The 77% of Income Fallacy

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WASHINGTON-When Congress returns next week for a "lame-duck," post-election session, Senate Majority Leader, Harry Reid (D-Nev) will try to muster the 60 votes he needs to block a filibuster of a vote on the misnamed Paycheck Fairness Act. It would be better titled the Paycheck Rareness Act, because it would make paychecks rare by driving small firms out of business and sending larger corporations overseas.

This bill would thrust the government deep into compensation decisions of employers. Its declared purpose is to close the alleged "pay gap" between men and women. That gap is mostly a statistical artifact, a false conclusion-and a rallying cry for feminist lobbyists who are well paid to advocate bills like this one.

Passed by the House of Representatives in January 2009, if the Senate concurs the bill is certain to be signed by President Obama. If it is not passed by the Senate, then, as the frantic feminists warn, there would be no chance of its being enacted next year because the House will have a Republican majority.

The complaint that the feminist organizations love to bandy about is, as the National Women's Law Center asserts on its Web site,, "Today, women make just 77 cents for every dollar a man makes..."

That is a spurious conclusion. It omits weekly hours of work, overtime, which is more typically earned by men, education, experience on the job, and time in the workforce. When all of these factors are accounted for, the difference is about five cents on the dollar. And, yes, discrimination against women may-or may not-explain some of that nickel, but the "gap" is far smaller than is alleged and does not merit Congress's imposing a new, cumbersome and costly layer of record-keeping on employers, and inviting more litigation.

The bill would require all employers with more than two employees and $500,000 of gross revenues-no small business exception here-to submit data on sex, race, national origin, and earnings of employees to the Equal Employment Opportunity Commission, even if no complaint has been filed. The threat of litigation about pay differences between men and women would raise the potential cost of employment, discouraging hiring.

At a Hudson Institute conference on Wednesday, Jerry Savitz, owner of Darby's Restaurant in Belfast, Maine, said, "No one in Belfast has heard of this bill, and when I told them, they were appalled. To hire a lawyer and comply with these regulations would drive me out of business."

Employers would face administrative costs that would silently discourage the hiring of those women who might catch the attention of EEOC investigators. This would particularly affect unskilled, inexperienced women who would start at lower rates of pay, and women who might be expected to take time out of the workforce for children, reducing their future productivity compared with men.

The bill would impose litigation costs on employers even as employees are represented with no out-of-pocket expenses by trial lawyers hopeful for a big slice of a big settlement. The result would be, as former Labor Secretary Elaine L. Chao described it at the Hudson conference, "a tsunami of lawsuits and tremendous uncertainty," adding to the estimated $300 billion a year America now spends on litigation.

First, women would be included in class-action suits against employers unless they specifically opt out, raising the costs of litigation whether or not the EEOC finds for the complaining employees.

Second, courts could levy heavier penalties on employers. Under the law now, employers found guilty of discrimination owe workers back pay. Under the pending bill, they would have to pay uncapped punitive damages, with a quarter or a third going to plaintiffs' lawyers. Even innocent employers would be under pressure to settle rather than fight, raising costs of business.

In fact, most employers are innocent of gender discrimination. Of the 942 pay-discrimination complaints filed with the EEOC in 2009, only 4.6% were found to have "reasonable cause," meaning that they merited full-blown investigation.

Third, the bill would allow employers to defend differences in pay between men and women only on the grounds of education, training, and experience-- if these factors were also justified on the grounds of "business necessity." This standard could prohibit male managers with college degrees from being paid more than female cashiers with high school diplomas, if college degrees were not consistent with "business necessity."

Fourth, the bill would put all places of business of an employer in a county, say a local grocery chain, under the same pay standard, even if no complaints were received.

Now, employees who do the same work in one location have to be paid equally. Including all locations would mean that employees in high cost, or unpleasant areas, where the employer has to pay more to attract workers, have to be paid the same as those in low-cost, more pleasant areas. Identifying the same work is hard to do for different jobs in different locations. The intent may be to raise wages of employees at the lower end, but the practical effect is likely to drive up employment costs and encourage layoffs.

One way for some employers to avoid the penalties in the Paycheck Fairness Act would be to move jobs offshore, especially if there is an offshore plant that can be expanded. If the bill were signed into law, the United States would be the only industrial country with this type of legislation.

America leads the world in opportunities for women, and 60% of adult women are in the labor force. The latest unemployment rate for adult women, at 8.1%, is lower than that for men, at 9.7%. Women are closing the pay gap because their education is increasing; they earn well over half of all B.A.s and M.A.s awarded, half of Ph.D.s, and half of professional degrees in law and medicine.

The Paycheck Fairness Act would narrow opportunities for advancement as employers reduce employment. With jobs and the economy now topping Americans' worries, Congress needs to think about how to make America a more welcoming place to create jobs, rather than how best to drive jobs away.


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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