Firm premia that don't reward women
Gender pay transparency was included as a key priority in the EU Gender Equality Strategy 2020-2025. In 2021 the European Commission published its proposal for a directive, which was then adopted by the European Parliament in March 2023 and by the Council of the European Union in April 2023. According to the pay transparency directive, EU companies will be required to share information about how much they pay women and men for work of equal value, and take action if their gender gap in pay exceeds 5%. There are also provisions for compensating victims of pay discrimination, and provisions for penalties, including fines, to punish employers who break the rules.
The key data mentioned to frame the action on gender pay transparency is the (unadjusted) gender pay gap. According to Eurostat, in 2021 women in the EU earned on average 13% less than their male counterparts, with large differences between the private and the public sector, and higher gaps in the former. In Italy the figure stands at 5.5 % in the public sector, and 15.5% in the private one. The female employment rate in 2022 was around 51%, eighteen percentage points below the male rate, one of the largest gender gaps in the entire European Union.
The focus on companies and on information disclosure on pay by gender can be explained by the increasing evidence that firm pay policy is crucial in explaining the levels and the dynamics of wage inequality in general, and gender wage inequality in particular.
How can firm-level gender-related wage differences emerge? For instance, when women sort into firms with lower pay rates, or have preferences for more flexibility, better work-life balance, or shorter commutes. Wage divides also develop as a consequence of differing job search behavior between men and women, given the different availability of time for job search between the two, or statistical discrimination in employers' wage offers and hirings. Gender wage differences can also appear within firms, due to females' lower bargaining power in wage negotiations, different standards for promotion between men and women, or lower earnings growth for mothers following childbirth.
The increasing availability of linked employer-employee datasets that record work and pay history of workers and characteristics of the firms that employ them, allow to study the role of firms in generating gender wage gaps. While it is well known that women are mainly concentrated in the service sector, in low-paid and part-time or temporary occupations, less is known about the characteristica of the firms they are employed in, and how gender differences in a firm's pay policy contribute to the gender wage gap.
In a recent study, using a large linked employer-employee dataset on the universe of Italian workers in the non-agricultural private sector between 1995 and 2015, we document how employer heterogeneity affects the gender gap in earnings across the distribution, over time, and over the life cycle, accounting for cohort effects.
These aspects were yet to be explored and this study can deepen our understanding of the role of firm pay policy in reducing or reinforcing gender inequality in the labor market. We find that differences in firm's pay premia account for approximately 34% of the Italian gender pay gap at the mean. We then decompose gender differences in firm's pay premia into a between-firm and a within-firm component. The former reflects gender differences in sorting across firms and accounts for two-thirds of the gender gap in firm pay premia. The within-firm component captures gender differences in the allocation of workers across hierarchical levels and in wage-setting within firms, and explains the remaining one-third of the gap, being more important at the top of the earnings distribution. We also show that, while the gender gap in earnings has decreased over time, in firms' pay premia it has almost remained unchanged, thus increasing its contribution to gender wage inequality, and making it even more important to consider this factor when reflecting on policy.
Can firm-to-firm mobility be a potential mechanism underlying the importance of a firm's pay policy? The answer is positive, because women are less likely than men to move to a firm with higher pay policy and more likely to move to firms with higher within-firm inequality. This happens especially when moves are caused by firm closure, indicating that women may have worse outside options or weaker networks than men. The good sign is that gender gaps in mobility have tended to decline in more recent cohorts and years.
Pay transparency, if properly implemented, can help addressing the gender wage gap.