On a Firm's Optimal Response to Pressure for Gender Pay Equity

Abstract

We present a theory of how a rational, profit-maximizing firm would respond to pressure for gender pay equity by strategically distributing raises and adjusting its organizational structure to reduce the pay gap between its female and male employees at minimum cost. Using mathematical reasoning, simulations, and data from a real employer, we show that:(a) employees in low-paying jobs and whose job-related traits typify men at the firm are most likely to get raises; (b) counter-intuitively, some men will get raises and giving raises to certain women would increase the pay gap; (c) a firm can reduce the gender pay gap as measured by a much larger percentage than the overall increase in pay to women at the firm; and (d) “ghettoizing” women in select jobs can help a firm reduce its pay gap. Our analysis yields a rich set of implications for empirical research and policy.