New research from Denmark finds that motherhood and a ‘child penalty’ are responsible for the gender earnings gap

From Mark Perry.

"That is the conclusion of a new NBER research paper by economists from Princeton, the London School of Economics and the Danish Ministry of Finance titled “Children and Gender Inequality: Evidence from Denmark” — that the gender pay gap in Denmark is explained largely by a “child penalty” that adversely impacts the earnings of mothers more than fathers, rather than by gender discrimination. Here are excerpts from the paper’s abstract, introduction and conclusion:
Abstract

Despite considerable gender convergence over time, substantial gender inequality persists in all countries. Using Danish administrative data from 1980-2013 and an event study approach, we show that most of the remaining gender inequality in earnings is due to children. The arrival of children creates a gender gap in earnings of around 20% in the long run, driven in roughly equal proportions by labor force participation, hours of work, and wage rates. Underlying these “child penalties”, we find clear dynamic impacts on occupation, promotion to manager, sector, and the family friendliness of the firm for women relative to men. Based on a dynamic decomposition framework, we show that the fraction of gender inequality caused by child penalties has increased dramatically over time, from about 40% in 1980 to about 80%in 2013.

Introduction

For a range of labor market outcomes, we find large and sharp effects of children: women and men evolve in parallel until the birth of their first child, diverge sharply immediately after child-birth, and do not converge again. Defining the “child penalty” as the percentage by which women fall behind men due to children, we find that the long-run child penalty in earnings equals about 20% over the period 1980-2013. This should be interpreted as a total penalty including the costs of children born after the first one, and we show that the penalty is increasing in the number of children. The earnings penalty can come from three margins — labor force participation, hours of work, and the wage rate — and we find sharp effects on all three margins that are roughly equal in size.
We show that children affect the job characteristics of women relative to men in a way that favor family amenities over pecuniary rewards. Specifically, just after the birth of the first child, women start falling behind men in terms of their occupational rank (as ordered by earnings or wage rate levels) and their probability of becoming manager. Moreover, women switch jobs to firms that are more “family friendly” as measured by the share of women with young children in the firm’s workforce, or by an indicator for being in the public sector which is known to provide flexible working conditions for parents. The importance of the family friendliness of occupations and firms for gender equality has been much discussed in recent work, but here we provide clean event study evidence that these qualitative dimensions directly respond to the arrival children.
Finally, we note that children may have two conceptually different effects on labor market outcomes. One is a pre-child effect of anticipated fertility: women may invest less in education or select family friendly career paths in anticipation of motherhood. The other is a post-child effect of realized fertility: women changing their hours worked, occupation, sector, firm, etc., in response to actual motherhood. The event study approach cannot capture pre-child effects; it is designed to identify post-child effects conditional on pre-child choices. If women invest less in education and career in anticipation of motherhood, then our estimated child penalties represent lower bounds on the total lifetime impacts of children.

Conclusions

1. The impact of children on women is large and persistent across a wide range of labor market outcomes, while at the same time men are unaffected. The female child penalty in earnings is close to 20% in the long run. Underlying this earnings penalty, we find sharp impacts of children on labor force participation, hours worked, wage rates, occupation, sector, and firm choices. Together, these findings provide a quite complete picture of the behavioral margins that adjust in response to parenthood and how strongly gendered these margins are. .
2. We have decomposed gender inequality into what can be attributed to children and what can be attributed to other factors. We have shown that the fraction of child-related gender inequality has increased dramatically over time, from around 40% in 1980 to around 80% in 2013. Therefore, to a first approximation, the remaining gender inequality is all about children. Our decomposition analysis represents a re-orientation of traditional gender gap decompositions: instead of studying the extent to which men and women receive unequal pay for equal work (the unexplained gap after controlling for human capital and job characteristics, but not children), we study the extent to which they receive unequal pay as a result of children (but not necessarily for equal work). The unexplained gap in traditional decomposition analyses is often labeled “discrimination,” but our analysis highlights that the unexplained gap is largely due to children. This does not rule out discrimination, but implies that potential discrimination operates through the impacts of children.

Related: It’s interesting to note that Denmark has a very generous paid parental leave policy of 52 weeks per child, here’s a summary:

A mother can take four weeks off before the child is born as pregnancy leave. After birth, mothers are entitled to take 14 weeks of maternity leave. During these first 14 weeks, the father can take two consecutive weeks off as well. Afterwards, both parents are entitled to split 32 weeks of parental leave, which can be further extended by another 14 weeks.
According to the law, parents can receive a total of 52 weeks of paid leave per child from the government. The amount that the parents are entitled to is less than the amount of a full salary. However, many companies are likely to have an employee agreement in place in which they pay your full salary for a period of time. Many private companies in Denmark have this kind of arrangement. In this situation, the amount paid by the government is reimbursed to the company, which in turn pays the parent’s full salary. At the point in which the employee’s right to full salary during maternity/parental leave at the company stops, the government benefits are then paid directly to the employee.

Of course, to fund those 52 guaranteed weeks of parental leave per child, Denmark has some of the highest taxes in the world, with a personal income tax rate that reaches 55.8% and a sales tax rate of 25%!

MP: Overall, the research from Denmark that concludes that personal career and family choices explain gender differences in earnings more than gender discrimination are not surprising, and are in fact intuitively obvious! The results are also consistent with this conclusion from a 2009 report for the US Department of Labor titled “An Analysis of the Reasons for the Disparity in Wages Between Men and Women”:

This study leads to the unambiguous conclusion that the differences in the compensation of men and women are the result of a multitude of factors and that the raw wage gap should not be used as the basis to justify corrective action. Indeed, there may be nothing to correct. The differences in raw wages may be almost entirely the result of the individual choices being made by both male and female workers."