Gender Pay Gap: "It’s about how work gets organized"

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Dr. Moritz Drechsel-Grau is a scientist at LMU’s Faculty of Economics, where he conducts research into inequality. To coincide with International Women’s Day on 8 March, he explains how women in Germany earn less than men on average, and why this is so.

How is Germany doing with equality between women and men on the labor market in 2024?

Moritz Drechsel-Grau: Sadly, not a lot has happened in recent decades. And not just in Germany: It is the same in many other countries. The pay gap between men and women is very persistent. According to the Federal Statistical Office, women’s average hourly wage today is about 18 percent lower than that of men. In 2000, the gap was not much wider, at 21 percent. Most of the difference is due to the fact that women tend to work in lower-paid jobs, which is partly because far more women work part-time. It follows that, in terms of annual earnings, the gap between women and men is far higher, at nearly 40 percent.

Why have women stopped catching up?

The 1980s and 1990s were the period when the number of women in gainful employment increased sharply. The income gap narrowed as more mothers began working again. But there are still lots of women who work part-time.

Gender norms aside, I think it is about how the world of work gets organized. The question is: How well can management positions with heavy responsibilities be combined with family life? It is clearly apparent that, when the first child arrives, women’s probability of working full-time – and earning accordingly – takes a huge hit. This is not the case for men.

Do men and women earn equal pay before they start a family?

They do, precisely. Until they turn 30 or so, men’s and women’s incomes follow a very similar trajectory. When the first child arrives, the income curve for women dips dramatically. The literature on the subject speaks of a ‘child earnings penalty’, equating the loss of income that occurs after the birth of the first child with a penalty or punishment. For men, the penalty is virtually zero. Yet for women, even ten years after the birth of the first child, the penalty still stands at more than 50 percent compared to the last year before the birth.

There are variations across different countries. The ‘child earnings penalty’ is lower in Scandinavia than it is here. In international comparison, Germany and Austria perform very badly.

That is partly due to norms and role models. On the other hand, it also has to do with a lack of good child care options. And the two factors are mutually reinforcing.

And women have no chance of catching up after this slump?

It is difficult. Wages tend to recover when women resume their career. But many women then go into part-time employment, with the result that their income does not really recover. There are many jobs that simply cannot be done on a part-time basis as things stand today. That imposes limitations on career development.

How do things look for self-employed women?

There are very sizable differences in the money earned by individuals who are not in dependent employment, too. Indeed, the gap in incomes between men and women who are self-employed or entrepreneurs is even wider than it is for employees.

If you only look at income from dependent employment, the income disparity between genders shrank slightly between 2001 and 2016. However, if you look at all forms of income, including those from self-employed work and income from companies’ profits, the gap between men and women actually grew larger in the same period.

How high is this average income?

Regrettably, we only had data up to 2016 for our analysis. In that year, the average salary was around 45,000 euros for a man in dependent employment and just under 28,000 for a woman. The average self-employed man earns more than 100,000 euros, the average womon slightly less than 50,000 euros. Among entrepreneurs, the average is roughly 76,000 for men and, again, just under 50,000 euros for women.

Why care work is distributed unequally

What do you think needs to change so that women are at less of a disadvantage on the labor market and so that the gap can be narrowed?

Again, we come back to the question of how couples divide up the work of child care. On the one hand, that depends on people’s preferences and norms, which are not so easy to influence. But there are also policy measures that make a difference. Additionally, it would make sense to structure the working environment in such a way that even for someone with family obligations – which, I am sad to say, are still very unequally distributed between men and women in Germany – it is possible to take on positions that are highly paid.

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What policy measures are you talking about in Germany, for example?

One lever that certainly could – and, in my opinion, should – be activated is to look at joint tax declarations for married couples, because this arrangement creates a huge incentive for couples to divide up child care unequally. If the father already has a better position and earns more money, the tax system actually favors this discrepancy. It then makes sense for couples to say: One person does the child care work and the other continues to earn the money. Other countries where income inequalities are much less pronounced between men and women – in Scandinavia, for instance – abolished this form of income taxation as far back as the 1970s. We could think about transforming the joint tax declaration arrangement into a form of family subsidy that is linked to children rather than marital status.

And what would companies have to do?

The issue here is how work gets organized within a company. Claudia Goldin recently won the Nobel Prize for Economics for her research into the significance of family-unfriendly working conditions for the gender pay gap. Precisely because of the shortage of skilled labor, companies have to fight to win employees, and women with children are a large source of potential. So, companies have an inherent incentive to create conditions that will enable them to retain talented women. The question is whether this will go so far as to create a model that strikes a balance between family and career in higher management positions. Under the conditions we have in place today, that is becoming increasingly difficult even for men who want to shoulder their responsibility for children and don’t want to still be stuck in a conference call at eight o’clock at night. The next question is: Why should it mostly be women who take a back-seat role as far as their career is concerned? That has to do with social roles and norms.

In other words, women earn less not because of individual women’s decisions, but because of structural factors?

The structures in place naturally have a powerful influence on the personal decisions made by women and men. Deciding whether to take up a social profession or go for a job in banking obviously also has to do with individual preferences. Women tend to work more in jobs that are less well paid. But here again, if I know that being a teacher makes it easier for me to combine family life with my profession, and if that is important to me, then it is more likely that I will move into this job rather than one where I know in advance: If I don’t answer my mails in the evening, I will probably find myself at a dead end.

Is this gap in income development between women and men visible even when women return to their job after only one year away on parental leave?

In principle, the lion’s share of the income gap between men and women can be explained by the number of hours worked. The issue is therefore how quickly you return to your job and how many hours you work. In Germany, however, many women engage only in marginal employment. This is another concept that tends to lead to fewer hours being worked per week, because there is an limit beneath little or nothing has to be paid in taxes and for social insurance.

That obviously has long-term consequences. Women accumulate a smaller number of pension points, leading to a wide gap between men and women in terms of old-age poverty. That is simply because men work much longer and pay higher contributions in the course of their career, which affects their pension.

Does this mean that generations of women are heading for old-age poverty?

…or that they have already reached it. This is less the case for the current generation of mothers, because many of them already work more than women did 30 years ago. But the fact that men aged 30 to 50 work full-time for virtually this entire period, while many women work part-time, naturally also affects differences in income after retirement.

Publication:

Moritz Drechsel-Grau, Andreas Peichl, Kai D. Schmid, Johannes F. Schmieder, Hannes Walz, Stefanie Wolter: Inequality and income dynamics in Germany. In: Quantitative Economics 2022