Path to Correcting Gender Inequality: Harness capital market forces

Research Associate, RIETI

The workplace gender inequality figure for Japan is among the highest of the member states of the Organization for Economic Cooperation and Development (OECD). According to data from the Japan Institute for Labour Policy and Training, the share of women in management posts in Japan in 2020 was as low as 13%, compared with 41% in the United States, 37% in the United Kingdom, 36% in France, 28% in each of Germany and Denmark, and 16% in South Korea.

According to statistics prepared by the OECD, while the wage gender inequality in Japan has gradually been narrowing, the median income for full-time female workers in Japan was 22% lower than the median income for their male equivalents in 2021. The gender gap was the second largest among the OECD member states, after the 31% difference in South Korea, and is much larger than the differences of 5% in Denmark, 7% in Sweden, 14% in Germany, 14% in the United Kingdom, and 17% in the United States.

The figure below shows the wage gender gap among workers aged between 30 and 55 in 15 developed countries as estimated by a research group in which this author is participating. Negative figures indicate the shortfall of wages for women relative to wages for men in percentage terms.

Gender Wage Gap in Major Developed Countries
Gender Wage Gap in Major Developed Countries
[Click to enlarge]
Gender Wage Gap in Major Developed Countries
Source: Prepared by the author based on “Within-Job Gender Pay Inequality in 15 Countries” (2022)
Source: Prepared by the author based on “Within-Job Gender Pay Inequality in 15 Countries” (2022)

The horizontal axis of the left panel shows the gender income gap controlled for age, number of years of education, and full-time or part-time work. The income level for female workers in Japan is 35% lower than that for male workers. Even after controlling for those basic attributes, the gender gap in Japan is the second largest in the OECD countries, after that of South Korea. The vertical axis represents the gender wage gap within the same workplace controlling for the workplace fixed effect in addition to the basic attributes. Within the same workplace, the annual income level for women is 33% lower than that for men, a shortage much larger than in other major developed countries. In short, income gender inequality is large not only on a nationwide basis but also within the same workplace.

In northern European countries, such as Sweden and Denmark, gender income inequality is small both on a nationwide basis and within the same workplace. On the other hand, in South Korea and Israel, while gender inequality is large on a nationwide basis, it is relatively small within the same workplace.

The right panel shows the gender gap in terms of hourly wages. In many countries, gender inequality is smaller on an hourly wage basis than on an annual income basis as women work shorter hours than men. However, in Japan, even after controlling for the basic attributes, the hourly wage level for female workers is 32% lower than that for male workers on a nation-wide basis (horizontal axis) and is 30% lower within the same workplace (vertical axis). In Sweden, the Netherlands, and Norway, the hourly wage level for female workers is only 8% lower than that for male workers within the same workplace.


What can companies do to narrow gender inequality? Professor Mary Brinton of Harvard University has pointed out that it has been believed that a seniority-based pay system works against women because women are generally more likely than men to experience career interruptions and have a shorter average job longevity. If that belief holds true, gender inequality may be reduced by replacing seniority-based systems with performance-based pay systems that determine wages based on individual employees’ respective performance levels.

Additionally, performance-based employment practices may also mitigate gender inequality by reducing room for discrimination against women by their managers. However, recent studies conducted in the United States, China and Finland indicated that performance-based employment practices could increase, rather than decrease, gender inequality.

In Japan, it has been confirmed by studies conducted by Professor Fumio Ohtake of Osaka University and his colleagues and by this author that compensation based on individual performance and merit have increased gender inequality. According to studies conducted in the United States and Japan, sales commissions and bonuses account for a large portion of the wage gender gap.

Possible reasons for that include: (1) that a pay system based on the performance of individuals causes employee competition to escalate, putting women, who tend not to like competitive environments to the same degree that men do, at a disadvantage; (2) that while pay for employees is significantly affected by the tasks to which they are assigned, job assignment is not equitable, and (3) that with skills being equal, the “performance” delivered is proportionate to the duration of working hours, which means that women, on average, who cannot work long hours, are evaluated lower.
Another possibility is that the prevalence of long working hours and inflexible ways of working may be the cause of gender inequality. Even in Denmark, where the gender gap is small, they have instituted gender-based difference in the duration of working hours due to gendered division of labor in household production. For example, in the case of families where both the husband and wife work in management positions, the wife is more likely than the husband to take leave in the afternoon in order to undertake family responsibilities, such as picking up children at school, and this factor contributes to gender inequality in career advancement.

Professor Claudia Goldin of Harvard University measured the premium paid for long working hours (the additional hourly wage that increases in proportion to an increase in the hours worked) based on data on U.S. workers. Her study showed that in occupations which deliver a high return for working long and continuous hours, the gender wage gap tends to be larger. The wage premium is small for types of workers who are substitutable for each other with the standardization of procedures, such as pharmacists, and is large for lawyers and other types of workers for whom replacement cost is high.

Professor Goldin points out that to realize gender equality in the labor market, it is necessary to change how jobs are structured and remunerated to enhance temporal flexibility.

Under a similar approach, Kodai Yamamoto and others at the Policy Research Institute under the Ministry of Finance developed an indicator of the level of worker substitutability by occupation in Japan and studied the relationship between worker substitutability and gender wage inequality. In Japan, unlike in the United States, a significant correlation was not observed between flexibility in the way of working and gender wage gap. However, there is a possibility that it is not appropriate to analyze gender wage gap by occupation in Japan because, unlike in the United States, wages are not determined by occupation. Therefore, they used panel data concerning individual workers to analyze the relationship between the way of working and the wage level and, as a result, found that simpler jobs with more flexible ways of working have lower wage levels and that simpler jobs which accommodate flexible ways of working are disproportionately represented by women.


What should be done to incentivize companies to narrow workplace gender inequality?

In July 2022, an obligation was introduced for large companies to disclose information on their gender wage gaps. Meanwhile, the Financial Services Agency is preparing to introduce an obligation for listed companies to include in their securities reports non-financial information, such as existing gender wage gaps, women’s share in management positions, and the percentage of those who took child care leave among male employees, starting with reports for the fiscal year that ends in March 2023. These measures may provide an opportunity to narrow the workplace gender gap and change ways of working and pay systems. As a result of enhanced transparency, companies may discover in-house problems, or pressure from the capital market may change their mindsets.

There is evidence that the capital market makes companies improve the situation of gender inequality. According to a study conducted by this author together with Professor Yukiko Abe of Hokkaido University and Beata Javorcik of Oxford University, women’s empowerment has advanced further at companies in Japan which have been under foreign ownership for a longer period, or which have a higher foreign ownership ratio. This indicates the possibility that the presence of foreign investors is bringing gender equality to the Japanese business world as a norm from abroad.

When you hear about “foreign-owned companies,” what comes to your mind may be companies that have an obvious foreign identity, such as American or European affiliates. However, “foreign owned companies” as defined in our paper include not only majority foreign-owned companies—that is, those with the foreign ownership share above 50%—but also companies with blocking share by foreign interests—those companies with a foreign ownership share of at least 25% but no more than 50%—and minority-foreign-owned companies—those with the foreign ownership share of less than 25% (but at least 10%). Many companies that are perceived to be “Japanese companies” are “foreign-owned companies” under this definition, which sets the 10% threshold for foreign ownership.

According to an additional analysis, which combined the propensity score matching with a difference-in-differences approach in order to identify the correlation between the foreign ownership ratio and gender inequality, the positive correlation that was identified can be explained not by foreign investment made in companies with a smaller gender gap, but by an advance of women’s empowerment due to foreign investment. The mindset of investors acts as a driver of the narrowing of workplace gender inequality.

>> Original text in Japanese

December 15, 2022 Nihon Keizai Shimbun

January 23, 2023

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