Male/Female Disparity in Starting Pay

Abstract

Empirical studies of the earnings of male and female workers persistently reveal a gap that is unexplained by the economic variables in these models.' This gap has been given two interpretations in the literature. One holds that the gap reflects non-market forces which distort the equilibrium relation among the wages of competing workers. Discrimination, according to this view, prevents female workers from being offered jobs commensurate with their qualifications and crowds them into low productivity occupations.2 The alternative interpretation holds that some substantial portion of the gap is an artifact, the result of missing variables, biased parameters, or measurement error. These researchers view the labor market as highly competitive, and, were it possible to correct for all these statistical problems, the measured wage gap would largely vanish.3 This research belongs to the latter category. We argue that a portion of the measured gap, at least that observed between the earnings of young men and women during their first few years with their employers, reflects sex-related differences in the shares of investment in firm-specific human capital borne by workers of each group. Moreover, these variations in investment levels are freely chosen by women and in no way imply long run deficits in their earning power. On the contrary, the model predicts steeper earnings profiles of women who undertake this firm-specific investment. Thus, women's earnings are predicted eventually to overtake and surpass those of equally qualified men. This theory was developed in earlier research by Becker and Lindsay [2] based on a model of Hashimoto [11; 12] and extensions by Parsons [21]. We argued that young women, for nondiscriminatory reasons, elect to shoulder a larger share of this investment than young men. The explanation for this is developed in two stages. The first derives the terms under which both male and female workers share the investment with their employers. The second argues that female workers will be led by these considerations to bear a larger share. Workers of both sexes agree to enter into inflexible wage contracts with employers specifying a share of the investment (i.e., a wage deduction from current MVP) and a post-investment wage. The advantage to such contracts lies in the solution to an assymetric information problem. The