior of millennials, and just what is up with the talent economy.

These topics tend to get a lot of cultural, sociological, and psychological analysis, but, I think, the discussion is lacking an economic perspective.  I will make a point to highlight where economics would agree and disagree with other points of view.  My hope is to add economic thought to the toolkit of people who are passionate about how our work-lives are changing and who want to leverage these changes for their careers and/or businesses.