She, Claudia

We celebrate the end of the AEA annual meeting in Boston today, by noting one of the more common-sensical papers published in the AEA Review (April) in the past year. I.e. Claudia Goldin's A Grand Gender Convergence: Its Last Chapter. Though we doubt it will be the end of the argument about the reason for the gap in pay between men and women.

We say it's just common sense, since most of us learned in our teens that the more work you put in, the more you earn. Goldin finds that, indeed, that is the explanation for the divergence between men and women's earnings. And she's got the math and graphs to prove it. What is new from this paper is Goldin's explanation of why the difference is, in some occupations, linear (pharmacists) and in others convex or disproportional.

I.e., pharmacists who work part-time, say 60% of the hours of a full-time pharmacist, will earn about 60% of a full timer's income. But MBAs and lawyers will often find their part-time work remunerated at less than a proportionate rate to their hours.

In many workplaces employees meet with clients and accumulate knowledge about them. If an employee is unavailable and communicating the information to another employee is costly, the value of the individual to the firm will decline. Equivalently, employees often gain from interacting with each other in meetings or through random exchanges. If an employee is not around that individual will be excluded from the information conveyed during these interactions and has lower value unless the information can be fully transferred in a low cost manner.

The point is quite simple. Whenever an employee does not have a perfect  substitute non linearities can arise. When there are perfect substitutes for particular workers and zero transactions costs, there is never a premium in earnings with respect to the number or the timing of hours. If there were perfect substitutes earnings would be linear with respect to hours. But if there are transactions costs that render workers imperfect substitutes for each other, there will be penalties from low hours depending on the value to the firm.

Or, as the old saying has it, there's no I in 'team'. Some jobs require more interaction with clients and co-workers--business and law--than others do. If a person can't participate at crucial times of the day, they're less valuable to the firm. And, Goldin stresses, the major reason why some women can't participate in that way; they have children.

The flexibility employed women need to care for those children comes at a cost. They are less productive than employees (whether they be men or women) who don't require that flexibility. Therefore, they earn less.

That's fair, no?

(Thanks to Ed Conard for noticing this first)