Equal pay laws leave bigotry unpunished 


Some people believe the government should regulate gender employment disparities. SOURCE: pxfuel.com

We hear about the gender pay gap all the time: the median female salary is less than that of a man. The media cries “inequality,” “oppression” and “patriarchy,” making everyone believe that the government must bring equity and peace by forcing employers to pay everyone the same, regardless of their sex. Even without considering the fact that the given metric is incredibly misleading, the question remains: “Should there be regulations enforcing equal pay?” and “Is mandated equal pay desirable?”

No, mandated equal pay is undesirable. In fact, if the government requires the same compensation for different employees, companies do not lose anything if they discriminate. Even though this proposition sounds foolish at first, an example clears things up very quickly. 

Imagine a company with a peculiar name: Misogyny Inc. Self-evidently, the company owner hates women and would never even think about hiring a woman instead of a male employee, and 100% of the company’s employees are male.

Now let’s consider two scenarios:

1. There is no government mandate on equal pay for all employees. 

Suppose the average man demands no less than $50 for X amount of work. The average woman is a little more flexible, and she would agree to take $47 for X amount of work. 

The owner of Misogyny Inc. is unnecessarily spending an additional $3 for every employee doing X amount of work. Even though $3 does not sound like a lot, the 6% difference in the salary of a man and a woman (in this scenario) accounts for a 2.4 – 4.8% increase in company’s spending, since businesses spend up to 80% of their gross revenues on employee salaries and benefits. 

If there is no equal pay law, the bigoted owner of Misogyny Inc. literally has to pay for his hiring practices. The next thing you know, his competitor with less prejudice takes notice of women offering the same labor at lower costs, and now he has 2.4 – 4.8% of revenue to invest in capital. This imbalance occurs solely due to the labor composition, and it would soon force the owner of Misogyny Inc. to either start hiring women or lose competition to the firms with less discriminatory hiring practices. 

And it does not stop there. Men will now have to compete with women by accepting lower wages to get hired.  The labor market will operate freely. As a result, both the employers and employees will benefit from the absence of regulation: the employers get a decrease in labor costs, and the employees get to compete based on their productivity rather than their sex.

2. There is a government mandate on equal wages.

Suddenly, the situation changes drastically. The government proudly proclaims that it has found a way to solve the wage gap crisis. It issues a law that says: “An employer must pay men and women the same.”

In this case, Misogyny Inc. employs only men once again. However, this time, the owner does not lose a dime for choosing a man over a woman. Since the competitors also historically have some men at the core of their enterprise, there is no reason for them to hire women if they must pay them the same wage. 

A government mandate on equal pay allows discrimination to happen without any economic punishment and encourages no competition from the group prevailing in the workplace.

But can’t we just fix this by forcing companies to hire more women?

Since company owners do not have incentives to hire women over men with a federal mandate on equal pay, the next logical step for the government is to impose a quota that would ensure that a certain proportion of company’s employees is female. One might wonder if there is a problem with such a proposal. Iceland is already doing it. What’s wrong if a company’s employee composition resembles the ratio that is present in the real world? 

The problem becomes apparent when the fact that women and men do not make the same job choices is taken into account. For instance, Iceland has the highest Global Gender Gap index of 0.877 (the highest possible is 0.9949), which implies that women have the most equal opportunities in that society and encounter fewer sex stereotypes than any other country. One might expect that women would represent 50% of workers in each industry; however, Iceland has the greatest disparity between sexes in interest in science in the world. 

If an Icelandic company wants to design a rocket engine, it will have to hire its most competent engineers. However, if there are more male engineers, subsequently more of the best engineers will be male. If the government demands equal sex representation in this company, it will kill any chance of the company surviving the international competition. 

Should the government get involved at all? 

Fixing the effects of a failing law with just another government regulation will bring even more dire economic consequences. To quote Adam Smith, the father of economics, “the man of the system … seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” 

When it comes to economic activity, the government is not the best solution, even when it comes to unequal representation and even if the proposed actions seem plausible at first. If people are free to choose their occupation and are able to compete with each other, the free market will benefit everyone. 

Unfortunately, during discussions on discrimination, it is rarely said that it is just economically irrational and unprofitable. All other things considered equal, the employer who values productivity and merit will always outcompete the employer who makes decisions based on a job candidate’s identity.

 So, anyone who advocates for federally regulated equal pay is becoming the enemy of women without knowing it. Such laws strip away women’s ability to compete in the labor market and thus serve no good to the policy’s supposed beneficiaries.