PAY EQUITY AN ECONOMIC PERSPECTIVE CHEN SONG, PH.D. - JULY 2018

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1 PAY EQUITY AN ECONOMIC PERSPECTIVE CHEN SONG, PH.D. - JULY 2018 Contents of this presentation are incomplete without accompanying discussion and clarification. The view expressed in this presentation is the view of the author only. Professional Background - Chen Song, Ph.D. Economist Work at Nathan Associates economic research and analysis to public and private clients in the U.S. and abroad INTRODUCTION Expert Economist and Statistician in Employment Matters Representative, collective, and class actions; single- and multiple-plaintiff Wage and hour claims; discrimination claims; employment practice consulting 2 1

2 Some Personal Facts My favorite books and pod-cast series: Freakonomics, & Super-Freakonomics by Steven Levitt & Stephen Dubner, Freakonomics Radio INTRODUCTION If you learn how to look at data in the right way, you can explain riddles that otherwise might have seemed impossible. Because there is nothing like the sheer power of numbers to scrub away layers of confusion and contradiction. Freakonomics (2009), Introduction: The Hidden Side of Everything, p. 14 Interview with Claudia Goldin, a Harvard labor economist, on pay equity: So, is this for equal work? Is it equal individuals? What economists do is they use data to figure out whether the individuals are the same; they try to make them comparable as possible; they squeeze out these differences and productive attributes; they look for individuals who have the same education, the same labor-force participation rates over their life cycle, etc 3 Agenda 1. Economic theory explaining pay differences INTRODUCTION 2. Statistical and Empirical Approach to Understanding Pay Equity 3. Example: Pay Equity in the Legal Profession 4 2

3 Economic Theory Explaining Pay Differences 1. Economic theory explaining pay differences Education On-the-Job Training Including Relevant Experience with Prior Firm(s), Current Company Tenure, and Current Position Tenure Compensating differentials Worker may be paid less in money for receiving part of the compensation in terms of other non-monetary job features or amenities ECONOMIC THEORY EXPLAINING PAY DIFFERENCES 5 Statistical and Empirical Approach to Understanding Pay Equity 2. Statistical and Empirical Approach to Understanding Pay Equity Who are similarly situated employees? Can any observed pay disparity be explained by non-discriminatory factors (education, training, compensating differentials)? Is the observed disparity in pay consistent with what would be expected from a random selection? Statistical test can determine the likelihood that a disparity as big as the one actually observed is in fact random 6 3

4 Is Observed Wage Differential Random or Systematic? 7 Pay Equity Study under California Fair Pay Act (CFPA) More Data Aggregation Eliminates same establishment requirement Replaces equal work with substantially similar work Employers need to explain the entire difference in wages: Seniority Merit Quantity or Quality of Production; and/or Bona fide factors other than sex (e.g., education, training, or experience) 8 4

5 Implications on Statistical Method under CFPA Job Job Grouping Shift from analyzing employees by job title or by code to analyzing groups of similar employees May define job groups using job descriptions May not be able to separate by department or division if similar skills are needed across departments Individual Location Level Region Level Need to consider cost-of-living adjustment and local labor market conditions 9 Stratification v. Aggregation Having more observations in a statistical model tends to increase the statistical significance of an observed gender pay differential Combining multiple locations in one analysis may mask the problem of a location if pay disparity in that location is diluted by a lack of pay disparity in other locations 10 5

6 Statistical Significance and Sample Size Illustration of a Small and Statistically Significant Pay Differential in a Larger Sample Wage Earnings average earnings differential wage = + human capital + random noise Human capital Men Women 11 Statistical Significance and Sample Size Illustration of a Large and Statistically Insignificant Pay Differential in a Smaller Sample Wage Earnings Men average earnings differential wage = + human capital + random noise Human capital Women 12 6

7 Statistical and Empirical Approach to Understand Pay Equity Starting pay is an important practice to audit under CFPA Gender starting pay differential cannot be justified by Higher salary in the previous job Being a better negotiator A cohort study can follow how pay differential by gender changes over time A decomposition analysis separating various compensation components can provide employers with insights on what to focus on when applying corrective measures STATISTICAL AND EMPIRICAL APPROACH -PAY EQUITY 13 After the JD Study: 1 st Wave ; 2 nd Wave ; 3 rd Wave Example: Pay Equity in the Legal Profession Percent of Men's Compensation 96% 94% 92% 90% 88% 86% 84% 82% 80% Women's Compensation as a Percent of Men's by Years of Practice After Admission to Bar - Comparison of Unadjusted Averages 95% 78% % 80% Years of Practice after Admission to Bar Source: After the JD III: Third Results from a National Study of Legal Careers 14 7

8 Partner Compensation Survey Compensation (Thousands) $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Top Ranked Law Firm Partner Compensation by Gender Comparison of Unadjusted Averages Over all years, women partners on average are paid 30% less than male partners $675 $734 $513 $497 $779 $531 $ $659 Men Women Source: Lowe, Jeffrey A. Major, Lindsey, & Africa Partner Compensation Survey, What May Determine Lawyers Compensation Business origination Practice profitability/receipts Billable hours and billing rates Human capital (experience, education, etc.) Demographics (marital, parent status, etc.) Seniority/Tenure Performance Evaluations Work Setting (size of firm, etc.) Terms of employment contract Sources: 1) Joyce Sterling & Nancy Reichman (2016), Overlooked and Undervalued: Women in Private Law Practice, Annu. Rev. Law Soc. Sci. 12: ) An Aderant White Paper for Law Firms (October, 2015), Your Partner Compensation System Can Be Better: Here s How. 16 8

9 Lawyer Salary Study Controlling for Measurable Productivity Factors A Comparison of Male v. Female Predicted Salaries for Lawyers Admitted to the Bar in 2000 and Surveyed in 2002 Estimated % Men Earn Above Women List of Control Variables Model 1 Model 2 Model 3 Model 4 R 2 (% of Variation in Salary Explained) 0.4% 36.3% 61.1% 64.8% 1. Male* 2. Number of Years Since Bar Admission 3. Black* 4. Hispanic 5. Asian 6. Has children 7. Married 8. Over 36 years old 7. GPA* 8. Law School Rank* 9. Size of Practice* 10. Compensation with bonus* 11. Firm choice (lifestyle) 12. Work hours* 13. Recruitment Committee* 14. Meals with Partners/Associates 15. Recreation with Partners 14. Areas of Law Practiced* 6.5% 7.6% 5.3% 4.2% * Statistically significant control variables Source: Dinovitzer, R., Reichman, N., and Sterling, J. (2009). The differential valuation of women s work: A new look at the gender gap in lawyers incomes. Social Forces 88(2) p Numbers are imputed from Tables 1 and 2, and represent an approximation. 17 Example: Pay Equity in the Legal Profession Temporal Flexibility as a Potential Explanation? Goldin and Katz (2011) develop a framework for understanding temporal flexibility Temporal flexibility is the ability for workers to have flexible work schedules Temporal flexibility is an amenity for which employees are willing to pay by trading off earnings for the amenity (demand) Employers are willing to supply the amenity at some cost (supply) The price of the amenity depends on both demand and supply for the amenity Sources: Goldin, C., & Katz, L. F. The cost of workplace flexibility for high-powered professionals. The Annals of the American Academy of Political and Social Science (2011), 638(1),

10 Example: Pay Equity in the Legal Profession Temporal Flexibility as a Potential Explanation? Temporal flexibility is the ability for workers to have flexible work schedules Women tend to have a greater preference for temporal flexibility than men Differences in preference for workplace flexibility may impact earnings For high-powered professions, Goldin and Katz find demand for workplace flexibility -> its price & gender earnings gap in the cost of providing workplace flexibility gender earnings gap The gender gap in hourly compensation would vanish if firms did not have a financial incentive to pay employees working 80 hours a week more than twice what they would receive for 40-hour weeks. Goldin, How to Achieve Gender Equality, The Milken Institute Review (3 rd Qtr 2015), pp Example: Pay Equity in the Legal Profession Temporal Flexibility as a Potential Explanation? Implication for Statistical Modeling - Include indicators for Part-time work, Remote work, Use of workplace flexibility policies Model relationship between earnings and billable hours as non-linear Captures increasing value of billable hours Effect will vary from firm to firm 20 10