How does wage stickiness contribute to the gender wage gap?

Today I am going to discuss the relationship between the gender pay gap and wage stickiness.

Wages are termed sticky when they don’t adjust to the optimal level driven by the changes in labour market conditions. The interaction between sticky wages and economic shocks helps to generate the business cycle, and also causes a lot of the most costly elements of an economic downturn – unemployment and losses in skills. 

As I have discussed in a previous post, prices as well as wages can be sticky. However, the focus here is on the inability for wages to change from a predetermined path – specifically the downward rigidity of money wages.

A strong reason why wages can be very sticky is unionisation.  Unions and employers both use size to generate a bargaining position to negotiate wages.  As part of this strategic negotiation, unions (at least in the Anglo-Saxon sense) tend to promote relatively sticky wages – and demand persistent increases in wages even when the economic cycle turns south.

But what does this have to do with wage inequality?

Note:  There are multiple models of unionisation and social assistance – Matty pointed out that the books “Varieties of Capitalism” and Chapter 13 of the Oxford handbook of the welfare state are a useful read for thinking about this.  The response of unions in Germany during the GFC and COVID show that the relationship between unions and stickiness is complex – and the assumption they are related is based on the experience of Anglo-American economies in the 1960-1980s.

So what does this have to do with wage inequality?

Biasi and Sarson (2020) provides an interesting link between flexible wages and the wage gender gap.

The authors find that the wage gap between women and men offered by flexible payment agreements is higher than under the collective bargaining agreement. 

Collective bargaining agreement introduces wage stickiness to the economy, as the union’s agreement usually includes a wage rise by a certain amount each year. 

However, these agreements don’t discriminate against employees based on their gender. And since these agreements are made prior to any downturn, wages continue to rise even though the revenue generated by each worker falls.  Such stickiness can then force employers hands, making them lay workers off rather than cutting wages.  Weakening union power to allow more flexible wages appears to help solve this issue. 

Note: Again this is a simplistic form of unionisation – by supporting job transition, or creating a cost for layoffs, unions might also prevent large swings in unemployment.  Ultimately what matters is the specific form of unionisation that is used – and for clarity we are assuming a form that ONLY makes wages more rigid.

However, even if there are issues of wage rigidity generating excess swings in unemployment the same unionization can also help narrow the gap in pay between similar workers due to collective agreements.  Collective agreements are often transparent and are based on objective criteria – specifically non-discriminatory criteria.  As a result, if a man and a woman are equally likely to get selected into a job (another area of potential discrimination) unionisation helps to ensure they will get paid the same.

In history this was not always the case – with unions and other institutions specifically including wage discrimination as a target on the basis of the “nuclear family-male breadwinner” view of the world. Modern unions are not expected to do this. However, the selection into a job issue remains important – as it is one of the main reasons why the wage gap exists, rather than due to differential payments for the same job.

The evidence seems to support this view of the wage gap and unionisation. In this study the authors note that the union wage gap (or mark-up) in the UK in the 1980s was approximately 10%. It was highest for women, part-timers, those who lived in the North, in high unemployment areas and worked in small plants.

As a result, although we normally view wage stickiness from unions as negative – as during a recession this can lead to more people out of work – such agreements can also help to achieve other social ends, namely closing the wage gap (reducing discrimination).