Nobel Prize winner advocates structural flexibility in law firms to reduce the gender pay gap

Still life illustrating ethics concept
Claudia Goldin was yesterday awarded the Nobel Prize for Economics. Today’s press mentions her research, amongst which the wage gap for women. Her main article “A Grand Gender Convergence: Its Last Chapter also makes an analysis of the legal profession. Hereby my (redacted) extracts from this article, related to law firms.
  • Claudia Goldin developed a framework to emphasize that certain occupations impose heavy penalties on employees who want fewer hours and more flexible employment. The lower remuneration can result in shifts to an entirely different occupation or to a different hierarchical position or to being out of the labor force altogether. She illustrates it with lawyers: an individual with a law degree can be partner in a large law firm in which there is a premium for working long and continuous hours. The same lawyer could, instead, be employed as general counsel and work fewer and more flexible hours. Finally, the lawyer can work in a small firm that allows short and discontinuous hours at no penalty. The remuneration of these lawyers, all of whom have the same formal education, would have a nonlinear relationship of total earnings versus hours or to the flexibility of hours. Pharmacy, on the other hand, has nearly linear earnings with respect to time worked. Pharmacists who work more hours earn more, linearly. Those who are in managerial positions in a pharmacy earn more chiefly because they work more hours. Those who work part-time get paid less in a linear fashion.
  • She empirically verified this framework using data on graduates from the University of Michigan Law School: the gender gap in earnings between male and female lawyers is nil at the start of employment. The gap is small and insignificant at year 5, after controlling for hours, weeks and time off. But the gap balloons by year 15. Those who work in law firms usually report their hourly billing rate or fee (about 90 percent do), Goldin also include the relationship between hours and the hourly fee reported. That, too, displays nonlinearity. The more hours worked, the higher the hourly fee reported.The fraction female at 15 years decreases substantially as average weekly hours increase. Furthermore, the fraction of women who have children at 15 years out also decreases as hours increase. Of some interest with respect to why nonlinearities in pay arise with respect to hours worked: lawyers working more hours spent substantially more time representing a Fortune 500 company. Similarly, the time representing “rich” people increases substantially when a lawyer shifts from working part-time to full-time.
  • A gender gap in earnings exists today that greatly expands with age, to some point, and differs significantly by occupation. The gap is much lower than it had once been and the decline has been largely due to an increase in the productive human capital of women relative to men. What, then, is the cause of the remaining pay gap? Quite simply the gap exists because hours of work in many occupations are worth more when given at particular moments and when the hours are more continuous. That is, in many occupations earnings have a nonlinear relationship with respect to hours. A flexible schedule often comes at a high price, particularly in the corporate, financial, and legal worlds. The framework developed here shows why there are higher or lower costs of time flexibility and the underlying causes of nonlinearity of earnings with respect to time worked. Much has to do with the presence of good substitutes for individual workers when there are sufficiently low transactions costs of relaying information. Data for lawyers show large increases in gender pay gaps with time since graduation and also reveals the relationship between the increasing gender pay gap and the desire for time flexibility due to the arrival of children. Lower hours mean lower earnings in a nonlinear fashion. Lower potential earnings, particularly among those with higher-earning spouses, often means lower labor force participation. Pharmacists, on the other hand, have pay that is more linear with respect to hours of work. Female pharmacists with children often work part-time and remain in the labor force rather than exiting.
  • What must be in this chapter for it to be the last? The last chapter must be concerned with how worker time is allocated, used and remunerated and it must involve a reduction in the dependence of remuneration on particular segments of time. It must involve greater independence and autonomy for certain types of workers and the ability of workers to substitute seamlessly for each other. Flexibility at work has become a prized benefit but flexibility is of less value if it comes at a high price in terms of earnings. The various types of temporal flexibility require changes in the structure of work so that their cost is reduced. There are many occupations and sectors that have moved in the direction of less costly flexibility. Firms in many sectors, including healthcare, retail sales, banking, brokerage, and real estate, are making their employees better substitutes for each other and trying to convince their clients of that. When clients perceive there is a greater degree of substitutability among workers, a more linear payment schedule emerges. Pharmacists are now better substitutes for each other than they once were and their earnings are fairly linear with regard to time worked. Larger scale in healthcare has enabled teamwork that has freed physicians from irregular and long hours. Most small veterinary practices no longer have weekend, night, and emergency hours and, instead, have clients use the increasing number of large regional veterinary hospitals. Self-employment has declined in a large number of professions the past several decades including dentists, lawyers, optometrists, pharmacists, physicians, and veterinarians. The decline has produced a reduction in the premium to long and unpredictable hours. Some changes have occurred organically, often due to economies of scale (as in the cases of physicians, pharmacists and veterinarians), some changes have been prompted by employee pressure (as in the case of various physician specialties such as pediatricians), and other changes have occurred because firms want to reduce labor costs. Not all positions can be changed. There will always be 24/7 positions with on-call, all-the-time employees and managers, including many CEOs, trial lawyers, merger-and-acquisition bankers, surgeons, and the US Secretary of State. But, that said, the list of positions that can be changed is considerable.

    What the last chapter must contain for gender equality is not a zero sum game in which women gain and men lose. This matter is not just a woman’s issue. Many workers will benefit from greater flexibility, although those who do not value the amenity will likely lose from its lower price. The rapidly growing sectors of the economy and newer industries and occupations, such as those in health and information technologies, appear to be moving in the direction of more flexibility and greater linearity of earnings with respect to time worked. The last chapter needs other sectors to follow their lead.

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Authored by Ilse Tack - 17 Oct 2023

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