How Labor Friction and Social Fiction Relate to the Gender Wage Gap

A nurse prepares to hand out medicine to patients at a hospital in Washington state on November 18, 2015.

One of the most infuriating retorts in discussions of the gender wage gap is that the disparity in earnings between women and men simply doesn’t exist. People too often misinterpret the effect of occupational and industry segregation—which, in this case, takes the form of women entering female-dominated professions that happen to pay less. Those who deny the gender wage gap exists base their argument on an insufficient understanding of how gender socialization affects worker characteristics—such as occupational segregation—that, when controlled for, reduce the size of the gender wage gap.

Monopsony, a field of labor economics research, adds complexity to the gender wage gap discussion by looking at how women and men face labor market frictions. Research in this field is based on an abstract labor market model in which there is only one employer. As the sole purchaser of labor, this employer can set wages for workers at any level it desires by virtue of not having to face competition from other employers looking to hire those workers. Economists in this field study the difficulty of seamlessly moving between jobs in search of higher pay, which is known as labor market frictions, as evidence of monopsony power.

In the modern context, monopsony can occur in any labor market in which a substantial portion of the workers who are employed by an individual firm are facing greater labor market frictions thus allowing employers to exploit these conditions and pay their workers less than a competitive rate without fearing a shortfall of workers. A large consolidated hospital system, for instance, is a modern example of monopsony as it is one of the only companies that hires nurses in an area. Such a scenario results in an employer monopoly, which requires all nurses in the area to work for this one hospital system and have no choice but to accept the wages offered by the hospital.

To underscore this point, consider a two-earner, opposite-sex couple that moves to a new location for a job. Studies have found that couples in this situation are usually moving because the husband is seeking higher-level work accompanied by higher pay—rather than for the woman’s career advancement. This trend is partly because the higher-earning partner’s career will dominate a couple’s choices. Men tend to be paid more because of the gender wage gap, and this exacerbates the dynamic of a male partner’s career dominating his female partner’s career.

A newly published study by economist Doug Webber looks at how monopsony contributes to the gender wage gap across 47 states and at 250,000 different firms that covered 105 million workers from 1990 to 2008. Webber found that women appear to be more restricted than men in how they search for jobs, as evidenced by the fact that women in his study did not switch jobs in response to changes in pay as often as men. This measurement is known as labor supply elasticity.

In part, women’s lower wages are a function of women working at lower-paying firms and men working at higher-paying firms, holding everything else constant. According to Webber, workers with the same characteristics and same jobs are being sorted in to higher-paying and lower-paying firms along gender lines. Additionally, this gap would persist even in the presence of fully effective antidiscrimination laws because it isn’t discriminatory for an employer to pay their female-dominated workforce less than another employer in the same industry pays their male-dominated workforce.

Webber next examined to what extent differences in pay sensitivity affect earnings and the factors that contribute to these differences. He found that differences in labor supply lead to women making 3.3 percent less than men. This roughly 3 percent difference essentially amounts to a tax on women, and it is equivalent to half the taxes that workers pay to the federal government on their income under the Federal Insurance Contributions Act, or FICA. With a gender wage gap of more than 20 percent, differences in labor frictions account for roughly 15 percent of the gender wage gap. Furthermore, Webber found that 60 percent of this difference is explained by marriage and raising a family. Put simply: Wives and mothers face life circumstances—such as being responsible for family caretaking in the home—that affect how they interact with the economy as workers.

In his book, Monopsony In Motion, economist Alan Manning argues that lower pay sensitivity for certain groups of workers can come from three different sources: imperfect information; heterogeneous preferences—meaning different preferences for different types of work between otherwise identical workers; and mobility constraints.

Lower pay sensitivity on account of imperfect information can be remedied in a fairly straightforward manner by simply providing better information to workers and employers on pay levels by gender. Such improvements would empower women to make better-informed decisions when considering what type of job to take and for which employer to work. Pay transparency by gender can start to hold companies accountable, give information to other companies on competitive pay levels, and—most importantly—give workers greater bargaining power vis-à-vis their employers in order to ensure that they are being compensated fairly.

Heterogeneous preferences between male and female workers may be a reflection of women’s disproportionate burden for family caretaking. Women, for example, are channeled into lower-paying jobs that allow them to also carry out their family responsibilities, such as picking children up from school. Workers without access to supportive family policies may be pushed out of the labor force when they have family caretaking duties.

According to Manning, another sign of significant labor market friction is the proportion of workers at an employer who entered the job after being out of the labor force. Because women are more likely to take leave because of their disproportionate burden for family caretaking, including taking time off to raise children or care for elderly parents, they may face unemployment scarring—meaning that employers will discriminate in pay because of a gap in employment. If she left the workforce for a time, a woman’s wages will be skewed toward her reservation wage—which is the minimum amount offered to incentivize a worker to enter the labor force—rather than at least matching her previous wage if they are moving directly from job to job. Taking time off of work can have long-term effects on what a worker earns, and women are more likely to face these effects because they are more likely to take time off for family responsibilities. Comprehensive family policies will help ease these constraints.

Finally, mobility constraints are exacerbated for married women whose husbands’ careers are higher paid, which means that wives are moving for their husband’s job and are precluded from moving to advance their own careers or to simply have a shorter daily work commute to better accommodate family responsibilities. As women have the opportunity to earn more, however, it will become increasingly financially disadvantageous for families to deny women the mobility to move between jobs. Alleviating the gender wage gap will also give women more bargaining power in dual-income families to ensure that they are better positioned to do the type of work they want and to go for jobs that pay the best.

The silver lining of a labor market where market frictions depress wages is that employers can raise pay and the workforce can increase without driving companies out of business. When firms underpay because of labor market frictions—meaning that workers’ wages are less than the value they bring to a firm—employers have room to pay more. This phenomenon was highlighted in one study of nurses at Veterans Affairs hospitals. After these hospitals raised wages, nearby hospitals correspondingly raised wages without having to decrease staffing. This example demonstrated that there was some slack in the labor market due to the ability of the employer to exploit frictions and underpay workers.

In order to improve the labor market frictions that women experience and improve their conditions of their job searches and their workplace lives, policymakers must address how women’s life circumstances affect how they interact with the economy. Alleviating these frictions will increase women’s wages and employment opportunities, creating a stronger economy where all people are able to contribute fully and be paid fairly.

Kate Bahn is an Economist at American Progress.