The distribution of the gender wage gap

Many modernising economies are witnessing rapid growth in women’s labour force participation, in the way that today’s richer countries did. While this is often associated with women’s empowerment, simple economic theory suggests that increases in the labour supply of women will tend to depress women’s wages, potentially widening the gender wage gap. The extent to which this happens will depend upon the degree to which men and women are substitutes in the workplace.

In a new working paper (Bhalotra and Fernández, 2018), one of our key observations is that this varies across the wage distribution, in line with the task content of jobs. Recent research has analysed the degree to which machines or technology substitute individuals, documenting a polarisation of the labour market with jobs in the middle `disappearing’. We focus instead on substitutability between men and women.

Using individual data on employment and earnings in Mexico that span more than a quarter of a century (1989-2014), we capture one of the most rapid contemporary increases in women’s labour supply. We find that the polarisation of tasks is reflected in opposing effects on the gender wage gap. In particular, in high-paying occupations that are intensive in abstract and analytical skills, there is a high degree of substitutability between women and men. As a result, a large increase in (skilled) women joining the labour force may depress wages in general, but without increasing the gender wage gap. On the other hand, in low-paying occupations in which individuals do manual or routine tasks, we find that women and men are poor substitutes. Thus, increases in (low skilled) women joining the labour force will tend to widen the gender wage gap.

While we have highlighted the consequences of increases in women’s labour supply, the gender wage gap will also depend on the demand for male vs female labour. In fact demand trends have favoured women, attenuating the supply-driven downward pressure on women’s wages in low-paid occupations, and fully counteracting it in high-paid occupations.

Pulling the supply and demand trends together and accounting for the education of workers and the skill-content of occupations, we find that the gender wage gap in Mexico narrowed between 5 and 18 percent among workers above the 80th percentile, and between 10 and 22 percent among workers below the median.