By István Boza & Balázs Reizer (Centre for Economic and Regional Studies – KRTK)
The gender wage gap has remained constant over the last two decades, with women earning less than men at the same level of education and occupation. The reasons for this gap are heavily debated by economists and the general public.
Recent literature in economics has shown that women earn less than men partially because they are less likely to work at firms that offer high wages to everyone. Furthermore, even if women are able to enter these high-paying firms, they earn less on average than their male co-workers. In contrast, women tend to face a smaller gender wage gap at lower-paying firms.
The reasons why women earn lower wages at high-paying firms are debated. Some economists argue that this is because women may have weaker bargaining power at these firms or may face discrimination that results in lower wages. On the other hand, the highest-paying firms may offer such non-pay characteristics as inflexible working hours or limited job security, which women may not prefer, thereby making them less willing to enter these firms or hindering their ability to earn the same wage as men. Finally, high and low-paying firms also differ in their wage structure. This may have a large impact on the gender wage gap as high-paying firms offer bonuses and require overtime hours more often, and women earn less in these types of jobs.
Our study, titled ‘The Role of Flexible Wage Components in Gender Wage Differences’ (deliverable 3.3) aimed to quantify the extent to which bonuses and overtime payments contribute to the lower share and wage of women at high-paying firms. We used novel Hungarian administrative social security records, allowing us to track the employment history and wages of 50 percent of the Hungarian population between 2003 and 2017. The data also includes information on the prevalence of bonuses and overtime payments at private sector firms.
In the first step of our analysis, we calculated gender wage differences in the Hungarian labor market using econometric methods (specifically, the AKM model after Abowd, Kramarz and Margolis, 1999). This approach enabled us to distinguish how much of the gender wage gap can be attributed to women being generally less productive and how much of it is due to women receiving a lower wage premium from their employers compared to otherwise identical men. This method is crucial because it allows us to compare firms that rely on high-skilled and low-skilled workers despite the significant raw wage differences between the two types.
Our analysis reveals that the gender wage gap in the Hungarian private sector is 22.7 percent, which is somewhat higher than the national-level wage gap of 14.7 percent (including the public sector) and the OECD average of 20 percent. Out of the total gap, 13.2 percentage points are attributable to individual differences between men and women such as age, education or the industry of their employers. Additionally, differences in employer behavior play a significant role as 9.5 percentage points of the gender pay gap can be traced to women receiving a lower firm wage premium than otherwise identical men. We further decompose this wage premium into two parts: 4.1 percentage points are due to women working at (generally) lower-paying firms, indicating a significant sorting channel favoring men. The remaining 5.4 percentage points can be attributed to either the bargaining effect or discrimination, whereby women receive lower wages than their male colleagues even within the same firm.
In the second step of our empirical analysis, we examine the impact of bonuses and overtime payments on gender wage differences. Our findings indicate that high-paying firms are more likely to offer these flexible wage components. However, women are less likely to work in jobs that provide such benefits. Specifically, only 63.4% of women receive overtime payments, while this figure is 68.4% for men. This discrepancy can almost entirely be attributed to the fact that women are more likely to work in occupations where flexible wage schemes are less prevalent.
Regarding the wage effect of flexible wages, we first note that the gender gap in firm premium is only 1 percent at firms where workers do not receive any flexible wage components, while it is linearly increasing in the share of workers with overtime or bonuses. We find that the gender gap in firm premium is expected to be 5.1 percentage points larger at firms where every worker receives bonuses compared to firms where no worker receives bonuses. This difference is 3.9 percentage points in the case of overtime payments.
We also calculate how much these within-firm differences contribute to the economy-level gender wage gap. We find that the gender wage gap would be approximately 6.2 percentage points lower if nobody received either bonuses or overtime payments on top of their base wage. This means that bonuses and overtime payments are important drivers of the gender gap, as they explain one quarter of the gender wage gap, even when taking into account individual differences in productivity.
Taken together, the results of our study suggest that policy interventions aimed at regulating bonuses and overtime payments could potentially decrease the gender pay gap. Specifically, stricter regulation of overtime work, such as higher taxes on overtime or direct restrictions, could be an effective policy tool for this purpose. However, regulating paid overtime hours alone may not be sufficient without also addressing unpaid working hours, as workers receiving bonuses tend to work more unpaid overtime.
It is also important to exercise caution when introducing such policies, as flexible wage components have a strong incentive effect that can motivate workers to work harder and earn more. Thus, if policies aimed at decreasing gender inequality by restricting flexible wages are implemented, there may be negative side effects on average productivity and wages. Ultimately, it is not within the scope of economic research to decide whether such policies are favorable to the general public or not. However, as economists, we must continue to investigate why women earn less at jobs and firms that offer bonuses and overtime payments in order to better understand and address gender wage disparities in the labor market.
Note: This blog post summarizes the key findings of deliverable 3.3. The Role of Flexible Wage Components in Gender Wage Differences, which is a part of the GI-NI project Consortium. You can read the full report here.