The Influence of Risk Preferences and Competitiveness of Women on the Wage Gap

The influence of risk preferences and competitiveness of women on the wage gap

Erasmus School of Economics

Bachelor Thesis in Economics & Business Economics (Economie & Bedrijfseconomie)

Submitted by: H.P. van den Bergh

Student number: 346793

Supervisor: Ilke Aydogan

Date: 17-07-2015

Table of contents

Abstract page 3
Introduction page 4
Motivation page 5
Literature review page 6
Literature on the wage gap pages 6-8
Literature on differences in preferences & literature on the difference in risk preferences pages 8-11
Literature on negotiation competitiveness pages 12-13
Literature on nature versus nurture pages 13-15
Summary of literature review pages 16-19
Discussion pages 20-21
Conclusion page 22

Abstract

Women earn on average less for preforming the same work as men. This is called the wage gap. In this thesis, the differences in preferences in competitiveness and risk between men and women are examined in order to shed light on how they affect the wage gap. This is done by using a literature study to compare the different articles written on the subject. The literature will be split into four sections “ Literature on the wage gap”, “Literature on differences in preferences & literature on the difference in risk preferences”, “Literature on negotiation competitiveness” and “Literature on nature versus nurture”. The major conclusion is that women are more risk averse than men and this affects both their career choices and salary. At the end of the article recommendations on how to close the wage gap will be given, and a suggestion for future research will be made.

Introduction

There has been a lot of discussion in the recent months on the difference between men and women in career paths and the differences in earnings. One recent example of this was a proposal by the Dutch government to introduce a quota for women in the boards of big corporates in the Netherlands. Another proposal by the government was to introduce a database of women which could be chosen for such a function. It is therefore clear that the government thinks that there is a significant difference between earnings of men and women. In this thesis I will try to explore if this wage gap has anything to do with the different career choices men and women make based on risk aversion and willingness to compete.

In this thesis I will investigate the differences between men and women which are expected to play a role in their respective career choices using a number of different scientific articles. These articles will be compared and studied to give a clear answer to the question: “Is the wage gap caused by women’s preferences of risk and competiveness”. In this thesis this research question is explored through a thorough review of the available literature on gender differences. The literature review will be split in different sections based on the topics that are relevant to answer the research question. The conclusion that can be drawn from various studies cited in this thesis is that, there is a wage gap at the moment which may be attributedto the different degrees of risk aversion between men and women. This conclusion has important implications for policy makers which will be discussed at the end of this thesis and a future research will be proposed.

Motivation

My motivation behind this thesis is that there is at the moment a discussion in the Netherlands about the so called wage gap (Lips, 2013). The wage gap implies that men and women get different wage for the same job. In an article on the wage gap on the Guardian (Topping, 2015)it is shown that there is a pay gap of 16.9% in the Netherlands, furthermore there is a pay gap of 19.1% in the UK. This shows that there is a significant difference in the pay that men and women get. The article also mentioned that the gap has been closing the last years, but that the progress has been very slow.

The first question of why the pay gap exists in the first place is an important one because identifying the factors at stake is the key for effective economic policies, and might help to come to a solution on how to solve the wage gap. In this thesis I will search for some of the underlying factors that might help explain the wage gap.

Literature review

This thesis will use a literature review to explore the different opinions voiced in the different papers written on the subject matter. In the summary section these findings will be summarized in a comprehensive manner and finally in the discussion I will discuss what kind of further research will be necessary. Furthermore, the literature is divided into subsections. In section 4.1. I will provide a review of literature on wage gap. In this section, I will present empirical findings on wage gap in previous research. In the next sections 4.2 and 4.3, I will review the literature on gender differences in preferences in fields that are expected to play a role in career decisions. In these sections I will focus on gender differences in risk preferences and competitiveness which were commonly investigated in the literature. In the section literature on negotiation competitiveness, I will look at the different ways in which men and women negotiate. Finally in section 4.4, by looking in to the literature on “nature versus nurture”, I will further explore the reasons behind gender differences with a discussion of nature versus nurture arguments.

These subsections serve the purpose of structuring the literature review, after the literature review these subsections will be summarized and discussed in section 5.

4.1 Literature on the wage gap

In the article “The Gender Pay Gap: Have Women Gone as Far as They Can?” by (Blau & Kahn, 2007) the wage gap (or gender pay gap as it is called in this article) is discussed at length. The article shows the trend that the gender pay gap has followed and offers some explanations for its causes and its effects. After the Second World War the gender pay gap has been closing, this is mainly due to the increasing amount of women in the labor force. Furthermore in the 1990’s the wage gap had closed even more to around 80%, this was also due to the overall status of the labor market. The general inequality in the labor market had decreased further during these years and that also affected the gender pay gap. It is argued that in the future there will be a further decrease in the gender pay gap; however the change will come more gradually than before. This is mainly because of the fact that women are already participating more in the labor market and also are better educated than they were decades ago. After reading this article one might argue that the wage gap/pay gap is closing however it has not closed as of yet.

The article by (Lips, 2013) the relevance of the wage gap is discussed. The author comes to the conclusion that there does exist a wage gap between men and women. Even in CEO pay there exists a difference in pay even when controlled for differences in human capital organizational size and performance variables. The working paper by (Mesch & Rooney, 2004) the gender pay gap between female and male CEO’s is 12000$ in salary and between 7000$ and 9800$ in bonus annually. Other studies however conclude that while CEO pay may not differ very much between genders, that there does seem to be a gender wage gap in among the larger non-CEO top executives. However not only does the gender of the employee matter in determining the amount of salary, also the perception of the job is of huge importance to the pay received.

This is shown in the article by (Alksnis, Desmarais, & Curtis, 2008) titled “Workforce Segregation and the Gender Wage Gap: Is “Women’s” Work Valued as Highly as “Men’s”?”, discusses the different levels of pay for jobs that are perceived as more masculine and jobs that are perceived as more feminine. The article looks at three type’s classes of jobs, low, medium and high paying. For example the low paying job was labeled as a department store clerk job with the masculine job called a hardware store clerk and the feminine job labeled the china/crystal store clerk. There was found to be pay discrimination between jobs that are perceived as more masculine and jobs that are perceived as more feminine, the more masculine jobs would pay better. This was even the case for jobs that were perceived as equal, even then there was a difference in pay between men and women.

Furthermore the effect of children as discussed in the article “The Effect of Children on Women's Wages” by (Waldfogel, 1997) also has a significant effect on wage. It is made clear that having children affects the wage a woman earns, and in the article there talk of a family gap. The lower wage is partly due to the effect that when a woman becomes a mother she will generally speaking start to work less and in some cases start to work part time. The effect of working part time on wages is severe, on average a part time working woman earns 10% less than a full time working woman. The effect of children on wage is also significant where a woman earn about 4% less after her first child and about 12% less after her second child. This means that there is another significant factor in the wage gap, namely maternity. The author argues that this gap may originate due to the work and family conflict, where either employer perceptions or employee adjustments may have a negative effect on wage.

4.2 Literature on differences in preferences & literature on the difference in risk preferences

Besides the factors described in the section on the wage gap such as the labor market conditions and maternity, there might be other factors which influence the wage gap. In this section the differences in preferences and differences in investments between men and women is discussed. In the article “Differences in the economic decisions of men and women: experimental evidence” by (Eckel & Grossman, 2008), the researchers are looking if there are differences between men and women in behavior using the results gained from public goods, ultimatum and dictator experiments. The results of the article are that the behavior of men and women does not differ much when playing the public gods, dictator and ultimatum games. However when risk is introduced into the game women tend to make more socially oriented choices and less individually oriented choices. Risk was introduced in these games through first a one-shot design and then a repeated play design. In the second game women were more risk averse. This shows that women do not prefer situations where risk plays an important factor.

In the article by (Croson & Gneezy, 2009) the gender differences in social preferences and risk attitudes are discussed. In this article it is also shown that women are generally more risk averse than men, however there is an important exception for managers, there men and women are more similar in terms of risk aversion. Important factors that contribute to women being more risk averse are emotions overconfidence and framing. It is also suggested that women’s social preferences are different than men’s and that this may lead to a higher variability in women’s behavior. Finally it is suggested that women have a lower preference for competitive situations than men and that therefore men therefore perform better in these situations.

However not only is the difference in risk preference important in distinguishing men and women, it also important how men and behave in a competitive environment. In the article (Gneezy, Niederle, & Rustichini, Performance in Competitive Environments: Gender Differences, 2003) the differences between men and women in competitive environments is discussed. Their main research question was whether women perform just as well as men in a competitive environment. This hypothesis is tested using a lab experiment where entrants are either paid a piece rate or paid using tournament incentives. When in a mixed gender tournament women perform worse than men. If however women compete in a single gender tournament they perform better. This change may be due to the fact that women consider themselves less competent than men and therefore they shy away from competition. This affects the labor market chances of both men and women.

However there might be differences between different groups within a population this is shown in the article “Decision Making, Risk and Gender: Are Managers Different?” by (Powell & Johnson, 1994) where the differences in risk taking between a pool of managers and a pool of non-managers is explored. The authors are investigating if there is a significant difference in attitudes towards risk in the two groups. In the paper the conclusion is drawn that men and women do not differ on the quality of the decisions made, also in the pool of managers there was no difference in risk aversion between men and women. However among the non-manager group there was a difference in risk aversion. Furthermore the quality of the decision’s made and the level of risk aversion was more closely linked to the level of management training the individual had received.

Also of importance in distinguishing the different preferences between men and women is the level of ambiguity aversion. In the article “Gender differences in risk aversion and ambiguity aversion” by (Borghans, Golsteyn, Heckman, & Meijers, 2009), it is explored whether men and women are different in risk and ambiguity aversion. What the article is measuring is how the willingness to pay increases as the level of ambiguity decreases. It is found that women initially respond more favorably to a decrease in ambiguity compared to men. This means that their willingness to pay does not change as the ambiguity is decreased. However when the ambiguity of the choices is increased pas a certain level the difference between men and women vanishes. This means that after a certain point of ambiguity men and women have the same marginal valuations of ambiguity. This experiment shows that while risk aversion is important, it is also important how the experiment is set up and how ambiguous it is. This is of importance because men and women react differently to different levels of ambiguity.

This is also shown in the article “Financial Decision-Making: Are Women Really More Risk-Averse?” by (Schubert, Brown, Gysler, & Brachinger, 1999) the classic literature regarding the fact that men are more risk seeking than women is challenged. This research finds that with gambles men are more risk prone to gains and women are more risk prone to losses. The findings suggest that the difference in reported risk aversion is related to the opportunity sets presented. It is pointed out that the problem with the previous research on the subject is that the framing and the context of the question is of vital importance.

In the article “Men, women and risk aversion: experimental evidence” by (Eckel C. C., 2008) it is tested if men and women systematically differ in their measure of risk aversion. In the article Eckle makes the remark that if men and women systematically differ in their risk aversion that this will affect all aspects of their decision making. This includes choice of career and investment opportunities to different goods consumed. The conclusions of the experiments are that the field studies conclude that women are more risk averse than men. In the article by (Eckel C. C., 2008) several field studies are used to come to this conclusion, for example both real world gambling data is used as well as pension fund contribution. However the findings from laboratory experiments are less conclusive. But this may be due to the fact that there is little comparability between the experimental studies. The difficulty with comparing studies is that there are often different forms of risk used, the potential payoffs and the degree of risk as variance. Finally it is argued that it is difficult to compare the conclusions of lab studies and field studies because it is more difficult in field studies to account for differences in knowledge, wealth and marital status and other demographic factors that might bias measures of male/female differences in risky choices according to (Eckel C. C., 2008).

The link with women having less risky assets is also shown in the article “Are women more risk averse?” by (Jianakoplos & Bernasek, 1998), it is researched whether single women exhibit relatively more risk aversion in financial decision making than single men. These findings were gathered using a field study, in the study it was investigated if either men or women held more risky assets. The findings are that women are significantly more risk averse in financial decision making, and that therefore their relative wealth might be smaller. This is because they held less risky assets which on average generate more money. There are some limitations to this research, mainly that it only focuses on single men and single women, and that these groups might not give an accurate description of all men and women.