Women in the UK on average earn less per hour than men. According to the Annual Survey of Hours and Earnings, the mean hourly pay for women in 2015 was 17.5% less than that for men. This figure is for all employees, full and part time. As far as full-time employees is concerned, the gap was slightly smaller at 13.9%. Nevertheless, as you can see from Table 6 in the linked Excel file, these gaps have decreased in recent years – but only slightly.
A recent paper from the Institute for Fiscal Studies has disaggregated the figures to give a better picture of this wage gap. It finds that having children is a major contributing factor to the gap. It also finds that this has a bigger impact on the earnings of graduates and those without a degree but with A levels.
On entry to the labour market, men and women earn roughly the same. People’s wages tend to rise during their 20s, but men’s rise slightly faster than women’s, causing a pay gap to open and widen – but slowly at first. Average (mean) men’s wages continue to grow during their 30s and a bit during their 40s. However, average women’s wages flatline. Thus the wage gap grows substantially, especially for the higher educated.
The paper argues that the arrival of children is a major contributing factor to this picture. It looks at the gap before and after the arrival of children. “The crucial observation is that the gap opens up gradually after the first child arrives and continues to widen for many years after that point.” By 12 years after the first child is born, the wage gap has widened to 33%.
The paper does not offer reasons for the small gap that exists before the arrival of children. But it does give possible reasons for the widening gap after having children. A major one, it suggests, has to do with labour market experience.
“As women are likely to do less paid work after the arrival of children, the level of labour market experience they have falls further and further behind that of their male counterparts, and the wage gap therefore widens.” They may also miss out on promotions.
Each year a woman spends away from the labour market is associated with an average 2% drop in pay compared with those who remain in work. For those with at least A levels, the penalty is 4%; but there is no drop in pay for those without A levels.
Other possible explanations include mothers taking work that requires a lower skill level, and at lower hourly pay, in order to gain flexibility in working hours. However, the evidence suggests that women who move to part-time work on having a child suffer no immediate drop in pay. But their hourly pay does grow more slowly, thus contributing to a widening of the gap.
Another explanation is employers exercising market power to discriminate against women with children. The paper does not consider this explanation.
The articles discussing the paper look at policy implications and identify various things that can be done to narrow the gap. Read the paper and articles and try answering the questions below.
Videos and podcasts
IFS: gender pay gap widens after first child Compendium of News Reports from BBC News at Six, Channel 4 News, ITV News at Ten and BBC Newsnight from Incorrigible Forever on YouTube (23/8/16)
Gender Pay Gap Hits Women With Children Hardest Sky News (23/8/16)
In Business: Supportive partner = success at work World of Business, BBC Radio 4, Peter Day (25/8/15)
Gender Pay Gap More or Less, BBC Radio 4, Tim Harford (26/8/16)
Gender pay gap: Why do mums increasingly earn less? BBC Victoria Derbyshire programme (23/8/16)
UK women still far adrift on salary and promotion as gender pay gap remains a gulf The Guardian, Katie Allen (23/8/16)
Gender pay gap: mothers returning to work earn a third less than men The Telegraph, Tim Wallace (23/8/16)
Mothers’ pay lags far behind men BBC News (23/8/16)
Four ways the gender pay gap isn’t all it seems BBC News Magazine, Simon Maybin (29/8/16)
Six ways to tackle the gender pay gap BBC News, Emma Atkinson (23/8/16)
Wage gap for UK women unchanged in 20 years Financial Times, Gemma Tetlow (23/8/16)
The UK’s slow march to gender pay equality Financial Times (23/8/16)
Gender Pay Gap For Mothers Widens For 12 Years After Having Children, New Research Finds Huffington Post, Jack Sommers (23/8/16)
Motherhood costs women a third of their salary compared to men, report reveals Independent, Joe Watts (23/8/16)
The gender pay gap means that more women will be in poverty later in life – but there is something the government can do Independent, Claire Turner (26/8/16)
Gender pay gap won’t close until 2069, says Deloitte The Guardian, Katie Allen (24/9/16)
Papers and Reports
Gender wage gap grows year on year after childbirth as mothers in low-hours jobs see no wage progression IFS Press Release (23/8/16)
The Gender Wage Gap IFS Briefing Note BN18, William Elming , Robert Joyce and Monica Costa Dias (23/8/16)
Women in STEM: Technology, career pathways and the gender pay gap Deloitte (September 2016)
Gender pay differences: Annual Survey of Hours and Earnings: 2015 Provisional Results ONS Statistical Bulletin (18/11/15)
All data related to Annual Survey of Hours and Earnings: 2015 Provisional Results ONS datasets (18/11/15)
ASHE 1997 to 2015 selected estimates (See Tables 1 to 4, 6 and 9) ONS dataset (18/11/15)
All Employees – ASHE: Table 1 ONS dataset (18/11/15)
- Identify possible reasons for the wage gap between men and women.
- Why is the median wage gap different from the mean wage gap?
- Why is the wage penalty for periods without work greater for more highly educated women?
- To what extent is the gender wage gap a reflection of marginal productivity differences?
- Is the gender pay gap primarily about men and women being paid differently for doing the same job?
- What evidence is provided by the Chartered Management Institute (CMI) on women’s lack of pay progression?
- What could the government do to reduce the wage gap?
- Discuss the relative effectiveness of different policy alternatives.
‘Employment has been strong, but productivity and real wages have been flat.’ This is one of the key observations in a new OECD report on the state of the UK economy. If real incomes for the majority of people are to be raised, then labour productivity must rise.
For many years, the UK has had a lower productivity (in terms of output per hour worked) than most other developed countries, with the exception of Japan. But from 1980 to the mid 2000s, the gap was gradually narrowing. Since then, however, the gap has been widening again. This is illustrated in Chart 1, which shows countries’ productivity relative to the UK’s (with the UK set at 100). (Click here for a PowerPoint.)
Compared with the UK, GDP per hour worked in 2013 (the latest data available) was 28% higher in France, 29% higher in Germany and 30% higher in the USA. What is more, GDP per hour worked and GDP per capita in the UK fell by 3.8% and 6.1% respectively after the financial crisis of 2007/8 (see the green and grey lines in Chart 2). And while both indicators began rising after 2009, they were still both below their 2007 levels in 2013. Average real wages also fell after 2007 but, unlike the other two indicators, kept on falling and by 2013 were 4% below their 2007 levels, as the red line in Chart 2 shows. (Click here for a PowerPoint.)
Although productivity and even real wages are rising again, the rate of increase is slow. If productivity is to rise, there must be investment. This could be in physical capital, human capital or, preferably, both. But for many years the UK has had a lower rate of investment than other countries, as Chart 3 shows. (Click here for a PowerPoint.) This chart measures investment in fixed capital as a percentage of GDP.
So how can investment be encouraged? Faster growth will encourage greater investment through the accelerator effect, but such an effect could well be short-lived as firms seek to re-equip but may be cautious about committing to increasing capacity. What is crucial here is maintaining high degrees of business confidence over an extended period of time.
More fundamentally, there are structural problems that need tackling. One is the poor state of infrastructure. This is a problem not just in the UK, but in many developed countries, which cut back on public and private investment in transport, communications and energy infrastructure in an attempt to reduce government deficits after the financial crisis. Another is the low level of skills of many workers. Greater investment in training and apprenticeships would help here.
Then there is the question of access to finance. Although interest rates are very low, banks are cautious about granting long-term loans to business. Since the financial crisis banks have become much more risk averse and long-term loans, by their nature, are relatively risky. Government initiatives to provide finance to private companies may help here. For example the government has just announced a Help to Grow scheme which will provide support for 500 small firms each year through the new British Business Bank, which will provide investment loans and also grants on a match funding basis for new investment.
OECD: UK must fix productivity Economia, Oliver Griffin (25/2/15)
The UK’s productivity puzzle BBC News, Lina Yueh (24/2/15)
OECD warns UK must fix productivity problem to raise living standards The Guardian, Katie Allen (24/2/15)
Britain must boost productivity to complete post-crisis recovery, says OECD International Business Times, Ian Silvera (24/2/15)
OECD urges UK to loosen immigration controls on skilled workers Financial Times, Emily Cadman and Helen Warrell (24/2/15)
OECD Economic Surveys, United Kingdom: Overview OECD (February 2015)
OECD Economic Surveys, United Kingdom: Full report OECD (February 2015)
- In what ways can productivity be measured? What are the relative merits of using the different measures?
- Why has the UK’s productivity lagged behind other industrialised countries?
- What is the relationship between income inequality and labour productivity?
- Why has UK investment been lower than in other industrialised countries?
- What are zombie firms? How does the problem of zombie firms in the UK compare with that in other countries? Explain the differences.
- What policies can be pursued to increased labour productivity?
- What difficulties are there in introducing effective policies to tackle low productivity?
- Should immigration controls be lifted to tackle the problem of a shortage of skilled workers?
What is the relationship between the degree of inequality in a country and the rate of economic growth? The traditional answer is that there is a trade off between the two. Increasing the rewards to those who are more productive or who invest encourages a growth in productivity and capital investment, which, in turn, leads to faster economic growth. Redistribution from the rich to the poor, by contrast, is argued to reduce incentives by reducing the rewards from harder work, education, training and investment. Risk taking, it is claimed, is discouraged.
Recent evidence from the OECD and the IMF, however, suggests that when income inequality rises, economic growth falls. Inequality has grown massively in many countries, with average incomes at the top of the distribution seeing particular gains, while many at the bottom have experienced actual declines in real incomes or, at best, little or no growth. This growth in inequality can be seen in a rise in countries’ Gini coefficients. The OECD average Gini coefficient rose from 0.29 in the mid-1980s to 0.32 in 2011/12. This, claims the OECD, has led to a loss in economic growth of around 0.35 percentage points per year.
But why should a rise in inequality lead to lower economic growth? According to the OECD, the main reason is that inequality reduces the development of skills of the lower income groups and reduces social mobility.
By hindering human capital accumulation, income inequality undermines education opportunities for disadvantaged individuals, lowering social mobility and hampering skills development.
The lower educational attainment applies both to the length and quality of education: people from poorer backgrounds on average leave school or college earlier and with lower qualifications.
But if greater inequality generally results in lower economic growth, will a redistribution from rich to poor necessarily result in faster economic growth? According to the OECD:
Anti-poverty programmes will not be enough. Not only cash transfers but also increasing access to public services, such as high-quality education, training and healthcare, constitute long-term social investment to create greater equality of opportunities in the long run.
Thus redistribution policies need to be well designed and implemented and focus on raising incomes of the poor through increased opportunities to increase their productivity. Simple transfers from rich to poor via the tax and benefits system may, in fact, undermine economic growth. According to the IMF:
That equality seems to drive higher and more sustainable growth does not in itself support efforts to redistribute. In particular, inequality may impede growth at least in part because it calls forth efforts to redistribute that themselves undercut growth. In such a situation, even if inequality is bad for growth, taxes and transfers may be precisely the wrong remedy.
Inequality ‘significantly’ curbs economic growth – OECD BBC News (9/12/14)
Is inequality the enemy of growth? BBC News, Robert Peston (6/10/14)
Income inequality damages growth, OECD warns Financial Times, Chris Giles (8/10/14)
OECD finds increasing inequality lowers growth Deutsche Welle, Jasper Sky (10/12/14)
Revealed: how the wealth gap holds back economic growth The Guardian, Larry Elliott (9/12/14)
Inequality Seriously Damages Growth, IMF Seminar Hears IMF Survey Magazine (12/4/14)
Warning! Inequality May Be Hazardous to Your Growth iMFdirect, Andrew G. Berg and Jonathan D. Ostry (8/4/11)
Economic growth more likely when wealth distributed to poor instead of rich The Guardian, Stephen Koukoulas (4/6/15)
So much for trickle down: only bold reforms will tackle inequality The Guardian, Larry Elliott (21/6/15)
Record inequality between rich and poor OECD on YouTube (5/12/11)
The Price of Inequality The News School on YouTube, Joseph Stiglitz (5/10/12)
Reports and papers
FOCUS on Inequality and Growth OECD, Directorate for Employment, Labour and Social Affairs (December 2014)
Trends in Income Inequality and its Impact on Economic Growth OECD Social, Employment and Migration Working Papers, Federico Cingano (9/12/14)
An Overview of Growing Income Inequalities in OECD Countries: Main Findings OCED (2011)
Redistribution, Inequality, and Growth IMF Staff Discussion Note, Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides (February 2014)
Measure to Measure Finance and Development, IMF, Jonathan D. Ostry and Andrew G. Berg (Vol. 51, No. 3, September 2014)
OECD Income Distribution Database: Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income ONS
- Explain what are meant by a Lorenz curve and a Gini coefficient? What is the relationship between the two?
- The Gini coefficient is one way of measuring inequality. What other methods are there? How suitable are they?
- Assume that the government raises taxes to finance higher benefits to the poor. Identify the income and substitution effects of the tax increases and whether the effects are to encourage or discourage work (or investment).
- Distinguish between (a) progressive, (b) regressive and (c) proportional taxes?
- How will the balance of income and substitution effects vary in each of the following cases: (a) a cut in the tax-free allowance; (b) a rise in the basic rate of income tax; (c) a rise in the top rate of income tax? How does the relative size of the two effects depend, in each case, on a person’s current income?
- Identify policy measures that would increase both equality and economic growth.
- Would a shift from direct to indirect taxes tend to increase or decrease inequality? Explain.
- By examining Tables 3, 26 and 27 in The Effects of Taxes and Benefits on Household Income, 2012/13, (a) explain the difference between original income, gross income, disposable income and post-tax income; (b) explain the differences between the Gini coefficients for each of these four categories of income in the UK.
With the full impact of the fiscal austerity measures yet to come, the fall in unemployment revealed in the latest ONS labour market release is probably a lull before the storm. Nonetheless, in the three months to July unemployment fell by 8,000 to 2.467 million, while the rate of unemployment – the number of people unemployed expressed as a percentage of those economically active – fell from 7.9% from 7.8%. But, within the ONS release we again saw an increase in the number of people who are long-term unemployed.
The number of people aged 16 or over who have been unemployed for at least 12 months stood at 797,000 in the three months to July. This represents an increase of 15,000 over the previous 3 months. While the pace of increase appears to have slowed – the number had risen by 100,000 in the three months to April – the pool of people who can be described as long-term unemployed is undoubtedly of much concern. To put this number into perspective, it means that of the 2.467 million people unemployed 32.3% have been so for at least a year. In effect, one-third of the pool of unemployed can now be thought of as long-term unemployed.
Of the long-term unemployed, 547,000 or 69% are male. This is the highest number of males described as long-term unemployed since the three months to May 1997 – the month when the Labour government of Tony Blair came to power. But, the historical context for female long-term unemployment is even bleaker. A further increase of 4,000 over the 3 months to July means that the number of females who are long-term unemployed has risen to 250,000. The last time long-term female unemployment was higher than this was in the three months to September 1995.
An obvious concern with the expectation that the total unemployment figure will grow in the not too distant future is that the number of long-term unemployed people will carry on growing. Of course, this not only has unfortunate implications for these individuals but for society and the economy more generally. Consequently, it raises some important and very difficult economic and social policy questions. One important economic question, for instance, is how we tackle the erosion of human capital as more and more individuals are divorced for longer and longer from the labour market. An erosion of human capital affects individuals and society not only in the present, but in the future too.
UK unemployment falls by 0.1 pct to 7.8 pct Associated Press (16/9/10)
Wasteland: Europe stalked by spectre of mass unemployment Independent, Alistair Dawber (16/9/10)
Job fears despite employment rise Telegraph, Angela Monaghan (16/9/10)
Part-time jobs fuel record rise in employment Express, Macer Hall (16/9/10)
UK unemployment falls to 2.47 million BBC News (15/9/10)
Latest on employment and unemployment Office for National Statistics (15/9/10)
Labour Market Statistics, September 2010 Office for National Statistics (15/9/10)
Labour market data Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
- If the overall number of unemployed people is falling why is the number of long-term unemployed rising?
- The current unemployment rate is 7.8%. But, what do we mean by the unemployment rate?
- Draw up a list of the problems that you think arise out of long-term unemployment.
- Use your list to draw up a series of potential policies to tackle these problems.
- Why do some economists think the current fall in unemployment is a ‘lull before the storm’? What impact might this have on the number of people long-term unemployed?
On the 24th May the new collation government released details of its plan to make £6.2 billion of savings (see HM Treasury press release). As part of this package, The Department for Business, Innovation and Skills (BIS) – headed by Business Secretary, Vince Cable – will make savings of £836 million, equivalent to 3.9% of its budget. One of the areas identified by BIS for ‘savings’ is the higher education budget, which will lose £200 million. Also targeted are the Regional Development Agencies (RDAs) in England. These are the strategic drivers of economic development in the English regions. They will lose £74 million from BIS as well as a further £196 million from other government departments.
So what is the Department for Business, Innovation and Skills charged with doing? Well, according to the BIS website it is charged with
…building a dynamic and competitive UK economy by: creating the conditions for business success; promoting innovation, enterprise and science; and giving everyone the skills and opportunities to succeed. To achieve this it will foster world-class universities and promote an open global economy.
In describing what BIS does, BIS states that it
…brings all of the levers of the economy together in one place. Our policy areas – from skills and higher education to innovation and science to business and trade – can all help to drive growth.
In other words, the BIS is intended to be a key player in affecting the UK’s long-term rate of economic growth. Since 1948 the average annual rate of growth of the UK economy, as measured by constant-price GDP (real GDP), is 2.4%. Of course, a key question is how we might do better. But, there is a significant disagreement amongst economists about the role that government should play in advancing long-term economic growth. This debate largely centres both on how activist a government should be and on the types of policy that a government should pursue.
The ’case for industrial activism’ is made in the leading article of The Independent on 25 May. It nicely encapsulates some of the policy issues surrounding long-term growth and, in reflecting on the cuts to BIS, identifies the role it believes BIS should play.
…we need to think clearly about the proper role for the state in the private sector. There is no future in a return to the heavy-handed statism of the 1970s or the discredited policy of trying to “pick winners”. The guiding principle as far as industrial policy is concerned is that government should do what the free market will not, or cannot. The function of the DBIS should be to increase Britain’s long-term growth potential.
This means supporting industries that cannot get funding from the capital markets and funding important research that would otherwise go unperformed. Most of all, it means education. Britain cannot compete successfully with the rising economic powers of China and India, which have access to a vast pool of cheap workers, on labour costs. Our only hope for advantage lies in our human capital. That makes the case for intensive vocational and advanced skills training.
Therefore, industrial activism, as envisaged by The Independent is about correcting for market failures and ensuring that there is sufficient investment in education and training.
The Confederation of British Industry, which describes itself as the ‘UK’s top business lobbying organisation’, in its press release of 19 May identified the following as ‘essential’ for delivering growth:
• Establishing competitive business taxes
• Developing a strong banking system
• Skilling students for the future and strengthening apprenticeships
• Attracting and cultivating enterprise and industry
• Prioritising energy security
• Working towards a low-carbon economy
• Developing the infrastructure for economic growth
The CBI too identifies the significance of skills. But, it believes that in the previous decade growth was driven too much by government spending (as well as by unsustainable growth in the financial sector). It argues that the private sector, along with trade, needs to be ‘the growth engine for the future’.
What is interesting about the proposed cuts to BIS is that they very visibly draw attention to the differences that exist among commentators, industrialists and economists as to industrial policy. In particular, they ignite the debate about the most effective role that a government can play in promoting long-term growth. Don’t expect too much agreement any time soon!
Government announces £6.2 billion of savings in 2010-11 HM Treasury (24/5/10)
Private sector growth and public sector reform needed to restore economy CBI (19/5/10)
The case for industrial activism Independent (25/5/10)
Public sector deficit cuts: Higher education and RDAs hit hard in BIS efficiency savings plan eGov Monitor (25/5/10)
George Osborne outlines details of £6.2 billion spending cuts BBC News (24/5/10)
Government axes £836 billion from business budget Growing Business (24/5/10)
Department for Business, Innovation and Skills hit hard by spending cuts Training Journal, Martin Kornacki (24/5/10)
Business department hammered as Osborne swings the axe Management Today (24/5/10)
Big cuts signal end to activism Financial Times, Jean Eaglesham, Andrew Bounds and Clive Cookson (24/5/10)
Businesses take a pounding as coalition cuts hit home London Evening Standard, Hugo Duncan (24/5/10)
Vince Cable explains spending cuts u-turn Newsnight (24/5/10)
- What do you understand by long-term growth? How does this differ from short-run growth?
- Evaluate the argument advanced by The Independent for industrial activism? What sort of policies might fall under this description?
- In considering the CBI’s list of influences on long-term economic growth outline what role you think government could play and what policies it could enact.
- Do you think the savings being made by BIS signal a new policy approach to delivering long-term economic growth in the UK?