Fairness at Work: Pay Gaps Lecture Notes

Fairness at Work: Pay Gaps

Agenda

  • What is a pay gap?
  • How is it calculated?
  • Human Capital Theory and pay gaps
  • Gender pay gap
  • Ethnicity pay gap
  • Class pay gap

Learning Outcomes

  • Understand Pay Gaps: Define what pay gaps are and explain the methods used to calculate them.
  • Explore Human Capital Theory: Analyse how human capital theory explains the existence of pay gaps.
  • Examine Specific Pay Gaps: Identify and discuss the gender, race, and class pay gaps, focusing on their significance, manifestations, and underlying causes.
  • Evaluate Reporting Practices: Assess how pay gaps are being reported and the implications of these practices for organizations and society.

The Importance of Monetary Rewards

  • Pay is a key part of the employment relationship.
  • Pay sustains us materially and is tied to our self-worth and job satisfaction.
  • Reward systems communicate how employees are valued.
  • Employers use reward systems to encourage desired behaviors.
  • Perceptions of inequity can undermine reward systems (Bingham, 2016).

Pay Gaps Between Demographic Groups

  • Pay gaps measure the difference in median/average hourly pay between people with different demographic characteristics.
  • Equality legislation in the 1970s aimed to end discriminatory practices, including those related to pay.
  • The existence of pay gaps suggests inequality persists (EHRC, 2018).
  • The gender pay gap is the most well-known.
  • Interest in the ethnicity pay gap has grown recently.
  • Pay disparity exists for other groups (social class, disability).

What is a Pay Gap?

  • Pay gaps measure the difference in median hourly pay between different groups.
  • This is not the same as an equal pay audit which looks at the difference in pay between people doing the same or comparable job.
  • Paying people differently for doing the same job is covered by the Equality Act and is illegal.
  • Pay gaps do not indicate a violation of the Equality Act.
  • Pay gaps suggest barriers to some groups accessing higher-paid jobs or progressing in the workplace.

How are Average Earnings Calculated?

  • Pay gaps are typically measured using the median rather than the mean.
  • The median is the middle number in a sorted list of numbers.
  • The median is used as it is not affected by extreme values.

Why do Pay Gaps Exist? Human Capital Theory

  • Human Capital Theory (Becker, 1964) suggests that individual differences in pay reflect variations in education, training, skills, and work experience.
  • Investments in human capital (e.g., education or job training) lead to increased productivity and higher wages.

Implications for Pay Gaps:

  • Gender Pay Gap: Women may choose different opportunities in education and training due to anticipated intermittent labor market participation (e.g., maternity leave) and working fewer hours, reducing experience and skills, which in turn affects pay as women end up in lower paid/skilled jobs (Betrand et al., 2010).
  • Class and Ethnicity Pay Gap: Unequal access to education and training opportunities widens income disparities.

Criticisms (Tomaskovic-Devey et al., 2020):

  • Ignores systemic discrimination and cultural norms affecting opportunities.
  • Overemphasizes individual agency, neglecting organizational biases and societal constraints.
  • Example: women with children choosing to work part-time, but these choices are influenced by societal expectations and access to support (e.g. childcare) (see e.g. Tomlinson, 2006).

Explaining the Gender Pay Gap (Source: ONS, 2023)

  • Occupational segregation: the clustering of women and men into different types of work (horizontal segregation) and different levels of work (vertical segregation - glass ceiling).
  • The glass ceiling is “a transparent barrier that (keeps) women from rising above a certain level in corporations.” (Powell and Butterfield, 2015).

Why are women clustered in lower-level paid roles and lower paying occupations?

  • Disproportionate responsibility for unpaid care.
  • Lack of quality part-time and flexible working.
  • Low pay and status of the part-time jobs that mothers often accept to accommodate their caring responsibilities.
  • Workplace cultures centered around the “male breadwinner” model (e.g., long-hours culture, progression dependent on being “tied to the job”).
  • Biased recruitment, development, and progression practices.
  • Discrimination in pay and grading systems.
  • Undervaluing of stereotypical female work, also ‘5 Cs’ - caring, cashiering, cleaning, catering, clerical.
  • Lower economic value ascribed to jobs in care.
  • Being employed in a female-dominated occupation can reduce your pay by as much as 9%.
  • Over the last decade the Gender Pay Gap has been falling steadily – the trajectory is positive but there is still a considerable gap.
  • The overall GPG in 2023 was 14.3\%. This aggregate data obscures the sectoral and occupational picture.

Gender Pay Gap in OECD Countries

  • Difference between median full-time earnings of men and women, as % of median earnings of men.
  • Data refer to 2021 or latest year available.

Gender Pay Gap Reporting

  • Since 2017, all large UK employers (more than 250 employees) are legally required to disclose earnings data by sex.
  • Large employers are also required to show the proportion of males and females receiving a bonus and the proportion of males and females when divided into groups of low to high pay.

Ethnicity Pay Gap

  • The overall ethnicity pay gap is small (2.3\%, in 2019 according to the ONS) but this figure hides a lot of variation, with some ethnic groups experiencing pay gaps of 15\%. Questions arise over which categories to use, e.g., binary option of White/BAME or the 18 ethnic categories used by the Office of National Statistics.
  • Employers feeding back on a government consultation expressed concerns about discomfort with talking about race at work Recommendation: report binary headline figure and use disaggregated data for more detailed workplace analysis (BEIS, 2017).
  • However, there is no mandatory obligation to report the ethnicity pay gap.

Explaining the Ethnicity Pay Gap (Longhi and Brynin, 2017)

  • Ethnic minorities may face bias in hiring, promotion, and pay decisions.
  • Ethnic minorities often find it harder to enter well-paid occupations.
  • Many ethnic minorities are over-represented in low-paying sectors.
  • Foreign qualifications may not be recognized, limiting job opportunities.
  • Ethnic minorities may be over-qualified for the jobs they do, leading to lower pay.
  • Poor command of English can limit job opportunities and affect pay.
  • Lack of UK-specific work experience can be a barrier to higher-paying jobs.
  • Ethnic minorities often live in regions with fewer high-paying job opportunities.

Why Ethnicity Pay Gaps Matter

  • It is not only a question of social and organisational justice.
  • Growing consensus that workforces should reflect the diversity of the communities in which they operate.
  • Lack of diversity suggests that the employers are not making full use of the talents on offer in the labour market in terms of recruitment and/or progression with the organisation.
  • Business case for “overcoming structural, procedural and attitudinal barriers within society and individual organisations”.
  • Starting point for this is understanding what is happening in the workforce so that employers can work out why disparities exists (explained v. unexplained differences in pay).

McGregor-Smith Review on Ethnicity Pay Gap Reporting

  • No employer can honestly say they are improving the ethnic diversity of their workforce unless they know their starting point and can monitor their success over time.
  • Simply stating a commitment to diversity or establishing a race network is not sufficient to drive lasting change.
  • Where employers are required to collect and publish key data, they will take action.
  • It is essential that all large employers must publish their workforce ethnicity data annually.

Motivation for Ethnicity Pay Gap Reporting

  • It is critical to become a magnet for talent – and that is talent in the broadest sense – different perspectives, different ideas, different thoughts, and backgrounds. Diversity of thought is a commercial imperative (Philip Davidson, Managing Partner at KPMG).
  • Being open about – and facing up to – our gender and ethnicity pay gaps is an important step in us taking informed, positive action that fosters a culture in which our staff flourish and their unique perspective, experiences and skills are valued (University College London).

The Business Case

  • 2019 CIPD survey of 243 members (employers) found an overwhelming majority supported reporting their ethnicity pay gap to:
    • Develop a reputation as a fair and progressive employer (66%)
    • Address workplace inequalities (61%)
    • Develop greater transparency and accountability (58%)
    • Offer ethnic minority employees equal access to development and progression opportunities (55%).
    • Create more inclusive workplaces (55%)

NetworkRail Ethnicity Pay Gap Report

  • Voluntarily publishing ethnicity pay gap report for the third year to be open and transparent about their people.
  • Acknowledge that their pay gap will fluctuate as they increase the diversity of the organisation, but remain committed to making their organisation a more inclusive place to work so that they can better represent the passengers they serve.
  • The 2021 median ethnicity pay gap is 6.7 per cent. This is a 1.7 per cent increase from last year and is above the national average of 2.3 per cent.
  • They have continued to increase the proportion of black, Asian and minority ethnic colleagues in the organisation this year to 9.4 per cent at the time of reporting (31 March 2021), an increase of 0.3 per cent on last year.
  • However, 9.3 per cent of their colleagues still have not shared their ethnicity with them. The pay gap will change as they improve the quality of their ethnicity data.
  • Target of 13 per cent black, Asian and minority ethnic representation across the organisation by 2024.

Social Class

  • Social class, also referred to as socio-economic background, is not one of the nine protected characteristics covered by the 2010 Equality Act.
  • Social class can be a strong influencer of an individual’s career progression.
  • Growing interest in the effects of class on access to employment opportunities.

Indicators of social class:

  • Parental occupation
  • Post code – indicating areas of social deprivation
  • First generation university students
  • Free school meals

Recent academic research on the class pay gap

  • Laurison and Friedman (2016): one of the first studies to demonstrate how class origin shapes earnings in higher professional and managerial employment
  • British Labour Force Survey data found a class pay gap of up to £7,000, after controlling for other characteristics such as educational qualifications

Class pay gap within professional occupations

  • Pay gap between those from professional-managerial and working class backgrounds is biggest amongst CEOs
  • Those occupations where pay is lower have a smaller gap
  • Scientists have a “class premium” – on average those from working class origins earn more!

Progression is one of the truest indicators of inclusion in an organisation

  • Driving greater social equality is the defining societal and economic challenge of our time.
  • There remains a proven link between someone’s social background and their educational and employment outcomes, and social inequality is estimated to cost the UK £39 billion per year.
  • It is exacerbating lower levels of productivity, poor mental health, and diminishing people’s life expectancy (Nick Miller, Bridge Group).

KMPG Longitudinal Study of Employees

  • Analysed career paths of over 16000 employees at KPMG over a 5-year period.
  • Parental occupation was used as an indicator of socio-economic background of employees.
  • Social class was found to have the strongest effect on an individual’s career progression compared to other diversity characteristics – those from a working class background took 19% longer to progress to next grade.
  • In 2021, KMPG became the first employer to report on social class pay gap.
  • Action commitment: increase number of leaders in the organisation from low socio-economic backgrounds to 29% by 2030.

Explaining the Class Pay Gap (Friedman and Laurison, 2019)

Education:

  • Those from privileged backgrounds tend to have higher qualifications and attend more prestigious universities, both of which are associated with higher earnings.

Regional differences:

  • The privileged are more likely to work in London, in large firms, and in professions such as finance – all of which are associated with higher pay.

Occupational segregation:

  • Employees with working class backgrounds clustered in lower-paying occupations (horizontal) as well as lower positions (vertical).

Financial security:

  • ‘Bank of mum and dad’ allows individuals to take more risky employment opportunities.

Cultural capital and bias:

  • Employers may subconsciously prefer candidates who share similar social or cultural traits, often associated with higher-class backgrounds (accent, dress, behaviour…). This bias influences hiring, promotion, and networking opportunities, perpetuating the advantages of those already in privileged positions.

Why do Employers Publish Pay Gaps?

  • Publishing a pay gap acts as an incentive device: companies have to explain why the pay gap exists and how they will tackle it.
  • McKinsey (2016): Female workers have a strong preference in favour of low pay gap employers: young female workers in particular are more attracted to companies with low gender pay gaps (so good for attracting potential employees).

Growing consensus around the business case:

  • Good corporate social responsibility branding/Signal of a ‘good’ employer
  • Acknowledgement of need to diversify their workforce
  • Attracting wider pool of potential employers

However, there are challenges with pay gap reporting:

  • Can be a crude measurement tool
  • Time-consuming
  • Understanding the drivers of pay gaps is not always evident
  • Managing perceptions of fairness amongst all staff

In Summary

  • Despite legislation on equal pay, average median hourly pay for women is less than that of men (NB – this does not mean companies are violating equal pay legislation).
  • Gender pay gaps have been in the headlines for some time now.
  • There are various explanations for the persistence of a pay gap.
  • Other pay gaps - ethnicity and class - have also come to light in recent years.
  • Since 2017 large organisations have had a legal obligation to report their gender pay gap.
  • Some organisations have chosen to voluntarily report their ethnicity pay gap – and a smaller number of organisations have chosen to report their class pay gap.
  • There are various motivations for doing this (e.g., reputation, diversifying talent pool).