70 | Big Picture
Using this approach, the Equal Opportunities Commission has
published research showing around 6.8 per cent of the pay divide
(6.8 per cent versus 17 per cent total divide) is attributable to
discrimination.
This leads to two conclusions. First, if the study is accurate,
just over one-third of the pay gap is due to discrimination.
Second, if the study is inaccurate, the measured residual may
overstate discrimination if it also captures what economists call
`unobservable characteristics' � differences in attitudes,
preferences and expectations. Recent research has shown that
many purported residual pay gaps from econometric research are
in fact merely evidence of model misspecification.
Data deficiencies mean that it is extremely difficult to capture
the life choices, career aspirations, attitudes and desires of those
for whom the pay divide is being measured. Unless these
attitudinal influences are accurately captured, any measured
residual will catch more than discrimination alone. As a result, a
large chunk of the residual gap is likely to be the result of model
misspecification � and the seven per cent differential cited above
will overstate the extent of discrimination.
JUST FOR A MOMENT...
Imagine that the gender pay divide is completely closed as a result
of new legislation increasing female pay by 17 per cent overnight.
What effect would this have on the economy?
It would result in lower female and/or male employment due
to the higher cost base imposed on companies
and/or
It would increase the supply of female labour � thereby
providing a downward force on earnings.
These two stylised arguments illustrate why there has to be very
clear evidence of pay discrimination before the Government should
consider new regulation or legislation.
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