Income equality

I have had many interesting discussions recently about income equality between the sexes. This post is an attempt to organise some thoughts.

Australia has a gender pay gap of nearly 18%, and women are very underrepresented in leadership positions. To start with, this is clearly unfair, unjustifiable and to the detriment of our species (numerous studies have shown that diverse teams make better decisions -- I'll leave the research to you if you are interested).

My idea (which I now find to be written about already -- see below) is that income nonlinearity contributes to the gender pay gap. I outline the idea here:

In Australia, at modest income levels, incomes rise in (approximate) proportion to the experience and responsibility of the employee. However, at higher levels this breaks down -- the trend becomes nonlinear and incomes rise exponentially with experience/responsiblity. The graph looks something like this:




In households where both a man and woman work (clearly not all households are structured like this but many are) there is a simple pressure to focus on one person's career because of the exponential rewards for seniority. Couple this with society's chauvanism (women need to challenge stereotypes to attain seniority in the workplace) and the fact that if the couple wants children the woman must take some time off, it makes sense for couples to in general focus on the man's career.

Note here that I am trying to understand what is happening in Australia now, not to argue that this is a good or just outcome.

This idea is described in detail in A Grand Gender Convergence: Its Last Chapter, by Claudia Goldin, who writes:
Whenever an employee does not have a perfect substitute nonlinearities can arise. When there are perfect substitutes for particular work- ers and zero transactions costs, there is never a premium in earnings with respect to the number or the timing of hours. If there were perfect substitutes earnings would be linear with respect to hours. But if there are transactions costs that render workers imperfect substitutes for each other, there will be penalties from low hours depend- ing on the value to the firm.

What to do?

If you think, as I do, that something needs to be done about gender inequality then what needs to be done? I think a good start would therefore be to reduce income inequality at all levels: reign in top incomes to be more proportional to experience/responsibility -- ie. return the exponential income increases to a more linear progression.

This will have the added benefit of a more egalitarian society in general.