World Class Faculty & Research / January 23, 2015

Closing the Gender Wage Gap

By Liu Yang

SMITH BRAIN TRUST -- Executive orders from the White House in 2014 rekindled a decades-long debate about gender pay disparities that persist in corporate America. Some blame the gap on lingering workplace biases that protect the C suite as the domain of men. Others dismiss the problem as overstated, citing the choices that women often make to sacrifice career advancement in favor of family.

A new study, which I coauthored with Geoffrey Tate from the University of North Carolina at Chapel Hill, debunks the argument that gender pay differences largely reflect the unequal career choices of men and women. More importantly, our research moves beyond the debate toward a solution.

We show that having female leadership in a firm dramatically mitigates the inequity. The biggest impact on the gender pay gap happens when at least three of the top five executives in a firm — a critical mass — are women, although having women in midlevel or senior leadership roles also makes a difference.

We started our research by eliminating the selection effect from the equation, allowing us to see if unequal treatment existed even without the influence of personal choices. To do this, we examined layoffs following plant closures and compared wage changes between men and women.

We found that even when workers left the same job for the same reason and got hired by the same new company, women wage earners suffered more than men. The pay gap widened during these involuntary transitions regardless of age, race, education or seniority.

It is hard to argue that life choices such as family commitment or voluntary part-time employment — things that might create real or perceived inequities in human capital — influenced our findings because these differences, if any, would have been reflected already at the wage level from the former places of employment.

Our results were not driven by one or two isolated incidents. Rather, we examined the aftermath of plant closures in 23 states from 1993 to 2006 using data recently made available from the U.S. Census Bureau’s Longitudinal Employer Household Dynamics program.

Women in child-bearing years were hit particularly hard following plant closures. Overall, women’s salaries slipped about 5 percent more compared to men dealing with the same transition.

This was true even after controlling for distance between old and new job sites to minimize the possibility that some women might have less flexibility than men to relocate and thus less negotiation power during salary talks.

A significant factor that mattered was having a majority of women in senior leadership roles at the new firms. Although still bearing a loss compared to men, women who landed at one of these female-led companies following a plant closure were able to cut the relative wage drop in half.

We are able to link this difference to the effects of women in leadership rather than industry or firm characteristics by tracking wages within the same firms over time. When organizations were led by a majority of men rather than women, the narrowing of the pay gap disappeared.

Our evidence suggests that when women hold senior leadership positions, they cultivate more female-friendly cultures inside their firms and subsequently improve career prospects for women employees.

This deflates the notion that gender wage gaps are purely driven by personal choices such as women putting family ahead of pay and promotions. We show that managerial bias, not lack of dedication or qualification, at least partly fuels the gender wage gap.

The question that remains is how to move more women up the corporate ladder so they can expand their influence. Currently, fewer than 5 percent of Fortune 1,000 companies have women CEOs.

When more women break through this glass ceiling and attain top leadership positions, women lower in the corporate hierarchy also will benefit. So will the organizations that harness and retain top female talent.

Liu Yang, Ph.D., is assistant professor of finance at the University of Maryland’s Smith School of Business. Her paper, “Female Leadership and Gender Equity,” is accepted for publication in the Journal of Financial Economics.

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