South-Western College Publishing - Economics  

Decreasing Differentials
Subject Male-Female Pay Differentials
Topic Labor Markets
Key Words Average weekly earnings, Labor market, Competition, Minimum wage, Performance-based pay, Economic cycle.
News Story

Figures just released show that in the past year the difference between male and female pay decreased. A year ago, for every dollar men earned, women made 73 cents, but now women earn 76 cents. This is significantly greater than in 1979 when women made only 62.5 percent of male pay.

Accounting for this is the fact that women’s average weekly earnings grew at an annual rate of 6.6 percent, while for men the increase was only 2.4 percent. Experts believe that several underlying factors are at work. First, the strong economy has led to a tight labor market, which requires employers to bid up wages in order to be able to recruit and retain employees. Second, the increase in the minimum wage improved the pay of many low-paid, low-skill positions that are disproportionately held by women. Third, increasing competition has induced some employers to offer more performance-based pay, which is said to give women a fairer opportunity of increasing their pay.

Progress over time is uneven, however. It is expected that as the economy slows, so will the relative gains of women.
(Updated August 18, 1998)

  1. Draw a diagram of the labor market for men, with the real wage rate on the vertical axis and the quantity of labor on the horizontal axis. Show the supply and demand curves and the equilibrium wage and employment level. To the side of this diagram, draw a similar diagram for women, but bear in mind the fact that they are paid less than men.
    1. Show the effect of a strong economy on the equilibrium wage and employment level in each diagram, assuming that it has benefited women more than men.
    2. What has happened to the difference between male and female pay?

  2. Draw another pair of labor market diagrams and a wage differential between men and women. Show a minimum wage that is ineffective for both groups.
    1. Show the effect of an increase in the minimum wage on both diagrams. Make sure it is effective, at least for the female labor market diagram.
    2. What has happened to the difference between male and female pay?

  3. In spite of such changes, women still earn only 76 percent of men.
    1. What market-related reasons related to the determinants of supply and demand for labor might explain some of the remaining differential?
    2. What non-market (or institutional) reasons might contribute to the differential?
Source Beth Belton, “Tight job market helps women close pay gap,” USA Today, June 5, 1998.

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