A market test for sex discrimination: Evidence from Japanese firm-level panel data

Abstract

This paper examines the empirical implications of Becker's classical theory of employer discrimination. If the male–female wage differential is due to employer discrimination, then non-discriminatory employers will hire more women and enjoy a higher profit than discriminatory employers. This proposition is tested using Japanese firm-level panel data from the 1990s. The empirical results, based on pooled OLS, indicate that an increase in the proportion of women employed by a firm enhances its operating profit. The female proportion could be endogenous in the profit equation, however, because firms may adjust their female labor in response to positive productivity shocks. To deal with this possible endogeneity, investment or intermediate input amounts are used as proxy variables for productivity shocks, as suggested by Olley and Pakes (Olley, G. S., and A. Pakes (1996): “The Dynamics of Productivity in the Telecommunications Equipment Industry,” Econometrica, 64(6), 1263–1297.) and Levinsohn and Petrin (Levinsohn, J., and A. Petrin (2003): “Estimating Production Functions Using Inputs to Control for Unobservables,” The Review of Economic Studies, 70(2), 317–341.). The findings based on these proxy variable estimations confirm the robustness of the finding that hiring more women results in higher profit. This result fails to reject the hypothesis that employer discrimination is a source of the male-female wage gap. However, the size of estimated effect of female proportion on profit is 1/20 of the predicted coefficient calculated based on the assumption that all the observed gender wage gap is due to gender discrimination. This result suggests that the large portion of gender wage gap is due to gender productivity gap. In addition, those firms that hire more women do not necessarily grow faster than firms that hire fewer women.