The Role of the Gender Wage Gap in Overall Wage Inequality: A Quantitative Exercise

Abstract

ABSTRACT:This article presents a novel wage inequality decomposition to analyze the impact of the gender wage gap on overall wage inequality. The decomposition determines the maximum relative wage between genders allowed before it begins to increase total inequality. In addition, I present a structural model of the labor market to evaluate the impact of establishing restrictions on intra-occupational gender pay gaps within each firm. Specifically, I introduce a restriction in which the average wage of one gender cannot exceed α times the average wage of the other gender. For α = 2, the model predicts a 10 percent wage inequality reduction. However, with a tighter restriction of α = 1, the inequality reduction dissipates and reverses into a wage inequality increase.