Introduction
The gender and racial pay gaps are two of the oldest and most prevalent issues in international reward management. The causes of these pay gaps lie in social contexts and wage structure development which have seen the marginalization of certain populations and can be reflected in professional settings. Despite every industrialized country adopting legislation which mandates equal pay and prohibits discrimination based on gender and race, they are a persistent feature in virtually every labor market (Blau and Kahn 2003). This report will examine the key data and underlying causes of the gender and racial pay gaps in the context of Western developed nations, in order to present recommendations for reward managers to address such disparities on a widespread scale.
Context and Definitions
There is a myriad of economic and theoretical approaches which attempt to explain, deny, or justify the pay gap. However, empirical evidence exists which suggests that it is a prevalent issue (Rubery, Grimshaw & Figueiredo 2005). Furthermore, the explanations most commonly given within traditional and mainstream productivity models appear to be flawed because despite tremendous growth in educational attainment and employment participation among women, and affected racial minorities, these pay gaps remain large (Rubery, Grimshaw & Figueiredo 2005).
In all Western societies, existing gender and racial pay gaps have been a prominent issue for decades. Although significant efforts have been made to close them, progress on wage convergence has slowed down and labor market discrimination and segregation is prevalent. Labor market wages are the primary source of income for most families and salary is a vital socio-demographic indicator which contributes to the building of wealth and stability. Therefore, disparities in income for marginalized social groups have far-reaching consequences.
A pay gap is defined by the disparities within the average hourly earnings of a company or industry. For this report, the differences between males and females as well as races (white majority and ethnic minorities) are examined. A pay gap is measured through a variety of means, but the primary one is percentages (AAUW 2018).
For example, with a 5% pay gap, a woman earns 95p for each £1 earned by males. In the UK, the 2018 ONS Annual Survey of Hours and Earnings shows an 8.6% gender pay gap, increasing to 17. 9% for part-time workers and widening after the age of 30 (Perraudin 2019). Furthermore, the racial pay gap in the UK is 17% or £3.90 per hour less for black, Asian, and other ethnic minorities, after taking into account labor market forces such as qualifications and occupation types (Topham 2018). This results in over £3.2 billion in lost wages annually and leads to significant social disparities in living standards between white employees and racial minorities.
It is important to discuss the policy context which surrounds the topic. In the UK, the most recent legislation is the Equality Act of 2010 which prohibits pay discrimination based on gender or race and mandates that all employees working in identical position for the same employer and in a similar location should receive the same salary and benefits (Equality and Human Rights Commission 2019). In the United States, pay management guided by the Equal Pay Act of 1963 under the Fair Labor Standards Act. Additional laws such as the Fair Pay Act of 2009 or the Civil Rights Act of 1964 focus on the discriminatory aspects of pay gap practices (U.S. Equal Employment Opportunity Commission n.d.).
Racial pay gaps are often less prominent in policy discussion and research than gender disparities. Theresa May’s government launched an inquiry on mandatory reporting of ethnic pay gaps in the workplace, a practice that came into force in 2018 for gender differences – requiring any company with more than 250 employees to report salaries and gender pay gaps (Topham 2018).
Gender Pay Gap Analysis
Various potential explanations have been offered by economists and sociologists to explain the gender pay gap, which are inherently interlinked and overlapping. Healy and Ahamed (2019) offer a three-factor explanation to the gender pay gap using previous theoretical research. First, using a human capital approach, differential investment in skill acquisition between men and women has been proposed as a key driver of pay divergence.
However, this approach does not recognize that women often invest more in careers and education. Therefore, the human capital approach may be used as a tentative explanation which stands true when focusing on individual occupation and industry factors rather than comprehensive variables. Another explanation is that men and women are segregated both horizontally, engaging in different occupations, and vertically, in that men often occupy the dominating positions in organizational hierarchies. Thus, the disproportion between male and female wages can be explained by gender devaluation in that women are more likely to participate in lower wage, feminized occupations.
This leads to the next point, that the general systems of workplace practices and reward management are based on such inequality and segregation. There is a need for change in workplace unionization and cultural practices. Finally, individual workplace discrimination may play a factor as a combination of the three previous factors, as a result of organizational practices and culture (Healy and Ahamed 2019).
Traditionally, economists have focused on gender-specific factors such as women’s shortfalls in the labor market or employer discrimination as explanations for the pay gap. However, economists Juhn, Murphy, and Pierce have suggested that the general wage structure, otherwise explained as the price that the market attaches to skills and rents, accruing in specific favored sectors, has an impact on particular subgroups (Blau and Kahn 2003). Since women tend to work in different sectors and occupations while having less labor market experience, sectoral differentials will lead to a rising pay gap. Although supply and demand, as well as the health of the labor market, may vary internationally, the gender pay gap remains a constant, albeit with minor international differences (Blau and Kahn 2003).
Paradoxically, despite American women having higher qualifications and a significant amount of anti-discriminatory legislation being in place, the United States has one of the largest gender pay gaps. This is due to decentralized wage-setting organizations which leads to greater sectoral differentiation and a larger penalty on those at the lower levels of the labor market, being disproportionately women. Therefore, the wider wage structure has a potentially greater impact on the gender pay gap than the female-specific factors considered above.
In addition, however, it is also important to note sociological factors, because both men and women have come to perceive and accept a slight gap between gender pay through the notion of the “legitimate” wage gap. Auspurg, Hinz and Sauer (2017) explain this theoretically through the same-gender referent theory, which states that women compare their earnings to other members of their own sex, usually underpaid females, thus creating a distorted perception. Furthermore, the reward expectations theory suggests that gender is comparable to status, which thus yields lower expectations for women about renumeration for comparably equal work.
This can potentially explain the persistence of discrimination and the gender wage gap in Western societies despite legislation strictly prohibiting it, suggesting that social equality norms inherently support it and disadvantaged groups (in this case women) have tolerated it. The two mechanisms of justice attitudes and individual labor market behavior are intertwined and shape each other, leading to inequalities at the macro level which perpetuate a belief system through which reward expectations are shaped at the organizational level.
Racial Pay Gap Analysis
There are several potential causes of the racial pay gap. A strong argument has been made regarding the impact of the exodus of manufacturing and blue-collar jobs from metropolitan areas and Western economies in general. Deindustrialization of economies leads to the elimination of many high-wage industry jobs as well as the stable labor provision which ethnic minorities strongly benefited from, particularly in manufacturing-focused cities.
For example, Detroit, Michigan in the United States saw a significant decline in manufacturing that thrust many workers from ethnic minorities into poverty and joblessness. Demographic composition and immigration are contributing factors as well, as globalization has allowed the unskilled labor needs in Western economies to be filled by ethnic immigrants who are commonly paid significantly less due to skill gaps and discrimination.
Finally, the digital innovation of the modern economy has primarily focused on the growth of high-skill service and technological industries where racial minorities, and black people in particular (the biggest minority group both in the US and the UK), have an extremely limited presence (McCall 2001). Technological shifts are eliminating the need for skilled or manual labor but creating more jobs where high educational and skill attainment is required, leading to employment and wage disparities.
Another aspect to consider is that the racial wage gap has expanded at the same time as general income equality continues to grow. The slow growth of living standards as a consequence of income inequality for low and moderate-income families has become a critical problem for modern developed economies. Reasons for this include stagnation of hourly wage growth and a slow to rebuild the middle class after the 2008 financial crisis. Policy decisions and business practices built around deregulation of labor standards have weakened the labor market, while executive and upper management salaries have seen strong growth.
Wages have grown more slowly than productivity, particularly for the majority of hourly-paid and blue-collar workers over the last three decades (Wilson & Rodgers 2016). While this phenomenon is not limited to a single group or race, ethnic minorities (such as blacks and Hispanics in both the UK and the United States) are disproportionately affected by the growing gap between income and productivity. Real wage growth is stagnant, but ethnic minorities experience greater disparity in wage growth in comparison to white counterparts. This is further suggestive of discriminatory practices as well as prevalent disparities and racial wage gaps in the economy.
In the UK, the racial wage gap remains stubbornly wide, with some minorities paid up to 20% less than white workers with otherwise similar profiles in terms of experience and education. It is the case that, other minority groups, such as the Chinese are generally paid more than white British citizens, but they compose less than 1% of the population and commonly work in high skill markets (Romei 2019).
Black and ethnic minorities continue to face pay gaps despite greater social awareness of the issue and equal pay audits becoming more common in firms. The primary cause of the statistical pay gap is labor force attachment and disparities in educational attainment between whites and minorities. In turn, this leads to lower labor force participation and to the accumulated experience which is necessary for promotion to higher-paying positions in any occupation or labor market (Antecol & Bedard 2004).
Discriminatory influences which are unarguably a factor in this context can occur at two points, job entry and on the job. Non-whites may experience difficulty obtaining well-paid jobs, and when they do, they are faced with less pay and potential on-the-job harassment. Overall, though, in the case of the British labor force, the primary cause of wage differentials is due to occupational segregation, with the gap being much less substantial within the same job roles (Brynin & Güveli 2012).
Addressing Disparities
In recent years, a popular organizational initiative has emerged as firms attempt to share responsibility and governments increasing require accountability and transparency in pay decisions. Organizational accountability may be defined as a set of procedures which ensure fair compensation and distributions of rewards among employees, including through design and implementation of pay structure, monitoring and auditing of pay distributions, and investigation of pay disputes. In the context of reward management, organizational transparency entails a process making relevant pay information accessible to various persons or groups (managers, HR professionals, government audits).
Measures should be adopted to ensure the upkeep of data, competent distribution processes, and availability of comparisons by gender or race. In a field study by Castilla (2015), implementation of such inequality-targeting organizational procedures led to a significant decline in both gender and racial pay gaps.
For individual companies, awareness and resolution of the pay gap issue is beneficial to their long-term health and success. Opponents of transparency argue that it will create additional administrative burdens and lead to reduced profitability, claims that have not been proven empirically. However, wage transparency is directly associated with being open about hiring practices and discriminatory disparities in companies.
Companies that have voluntarily or compulsorily adopted transparency processes have subsequently hired more women and minorities, increased promotion in vertical hierarchies among these groups, and, in fact, reduced salary expenses by slowing down male wage growths (Bennedsen et al. 2019). This contributes to narrowing the wage gap as women and racial minorities attain greater influence and negotiating power.
These vulnerable groups could use bargaining power to achieve higher wages and have the support of both company and legal standards regarding wage equality to white men. In the long-term, it positively affects the company culture as equal opportunities promote commitment, mentorship, and performance. Career and wage trajectories will eventually stabilize and produce more equitable growth, which will create a balanced atmosphere in the firm and make it more attractive to top talent.
Discussion and Recommendations
From the foregoing analysis of gender and racial gaps, it can be observed that broader wage structures are both a potential cause as well as a consequence of this socio-economic phenomenon. All people, no matter their gender or race, work in a global economy where labor market forces such as supply and demand, experience, education, and occupational or industrial wage differentials apply, even in the context where social attitudes or segregation are present.
A crucial insight regarding intergroup wage differentials which applies to both gender and racial disparities is that wage structure has a real effect on incomes of specific groups. For example, countries inherently differ in their wage structures; some with strong unions have a compressed wage structure which raises incomes of low-skill workers (occupations held primarily by ethnic minorities and women). Meanwhile, Western countries such as the US or the UK have a decentralized economic approach which leads to more dispersed wage structures.
It follows that changes in the overall wage structure can have a positive effect on income pay gaps for both groups. For example, in the 1980s, the US experienced a return to a skill-based economy as manual labor was being rapidly outsourced to Asia, giving rise to white-collar employment and a decrease in manufacturing and blue-collar work. When this occurred, two patterns emerged which led to a decrease in the pay gap.
Since men predominantly work in manufacturing and blue-collar jobs, this led to a redistribution of skills and wages in the economy, narrowing the gap. Furthermore, since white-collar employment requires greater skills which also benefits men, more women increased their qualifications to counteract the adverse effects of the transition and narrowed the gender pay gap (Kahn 2015). However, it is important to compare this example to one made with Detroit previously. Both follow similar scenarios, however Detroit serves as a localized example and affected the racial pay gap, while this particular instance benefited the gender pay gap, without data to determine influences on racial minorities.
In addition to supply and demand guiding wage structure, the institutional impact should be considered, its effects on wages as well as on the direction of the economy. The most prominent forces can be considered to be minimum wage legislation and collective bargaining. Raising the minimum wage will primarily affect low-skill occupations or the lowest levels of pay-distribution hierarchies, both primarily dominated by women and minorities.
Meanwhile, collective bargaining across sectors can set wage floors for a whole industry and benefit low-paid workers. Furthermore, offering stronger employment protection, not only to permanent employees but also to non-contractual or part-time workers (a large percentage of which are also composed of vulnerable labor groups) will lead to greater stability as well as bargaining power, helping to decrease the wage gap.
In the context of modern policy initiatives and social movements for racial and gender equality, closing the gender pay gap has become a high priority among governments and companies. For example, since the early 2000s the EU has emphasized a commitment to this issue in its European Employment Strategy, though with mixed success (Rubery, Grimshaw & Figueiredo 2005). On a policy level, systems of wage compression do show evidence of narrowing the pay gap among genders and races. However, policymakers must consider potential implications for the labor market if any interventions are made, particularly in the context of Western economies which welcome a decentralized approach.
It is recommended that policy be directed towards guiding and supporting vulnerable groups into entering traditionally white and male sectors of the economy, facilitating participation, skills and qualifications, and retention in the labor market, while reducing barriers to entry. Supporting policies such as anti-discrimination legislation and investments in education and childcare can also contribute to progressive transitions in the labor market (Kahn 2015).
Conclusion
The issues of gender and racial pay gaps are prevalent in modern society and reward management. Despite having different origins and contexts, the manner that gender and racial inequalities are reflected in the labor market and wage distributions are ultimately similar. Wage structure has been identified as a primary driving factor in the formation of this gap as population groups experience both vertical and horizontal segregation. It is a particularly salient factor in Western economies that take a decentralized approach to wages. It is recommended that policies be enacted at both government and organizational levels to address disparities, facilitate entry and retention of women and racial minorities into new sectors, and engage in wage compression practices.
Reference List
AAUW 2018, The simple truth about the gender pay gap. Fall 2018 edition. Web.
Antecol, H & Bedard, K 2004, ‘The Racial Wage Gap: The Importance of Labor Force Attachment Differences across Black, Mexican, and White Men’, The Journal of Human Resources, vol. 39, no. 2, pp. 564-583.
Auspurg, K, Hinz, T & Sauer, C 2017, ‘Why should women get less? Evidence on the gender pay gap from multifactorial survey experiments’, American Sociological Review, vol. 82, no. 1, pp. 179-210.
Bennedsen, M, Simintzi, E, Tsoutsoura, M & Wolfenzon 2019, ‘Research: gender pay gaps shrink when companies are required to disclose them’, Harvard Business Review. Web.
Blau, FD & Kahn, LM 2003, ‘Understanding international differences in the gender pay gap’, Journal of Labor Economics, vol. 21, no. 1, pp. 106-144.
Brynin, M & Güveli, A 2012, ‘Understanding the ethnic pay gap in Britain’, SAGE, vol. 26, no. 4, pp. 574-587.
Castilla EJ 2015, ‘Accounting for the gap: a firm study manipulating organizational accountability and transparency in pay decisions’, Organization Science, vol. 26, no. 2, pp. 311-333.
Equality and Human Rights Commission 2019, Equal pay for equal work: what the law says. Web.
Healy, G & Ahamed, MM 2019, ‘Gender pay gap, voluntary interventions and recession: The case of the British financial services sector’, British Journal of Industrial Relations, vol. 57, no. 2, pp. 302-327.
Kahn, LM 2015, Wage compression and the gender pay gap. Web.
McCall, L 2001, ‘Sources of racial wage inequality in metropolitan labor markets: racial, ethnic, and gender differences’, American Sociological Review, vol. 66, no. 4, pp. 520-541.
Perraudin, F 2019, ‘What is gender pay gap reporting, and what does it mean?’, The Guardian. Web.
Romei, V 2019, ‘Ethnic minority pay gap in UK still stubbornly wide’, Financial Times. Web.
Rubery, J, Grimshaw D & Figueiredo, H 2005, ‘How to close the gender pay gap in Europe: towards the gender mainstreaming of pay policy’, Industrial Relations Journal, vol. 36, no. 3, pp. 184-213.
Topham, G 2018, ‘£3.2bn UK pay gap for black, Asian and ethnic minority workers’, The Guardian. Web.
U.S. Equal Employment Opportunity Commission n.d., Laws Enforced by EEOC. Web.
Wilson, V & Rodgers, WM 2016, Black-white wage gaps expand with rising wage inequality. Web.