Does Diversity Hire Mitigate the Gender Wage Gap?
by Ethan Choi
If you are a first or second-year UK undergraduate student applying to insight programmes or internships in finance or law, you should be no stranger to these diversity categories. Aimed at helping firms access a larger talent pool and build a progressive, all-inclusive company culture, diversity programmes aim to diminish the prevalence of unconscious biases in the workplace. Notwithstanding, the efficacy and return-on-investment of these diversity programmes in fostering equity are widely contested matters. These principles are often undergirded by what is commonly termed as diversity, equity, and inclusion (DEI).
In the corporate world, comprising largely male-dominated sectors (European Commission, 2022), diversity hire works in tandem with mandatory diversity training. These training schemes encourage managers and employees of all levels to police and challenge their deep-ingrained internal and external biases. It follows that a firm’s indicator – at least to the public gaze – of their faithfulness to DEI correlates to the extent to which they employ such policies.
An ostensibly reasonable indicator of gender-based inclusivity is a negligibly low gender wage gap. (ITUC) Formally, the gender wage gap measures the difference between the median earnings of women and median earnings of men. The age-old question stands: do the large sums of expenditure poured into diversity training reduce the gender pay gap"?
To understand this question, it is crucial to uncover the rationale behind diversity training. In 2023, Goldman Sachs agreed to pay $215 million USD to settle a gender discrimination lawsuit. The lawsuit claimed that female Vice Presidents were paid 20% less than their male peers. Not only were cases of sexual harassment and misogyny condoned, but women also faced great ostracism and had, in general, significantly fewer promotional opportunities and less upwards mobility (Goldman Gender Case, 2023). Programs to reduce gender bias are not new. They existed since the 1960’s and garnered popularity as high-profile lawsuits started to tarnish the reputation of firms in high finance.
Goldman Sachs, alongside the lawsuit, simultaneously heralds a program supporting women’s economic empowerment. They also run a high-profile, intersectional scheme that narrows opportunity gasps for women of marginalised ethnicities through offering philanthropic support. (Goldman Gender Case, 2023) This irony is not unprecedented. Figures show that investment banks often have high gender wage gaps albeit claiming to be forerunners in their approaches to DEI.
The figures above are given as a percentage of male earnings. For example, female workers in Deutsche Bank earn, on average 69.2% the wage of male earners in 2023.
The figures demonstrate median hourly pay gender pay gaps lie in the mid-twenties for both banks. The prevailing sentiment is to highlight the gross injustice that for every 100 dollars a man works at a high-finance investment bank, a woman makes less than 80 dollars. However this makes the tacit and often untenable assumption that the man and woman have commensurate skills, and that systemic discrimination was what inhibited the woman from scaling the corporate ladder.
In fact, we must distinguish between unequal pay and the gender wage gap. Unequal pay underscores the offering of differential wages due to factors originating from no fault of their own. It has been outlawed in most countries since the mid-20th century. For example, in the USA, the Civil Rights Act of 1964 legally prohibits workplace discrimination. Meanwhile, the gender wage gap refers to a difference in average wages across the labour market.
Does diversity training bring down the gender wage gap? To answer this, we have to investigate the origins of the gender wage gap.
Origins of the gender wage gap
Claudia Goldin, in her Nobel Prize-winning studies on the gender wage gap, identified greedy wages, the ‘price of being female’ and implicit gender biases as the driving force behind the gender wage gap. (Goldin, 2021) To motivate this, Goldin produces a historical survey of the proportion of working women in what she terms the “U-shaped curve”.
The U-shaped curve measures the proportion of women (or married women) in employment over time. While it may seem like a growing economy is correlated with the proportion of women in work, this hardly holds true in developing nations. In the 18th century or in modern-day developing nations, women would work alongside their husbands in subsistence farming or agriculture.
The labour force participation rate of women subsequently declines as technological innovation occurs. Jobs in the primary sector are replaced by automation due to increased relative productivity, agricultural products are bought and outsourced and there is lowered demand for women’s labour in agriculture.
In the western world, there are prevalent stigmas against women working in the manufacturing sector. When a woman performs manual labour, she signals that her husband is neglectful of the family. This norm is weakened when women work in white-collar jobs as they are given a license to work. (Goldin, 2023)
When incomes increase, the decline in labour force participation occurs primarily due to an income effect¹ that dominates the substitution effect². When education levels are low, an increase in household income would divert education towards males rather than females. The income effect would lower female labour participation as the stigma against women working in the manual sector becomes more eminent when incomes increase. (Goldin, 2021)
As incomes rise even more, females start to receive more education too, and begin working in white-collar jobs. Having previously established that such a stigmatised norm is less prevalent in white-collar jobs, the elimination of said stigma causes the substitution effect to increase and the income effect to fall as households no longer face the stigma of women working in manufacturing jobs. Thus, the female labour participation rate increases.
The increasing portion of the U-shaped curve occurs when increased income causes increased schooling for women. As you can probably tell from stories of workplace conditions, the proportion of women in white-collar sectors has been, and is steadily increasing (World Bank). The stigma against women working in white-collar jobs, especially in MEDCs, is significantly less than women working in manual labour. The income effect falls as women face lesser stigma compared to working in manual labour. At this point, the substitution effect of the demand for labour exceeds the income effect.
The U-shaped curve demonstrates two aspects of gender-driven labour dynamics. Firstly, economic growth was not the driver of a level playing field between genders in the employment market. Secondly, social norms and expectations of women in the labour force are a significant determinant of this proportion. We will also show that these expectations are also a determinant of female employees’ decisions to take on less demanding jobs, to quit work and to be paid less than their male counterparts.
Greedy wages, the ‘price of being female’ and diversity training
Claudia Goldin claims that “greedy jobs” are the main contributor to a widening gender pay gap. These are jobs that pay disproportionately more on a per-hour basis for longer hours. Additionally, greedy jobs pay more if the hours to be worked are uncertain and not precisely dictated in contracts. They are jobs with minimal time flexibility.
For example, investment banking jobs at companies like Goldman Sachs and Deutsche Bank have some of the most demanding working hours out of any profession. The abundance of greedy jobs in these banks, combined with how said greedy jobs disproportionately disadvantage women, explain the egregious gender wage gap. By this, women are less likely to remain in said jobs even if they are as qualified or more qualified than their male counterparts.
¹ The income effect measures the change in demand of a good due to changes in purchasing power, such as a change in income.
² The substitution effect occurs when an individual replaces a good with another good due to changes in relative prices.
Greedy wages also contribute towards economic inequality (European Commission). Earnings on the upper extreme of the income distribution have skyrocketed as the Leveraged Finance associate at Deutsche Bank burning the midnight oil for weeks on end has a more optimistic chance at bonuses and promotions than the ordinary salesperson.
Do babies bring job prospects down?³ Somewhat. Non-mothers have the capability to dedicate themselves to institutions that seek the undivided attention of the employee. What happens when the non-mother decides to have kids? In a conventional heterosexual couple, one person (usually the wife) adopts the greedy job of parenting, while relegating any remaining time to a flexible job that pays disproportionately less.
Therefore, unless domestic work and child-rearing becomes a shared responsibility (termed “couple equity”), the gender gap will persist regardless of diversity training. Diversity training has no bearing on addressing greedy work. Consider your upbringing or the caretaking habits of parents around you. Why is it viewed as a rare hallmark of progressivity when a man brings his child to pre-school while his wife works her semi-flexible 9-5?
Consider a heterosexual couple where the man has a 40-hour work week and the woman has a 20-hour work week. Due to increasing returns to labour, the couple would be making less than if the man had a 60-hour work week and the woman did not work even if the total hours worked are the same. Men and women start on roughly equal footing right after college graduation due to a lack of familial obligations. The wage segregation does not start there. It is only after these obligations kick in that the average man and the average woman start working in dramatically different sectors. Women who start in these greedy jobs do not advance as quickly as their male counterparts as they possess the stereotypical social responsibility of raising families. Therefore, they are relegated to working in more flexible jobs, or in firms or institutions that are less demanding of their time. Notably, no amount of diversity training on microaggressions or implicit sexism will directly solve this structural problem, though we will show later that diversity training that drives changes to the way wages and labour-hours are negotiated may reduce the gender wage gap.
Could the gender wage gap occur due to social norms categorising the majority of men and women into different careers? Goldin’s econometric analysis says that this would “wipe out only, at most, a third of the difference in earnings between men and women” (Goldin, 2021). One measure of segregation may be that women naturally position themselves in jobs with more flexible work hours, suggesting that such segregation occurs due to women categorising and filtering available jobs for them.
Meanwhile, outright discrimination, although rare, is still prevalent in many careers. Much of this discrimination shines through implicit bias. In this case, diversity training holds great merit. A 2000 paper by Cecilia Rouse and Claudia Goldin (Rouse, 2000) shows that in the audition procedures for symphony orchestras, the procedure of blind audition produced more impartiality in hiring. Concealing the performer’s identity increased the proportion of women in symphony orchestras.
Diversity training holds merit if it aids companies in shining a light on ways to reduce the greediness of work. For example, companies could enable and encourage women to negotiate their salary ranges in a way that accounts for their reduced work-hour flexibility due to familial obligations. They could also devise a promotion and reward process that is irrespective of availability and flexibility of work. This element of company culture builds towards the social norm of allowing women to enjoy a fruitful job while not bearing the brunt of being paid disproportionately less than their male counterparts. It also bolsters the confidence of married women and women with children to increase their reservation wages⁴ to decrease the stigma associated with greedy wages. It is for this reason that Deutsche Bank’s scheme to increase the proportion of women in highly remunerated roles and to increase transparency in the wage-deciding process that their gender wage gap has slowly decreased, as shown above in Figure 2.
Covid-19 is a decisive hallmark in reducing greedy work. The popularity of work-from-home jobs demonstrated that jobs on the higher end of the earnings spectrum need not be greedy. The consultant need not travel to a foreign country and sacrifice her familial obligations anymore. Much like what dictated the U-shaped curve from becoming upwards-sloping, the burden of reducing the gender wage gap lies in transformative changes in social norms. Diversity training plays the role of reinforcing these transformative changes in a localised manner.
³ Needless to say, this question is very vague and gives rise to overgeneralisations. This question aims to illustrate the consequences of child-rearing on wage differentials, or the difference in pay between workers working similar jobs within an organisation.
⁴ The reservation wage of a worker is the lowest wage a worker is willing to accept for that type of job.
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