Unintended effects of equal-pay laws

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This article was published 1/10/2018 (288 days ago), so information in it may no longer be current.

Popular culture represents King Canute as a foolish monarch who ordered his aides to place his chair by the ocean’s edge, whereupon he commanded the tide to stop. Of course, he got his feet wet.

In fact, Canute, one of the great kings of England (and Norway, Sweden and Denmark), was much wiser than this fable. He wished to show his subjects that he had limited powers. After the incoming tide soaked his feet, Canute remarked to the assembled onlookers — "Let all men know how empty and worthless is the power of kings. For there is none worthy of the name but God, whom heaven, earth and sea obey."

Many politicians ignore this advice and seem intent on proposing legislation that is, at best, bound to fail, or worse, creates cost and mischief.

A case in point is legislation to compel pay equity between men and women in the same occupation. Iceland recently passed legislation requiring all employers with 25 or more employees to certify that men and women receive the same pay for the same job.

This sounds good, and if it eliminates pay discrimination, who is to object?

But will it work? And what unintended consequences might result?

According to Statistics Canada, women earn about 87 per cent of what men earn. This occurs for two primary reasons.

Women still tend to select different occupations than men. Men tend to choose STEM (science, technology, engineering and mathematics) occupations where wages are higher than in the social sciences, teaching and caring professions where women predominate.

Also, Statistics Canada data reveal that women work fewer hours than men: in 2015, 35.5 compared to 43.6 hours per week.

However, times are changing. Women are entering STEM professions at a high rate and the gender gap in weekly hours worked is also narrowing. But it does not cut it to say to women, "Be patient, by 2030 everything will be equal." Can we accelerate pay equity through legislation?

Let’s do a thought experiment, a favourite technique of Albert Einstein.

Imagine a firm has hired two computer engineers; call them A and B, both graduating from the same program with the same marks. Engineers A and B work for a year and start at the same wage and have the same occupational classification. Imagine Engineer A is prepared to come in early and stay late, often taking work home on the weekends. Engineer B heads for the door at 4:30 and seeks work-life balance.

Most employers would wish to reward the more industrious employee, assuming the extra time spent does not mask poor productivity.

The key defect in any pay equity legislation is that it creates a bureaucratic tangle in enforcement and reporting. Requiring employers to report on pay by gender will encourage the invention of artful workarounds to reward more valuable employees in the same occupation regardless of gender, race or another attribute.

New sub-occupations will emerge within job descriptions to accommodate pay differentials, and employers will likely resort to non-financial benefits (free parking) to reward productive employees. Human-rights tribunals will invariably need to parse job descriptions, assess compensation packages and adjudicate myriad definitional disputes, creating yet more cost for employers and the taxpayer.

The other important challenge is that our economy is generating new industries and new occupations at ever-increasing rates. The current thinking is that in addition to technical skills, future occupations will require a range of human and social skills, or the "art" of managing yourself and people. These increasingly important human arts are leading the evolution of STEM to become STEAM. Liberals arts, it seems, does have a future, provided one also has technical skills. Most important is that these emerging and yet-to-be-defined occupations resist simple classification and description.

This rapid change in occupations means government will always be working from outmoded job descriptions, and therefore will play constant catch-up to enforce pay equity along gender or any identity dimension.

Cost aside, the real problem is that this legislation will limit rewarding productive employees within specific occupations. The thought experiment I just concocted is gender-neutral, since such legislation will also constrain managers in paying a productive woman more than an unproductive man in same occupation.

Here is a simpler solution: employees have a good idea of who has contributed to the organization, and they also sometimes share information on pay and benefits, so why not simply require all workplaces with more than 25 employees to reveal the entire compensation package received by each worker?

Employers failing to convince workers that they are receiving the right pay risk losing their human-resource talent pool. More productive and committed workers will cheer such innovation in human-resource policies, since they currently chafe when slackers are rewarded. Organizations that retain their productive workers will thrive.

If such compensation transparency were the norm, unfair pay differentials would quickly disappear without the need for targeted legislation that is bound to cost, have unwanted consequences and result in wet feet.

Gregory Mason is an associate professor of economics at the University of Manitoba.