Harvard and City are two equal-opportunity universities. Every professor -- male and female -- at both universities, is paid a salary that is appropriate given his or her qualifications. To be specific, superstar faculty members are paid $120K annually and other faculty members are paid $80K per year. Let us say that half the professors are superstars and half of them are not. However, only 20 percent of available professors are women and 80 percent are men. Both Harvard and City each have 100 spots for faculty and there are 200 professors available.
Harvard likes to hire superstar faculty and City likes to hire any good faculty they can get. Every professor prefers to work at Harvard because of its prestige rather than at City even though the salary given the qualifications are the same at both universities.
Scenario 1: Harvard hires all 100 superstar faculty -- 80 men and 20 women where each gets paid $120K. City hires all remaining faculty -- 80 men and 20 women where each gets paid $80K. Harvard gets known as the university with superstar faculty with high salaries and City gets known as the more affordable good university where faculty are paid reasonable salaries. There is no difference in salaries of men and women faculty at either university.
Scenario 2: A leading national newspaper writes a scathing attack on both universities complaining that only twenty percent of their faculty are women and they must do more to improve gender balance.
Consequently, Harvard decides to hire 10 more women faculty (who are not superstars) by replacing 10 of its superstar male faculty. The new women faculty are happy to work for the same salary of $80K because it is more prestigious to be at Harvard rather than at City. The 10 superstar male faculty denied tenure at Harvard are enthusiastically hired by City paying them the same high salary ($120K) they were getting at Harvard. Harvard has managed to improve the gender balance going from 20 percent women professors to 30 percent women professors. Unfortunately, City is not so fortunate -- after all there are only a limited number of women faculty available. They console themselves by publicizing that they have managed to improve the average quality of their faculty.
Notice that now Harvard has 70 superstar male faculty members, twenty superstar female faculty members (all getting $120K salaries) and 10 female faculty members who are not superstars (who get $80K salaries). The average salaries of male professors at Harvard will now be higher ($120K) than average salaries of female professors (between $80K and $120K). How about City? City now has 10 superstar male faculty (receiving $120K each) and 80 male and 10 female faculty members who are not superstars (receiving $80K each). The average salaries of male professors at City also will now be higher (because of ten superstars getting $120K each) than average salaries of female professors ($80K). Correspondingly, the average quality of male professors at both universities will be higher than those of female professors.
The leading national newspaper now writes another scathing article lamenting that top universities like Harvard have managed to improve the gender balance of their faculty but it has become worse at other universities such as City but there really has been no change in the gender balance across the country (of course, not). Moreover, women and men used to be paid equally but now women professors' salaries are lower everywhere compared to professors who are men.
What is the moral of the story above? Simply finding evidence that women on average are paid less than men at most organizations does not necessarily prove that there is gender-based discrimination. Trying to cure gender imbalance by pushing organizations to hire more women will not only fail overall -- more aggressive organizations will succeed at the expense of less aggressive ones -- but also -- and this came as a surprise to me and many of my colleagues -- it would make the salary imbalance between men and women appear worse -- because average quality of women will fall -- at all organizations (even though there is no change in quality overall).
The main culprit is the pipeline. If the percentage of qualified women remains lower than that of men, gender balance at all organizations is mathematically impossible. The cure then is to fix the pipeline. The gender balance in pay will follow. Moreover, as the Nobel Laureate Gary Becker pointed out, if women continue to get paid less than their male counterparts, profit-maximizing competitive firms can hire more women (if they are less expensive to hire) and fire men (if they are more expensive to hire) improving, and perhaps even reversing, not only gender balance but also their bottom lines at the peril of their competitors who continue to discriminate against women by hiring (more expensive) male labor force.
This blog post first appeared on Medium on September 24, 2014.