Unequal Pay? The Real Crime.

The shocking irony is that in order to defend the ill-conceived contract rights of first-class citizens, we’ve created a whole class of second-class citizens. Would anyone call this a just policy?

Much has been made this election season about the gender gap in incomes. The political movement for legislation to correct this gap, called Equal Pay for Equal Work, assumes that any statistical difference is due primarily to wage discrimination in the work place. In other words, the gender-gap discussion always centers on holding employers accountable and demands new laws to correct the injustice.

There are all sorts and forms of studies to address this puzzle and it seems one can find a study to confirm any desired result. Mostly, statistical comparisons fail to control for other variables that could explain the difference. (Economist Diana Furchtgott-Roth runs through the problems in her book “Women’s Figures.”)

Legitimate comparisons look at men and women with the same job tenure in the same position at the same firm. If there’s a big difference under those circumstances, there may be discrimination, giving women grounds to sue. Federal law forbids discrimination, and permits such suits.

But when economists compare men and women in the same job with the same experience, the analysts find that they earn about the same. Studies by former Congressional Budget Office director June O’Neill, University of Chicago economics professor Marianne Bertrand, and the research firm Consad all found that women are paid practically the same as men.

This is not to deny that discrimination based on gender or race may exist in the workplace, but it does open up the discussion over how prevalent it is and what to do about it. Frankly, the obsession with the pay-gap statistic that has led the National Organization for Women to support legislation to restructure the economy seems inappropriate, if not counterproductive.

First, the historical data suggest that the trend over the past thirty years has closed the gap, with the main cause cited as the increased demand for skilled labor in the work place during the Great Credit Bubble of 1982-2007. Between 1979 and 2009, the earnings gap between women and men narrowed for most age groups. The women’s-to-men’s earnings ratio among 25- to 34-year-olds, for example, rose from 68 percent in 1979 to 89 percent in 2009, and the ratio for 45- to 54-year-olds increased from 57 percent to 74 percent.

Furthermore, the gap has been closed most effectively at the higher skill levels as measured by education. On an inflation-adjusted basis, earnings for women with college degrees have increased by 33 percent since 1979 while those of male college graduates have only risen by 22 percent. The point is that this is a market phenomenon in which the main driver has been employers’ desire to hire qualified workers who just so happen to be women. They must pay the going price paid by their competitors. It should come as no surprise that the gap has leveled off at 80% after 2007 and the flat economy since.

But, more egregiously, Equal Pay for Equal Work has ignored and distracted us from more serious economic injustices associated with inequality. These injustices are unemployment disparities and the political sanctification of two-tiered labor contracts. Let’s start with how unemployment affects the income gap.

Unemployment of Women vs. Minorities

Last month the official BLS unemployment rate registered at 7.8% of the labor force. Depending on how one chooses to measure employment, the real rate could be anywhere from 12% to 16%. For men, the rate was at 7.8% and for women it was also 7.8%, meaning there is virtually no official gender gap in unemployment. (Of course, this is not true when one expands the definition to include the underemployed.) But let’s look at the unemployment rates broken out by race and age: teenagers, 23.7%; blacks, 15.9%; and Hispanic, 11.5%. These figures show that these groups suffer disproportionately from what we might call No Pay for No Work. Their only hope is growing opportunity that flows from a thriving private sector economy. No discrimination legislation is going to secure that for them.

This brings us to the second problem of economic injustice associated with pay: two-tier labor contracts that pay higher wages and benefits to senior union members for equal work.

Two-Tier Labor Contracts

Businesses and workers competing in a global economy face constant pressure to reduce costs to keep prices competitive. We’ve seen this unfold across the industrial economy, and with new communications technology it has invaded the service sector with IT outsourcing.

The necessary response for businesses and workers to survive this onslaught of world competition is to reduce labor costs by improving productivity. But this necessitates a reduction of jobs combined with an industry-wide reduction of wages. Of course, legal union contracts prevent any such reductions. The result has been to split the workforce into two tiers: union members with seniority who are able to reap the unsustainable pay and benefit rates and the new hires who receive less pay and benefits for the same work.

These two-tier contracts were enacted first in the airline industry, then the auto and retail workers unions, and finally are leeching into the teachers unions and public service unions. For example, at Chrysler, newly hired workers earn just $14 to $16 an hour in wages and about $25 when all their benefits and other costs are added in. That’s roughly half what it costs to employ a veteran member of Chrysler’s 26,000-strong UAW work force.

This is the politically-condoned compromise between unions and employers. But how can anyone make the claim it is not discriminatory? Apologists will claim that the differentials are for seniority and experience, but this papers over the two-track system and how it will affect workers over their working lifetime. In simplest terms it is Unequal Pay for Equal Work.

The degree of this injustice varies radically between the private and public sector. The private sector will rationalize pay according to market signals and end up improving productivity through capital substitution. The result will be less number employed in existing businesses. But a thriving economy will lead to jobs increases through new business formation. Labor unions can adapt through profit-sharing arrangements that make labor costs more flexible.

However, in the public sector there is no flexible component and no impetus to correct this injustice except through an entire generation dying off. This means the generation that follows the “first tier” will suffer lower income levels and benefits for their entire lifetimes in order to pay the outsized benefits for their predecessors. In addition, first tier labor contracts are iron-clad when it comes to firing and layoffs, while second tier hires can often be fired at will. The explicit incentive structure insures that second tiers do all the work, while first tiers collect all the reward. The shocking irony is that in order to defend the ill-conceived contract rights of first-class citizens, we’ve created a whole class of second-class citizens. Would anyone call this a just policy?

It would be nice to think we could just raise all public union workers to unsustainable compensation levels, but that would merely harness the economy with higher taxes and less investment and production. It would lead to the Incredible Shrinking Economy.

The lesson here is that when it comes to economic policy and government legislation concerning preferences for one group over another, we had better pay attention to the longer term consequences to our society. If one wants to know where the future of two-tier public labor contracts lies, I would guess public unions will be regulated like public utilities where labor contracts must adhere to a public finance/tax revenue logic. The days of politicians trading unfunded benefits to public unions for votes is over. Too late for many.


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