How competition benefits women's pay

Last year the folks at Motu came up with a great piece of research which, among other things, showed that wage discrimination against women in New Zealand was less when firms faced greater competition.

The logic is simple: you might try to discriminate if you could get away with it without repercussions, but you'd pay dearly for indulging in your sexist preferences when there are plenty of firms competing with you who'll scoop up the qualified women and do better than you. Ditto, sexism will cost you when the labour market is tight, since you can't afford to be unfairly picky when staff are harder to find than usual.

Here's the guts of the results, from my blog post at the time. The impacts of more competition and tighter labour markets are very large indeed:

That already large pay difference [19.2% against women] is doubled - doubled! - if there's lots less competition among businesses in the sector. However the large difference goes away completely - to be consistent, completely! - if there's lots more business competition. It also goes away completely if a tight labour market is holding employers' feet to the fire and forcing them to make gender-blind hiring decisions, which is what you'd expect.

There hasn't been a ton of research elsewhere in the world along the same lines, but thanks to a lucky accident another bunch of researchers have also shown how increased competition between businesses works to women's advantage.

The lucky accident happened in Portugal, where, as 'Product market competition and gender discrimination' shows, a new programme got rolled out which made it hugely easier to set up a new company. It increased the level of competition against established firms from new companies who had previously been kept out of the game by an expensive and lengthy company registration rigmarole. The authors show, for example, that rolling out the programme resulted in more firms being set up and in industries being less concentrated in a few hands.

The especially lucky part of the exercise was that the new "On The Spot Firm" initiative got rolled out in different places at different times. And that enabled the researchers to measure the difference in outcomes between places that had already rolled it out and those that hadn't yet. It also helped that Portugal has a huge linked employer-employee dataset (like the one in our own Integrated Data Infrastructure) so they could analyse what went on in very considerable detail.

Key results (bits in square brackets are my explanatory glosses):

We find the entry deregulation reduced the gender pay gap for medium- and high-skilled workers in affected municipalities [i.e. where On The Spot Firm had been rolled out]. The differential effect of the reform on women workers' pay is positive and statistically significant. Our estimates imply that for workers in high-skill jobs, while male wages increased by 1.5 percent, females' increased by 2.9% as a result of the deregulation, thus reducing the gender pay gap [by 1.4%]. Overall pay of medium-skilled males decreased by 0.6% in treatment municipalities [those with On The Spot], while those of females in the same skill category increased by 0.4% [a 1.0% narrowing of the gap] (p20)

We also find that the share of females in managerial positions increased following the deregulation, suggesting that discriminating employers kept women in lower positions than implied by their skills, and competition induced them to upgrade their occupational status (p20)

Deregulation and increased business competition wasn't a complete panacea:

these effects are not found for those in the lowest skill jobs or for CEOs. The labour market for the top executive still especially favours men and increased competition does not improve relative women's pay [in the CEO role] (p20)

But even so I was impressed by the size of the effect, given that these new firms would hardly be expected to be total giant-killers day one when they first started to go up against longer-established incumbents. Just making it easier to set up a business closed the wage gap by 1.0-1.4% for medium and high skilled women, and got them promotions they should have had before. That's a remarkably big pay-off.

Increased competition in the business marketplace is one of those ideas that neatly hit both equity and efficiency objectives. The equity outcome is obvious: the efficiency payback is that output rises as the previously underutilised female workforce gets to pull its proper weight. And what's true of women is very likely also true of other groups that would otherwise face relatively uphill going in the labour market.

People concerned with some of today's big social or environmental issues tend to be wary of markets, and rather inclined to see them as part of (or all of) the problem. What these New Zealand and Portuguese results show is that vigorously competitive markets can deliver more desirable social outcomes - provided firms aren't allowed the sheltered luxury of bias and slack.