VoxEU Column Labour Markets

What are the reasons for international gender wage gaps?

Recent empirical work finds a strong negative correlation between competitive markets and gender wage gaps, in particular when competitive markets are measured by the components “free trade”, “absence of regulation” and “legal structure”.

Despite a considerable decline in the gender wage gap since the 1960s, women still earn significantly lower wages than men. Over the past 40 years, women have substantially improved their labour market qualifications – they accumulate more labour-market orientated education, have more job-experience and fewer work interruptions. Moreover, technological change and industrial restructuring has led to an increased demand for white-collar workers. Nevertheless, empirical evidence from an international meta-analysis by Doris Weichselbaumer and Rudolf Winter-Ebmer indicates that men with similar labour market qualifications as women earn a wage premium of 25% on average and that this wage premium varies considerably between countries.1 Moreover, this unexplained wage premium declined by only 0.2% per year in the last 30 years.

Much of the debate in economics concerns the questions whether this wage premium is due to discrimination, and whether institutional changes – in particular more competitive markets – can bring an end to unequal labour market outcomes of men and women, or whether some form of anti-discrimination law is necessary.

Francine D. Blau and Lawrence M. Kahn use international data to show that general wage inequality in a country has a quantitatively big effect on the gender wage gap, since women are typically on the lower end of the wage distribution: a more compressed male wage structure as well as a higher female net supply lead to lower gender pay gaps.

Moreover, the prevalence of collective bargaining or minimum wages can reduce the gender wage differential.2

Nevertheless, at least part of the gender wage gap cannot be explained by the wage structure or differences in labour market qualifications, and thus is attributed to discrimination. This unequal treatment has motivated policymakers to pass national laws and adopt international conventions that combat discrimination.3 Evidence across countries and time shows that the ratification of international conventions supporting equal treatment of men and women has a strong and significant impact on the gender wage residual.4 While one might suspect that equal treatment laws are signed by societies which have a general tendency for equal treatment of the sexes, instrumental variables estimates – taking care of possible endogeneity of the signing of international conventions – are supporting the conclusion that it is indeed the ratification of anti-discrimination laws which causes equal treatment. It should be noted that this measure of the impact of signing an international convention should not be attributed to the sole impact of such a convention however: typically such conventions trigger other national policies which are fostering integration of females in the workforce, like national equal treatment laws, measures facilitating the compatibility of work and family duties and the like.

Also another result speaks against the hypothesis that the signing of international conventions is just a consequence of a national stance towards equal treatment rather than being causal for reduced gender wage gaps: whenever a country has signed “protective conventions” – which were designed to protect women against unpleasant working times and conditions – gender wage residuals increase. This is exactly what the theory of crowding in the labour market would predict, but it does not back the hypothesis that societies with a generally women-friendly climate have lower gender wage residuals.

Economic conditions also play a role in shaping the extent to which discrimination can affect the wage gap. Gary S. Becker was the first to claim that more competition can do away with discriminatory behaviour of firms.5 He argued that employers (like customers or coworkers) might have a “taste for discrimination” and maximise utility, not profit, by employing preferably men and paying them higher wages. As a consequence, competition should expunge discrimination in the long run, since non-discriminatory employers can produce at lower costs by hiring more female workers.

Becker concentrated on competition in the product market as the prime mechanism which should eliminate discrimination, but arguments can be made that the competitiveness in a country at large, i.e. the prevalent market orientation more generally, could do the job. The absence of regulation, the freedom to exchange of goods and services, just like the protection of private property, are paramount aspects of market orientation. They facilitate the entry of firms into markets, force less efficient enterprises out of the market and lead to the dissolution of monopolies. As a result, open and covert discrimination against women by clubs, networks and social norms, becomes less possible and females may find it easier to compete with males in the labour market. On the other hand, less regulation and state intervention will diminish the role of legislature to influence wage setting which may increase the gender wage gap. Market orientation can, therefore, have both a limiting as well as furthering influence on the gender wage gap.

In recent work, we use two different approaches to explore the relation between market orientation and gender wage gaps in international data.6 The first approach employs meta-analysis data and takes advantage of the fact that many studies already exist which use national data sources to the best possible extent. The second approach uses comparable micro data from the International Social Survey Programme (ISSP), which allows calculating internationally consistent gender wage residuals in the first place. We use the Index of Economic Freedom assembled by the Fraser Institute of Vancouver that, by its definition, measures the market orientation and competitive climate of a country, and relate it to a country’s wage gap.

Both databases lead to the same conclusion: there is a strong negative correlation between competitive markets and gender wage gaps, in particular when competitive markets are measured by the components “free trade”, “absence of regulation” and “legal structure”. These indicators are strongly related to competitiveness in the product market and are, therefore, backing Becker’s taste for discrimination model. This research therefore indicates that the competitiveness of the economy also reduces gender inequalities in wages - just like equal treatment legislation.




1 Weichselbaumer, Doris and Rudolf Winter-Ebmer: A Meta-Analysis on the International Gender Wage Gap, Journal of Economic Surveys, 19/3, 2005, 479-511.
2 Blau, Francine D. and Lawrence M. Kahn: Understanding International Differences in the Gender Pay Gap, Journal of Labor Economics, 21/1, 2003, 106-144.
3 Two ILO conventions are directed at prescribing equal treatment: the Equal Remuneration Convention (C100) and the Discrimination (Employment and Occupation) Convention (C111).
4 Weichselbaumer, Doris and Rudolf Winter-Ebmer: The Effects of competition and equal treatment laws on gender wage differentials, Economic Policy 50, 2007,
5 Becker, Gary S.: The Economics of Discrimination, University of Chicago Press, Chicago,
6 Zweimüller, Martina, Doris Weichselbaumer and Rudolf Winter-Ebmer: Market Orientation and Gender Wage Gaps: An International Study, CEPR Discussion Paper 6388, July 2007.



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