Wage Gap Series (Mono-a-Mono!*)

September 28, 2003

Hobson's Choice Wage Gap Series 1, 2 Links updated 3 September '05

[ Alas A Blog Wage Gap: part 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 ]
Trish Wilson addresses the same subject here.
US Census Data on Income: released Sep '03. Median income fell again

Ampersand, et al. have posted a series of articles on the wage gap between men and women in the work force. They are all very well worth reading for anyone remotely interested in the subject. Ampersand explains the subject very well. Trish includes a link to this PDF file (click on chart) which shows the history of the wage gap when measured a particular way. Here is a chart summarizing the contents of the chart:

The acronym YRW = year-round worker. As the astute reader will notice, the median weekly earnings are higher (as a percentage of men's median weekly earnings) than the median earnings for YRW. The reason, of course, is that a large proportion of women are employed in seasonal or temporary employment, and here disparity is likely to represent the larger number of weeks that men are employed in the workforce.

Here is a link to IWPR's website. The link will take you to state-by-state comparisons for various quality-of-life issues for women. Howard Dean's state, Vermont, was tied for first place overall with Minnesota and Massachusetts. (IWPR used boilerplate text in the report for all 50 states & the DC. They probably felt in would be inappropriate to say "In Vermont, women have really jammed!"; or "In Mississippi, women are like so totally screwed it makes Iran look like freakin'; Denmark.")

Now, I don't want to reproduce Trish or Amp's work here; I'm far too lazy for that, and since you're reading my write-up instead of sitting in class studying this from a credentialed professor, I guess you're lazy too. But you might want to notice that during periods of recession the blue line (representing women's annual incomes) would surge, which reflected the decline in men's wages during the same period. Also please note that the weekly earnings for for women would converge with the annual earnings for year-round workers, which would reflect the blow to the cohort of women in temporary or seasonal employment during recessions.

FOOTNOTE: 1 A monopoly is a firm which enjoys the position of being the only supplier in a market. Since the monopoly reduces the price by selling more, it will be more concerned with its marginal revenue curve than with its demand curve. Revenue is sales (in units sold) times the price; the slope (figure below, on left; dashed red line) represents the increase in income to the firm caused by selling more units. The monopoly maximizes earnings by setting costs equal to marginal revenues (which means fewer units sold at a higher price—but a lower cost).

A monopsony is a firm which enjoys the position of being the only consumer of a particular input.

An oligopoly is a firm which is one of a small number of firms that supplies a product. Usually, the Justice Department—back in the days when it actually fought monopolies—defined oligopoly in terms of market concentration. Of course the actual features that make a market oligopolistic vary, since a market with many participants nationwide may still defeat efforts by customers to shop for prices. Similarly, in very small specialized transactions where time is important as a factor, an oligopoly can emerge very suddenly. The point of this essay is not to steam about wicked monopolies or oligopolies, as to demonstrate how the presence of a certain amount of ligopoly force can distort the market. In some cases, naturally, it may be entirely untenable to prevent market concentration. But it shouldn't be ignored.

2 Duane (in the comments section of part four) brings up an argument used by early students of economics. (For those who didn't understand the argument, it goes like this: if women were paid less than men, employers would hire women since they would cost less. This would drive up the wages of female workers and the discrimination would vanish.)

There are at least two reasons why this is not true. The first is that the labor market is not the same as the market for—say—milled sugar. Discrimination by gender may occur inadvertantly because employers use it to reduce "search" costs, which reflects network externalities to hiring male employees. This is a standard problem in labor markets, which are notoriously inefficient. Not only that, but consider the cultural obstacles of a woman in a job search. Women are barred in nearly all cultures (including ours) from being aggressive in certain situations, yet aggressiveness is usually a decisive factor in selling one's labor.

The other reason the argument doesn't work is that labor markets are segmented. In theory, a market where laborers have unlimited movement between markets for which they are qualified, and where good information exists about prices, etc. would not be segmented. Competing firms would have every reason to hire workers from a "global pool" which included women. Discrimination would only harm the discrimator.

But in the world where we live, there is an oligopoly in each business sector (e.g., there are only two department stores in my neighborhood) and an oligopsony in each labor market (i.e., there are at most only three plausible employers for a given worker at a given time).

To keep this simple, let's suppose for a moment that a typical firm in the labor market is a monopoly (see figure 1, left side) and also the only firm that employs workers of that particular skill in that particular labor market. The solid red line represents the price the firm is able to get for its products for any given quantity. The dotted red line represents the net increase in revenue caused by any increase in the firm's output. As you can see, the monopoly has to consider the fact that an increase in output will lead to a decrease in price. Likewise, the monopsony has to consider that an increase in the number of workers it hires will increase the wage cost (see figure 1, right side).

But even though the monopoly firm is going to produce with the dotted red line as its production parameter (limit), and the monopsony is going to hire with the dotted blue line as its hiring parameter, the price that the monopoly firm gets for its product is determined by the solid red line, and the wage that the monopsony employer pays is determined by the solid blue line. That explains the monopoly rent (the difference between the higher price per unit that the monopoly can charge, and the lower unit cost it pays) and the monopsony discount (the difference between the lower price that the monopsony must pay, and the higher marginal value product—MVP—that the monopsony gets for each hour worked). In figure 2 below, I combined the two. MVP is now marginal revenue product (MRP) since we're interested (as the managers of a firm in a segmented market) in marginal revenue.

Both attributes allow employers to make more profits in a segmented labor market than a non-segmented one (figure 2). Notice I've altered the vertical scale of the chart so everything is in unit costs. We assume that, for our particular firm, there is a diminishing marginal return to labor (meaning, if you increase the number of workers or the number of labor-hours, your firm's productivity will increase at a rate that gets smaller. That's why the solid red line in figure 2 is curved downward: not only is the demand curve for the monopoly firm downward sloped, but more workers also produce less per worker).

Critics will notice that there are other components to cost for a firm, including a firm in a totally segmented market. For example, there is the cost of capital. In figure 2, there's a figure on the bottom L_m which represents the firm's likely amount of labor hired. Of course, L_m implies a certain level of output; the firm hires L_m because it wants to produce Q_m. But this entire explanation for a segmented market in labor could also apply to a segmented market in capital, too; and the firm might arrive at a K_m (optimal amount of capital) that implies a different Q_m. All this means is that the rents to the firm will be somewhat less.