Role of 'firm-pay gap' in why women are paid less

WHY do women earn less than men? The usual suspects – occupation, hours, experience – explain some of it. But a powerful, often overlooked reason is simply this: where women work.

- IHSAAN BASSIER, LEILA GAUTHAM

South Africa has a severe gender pay gap, much of which is unexplained by worker characteristics such as occupation, skills or experience. It is, in fact, the companies that hire women that play a huge role in shaping their lifetime earnings.

In our new study published in the Journal of Development Economics, using tax data on the universe of formal workers in South Africa, we uncovered a striking fact: nearly half of the gender pay gap in South Africa is explained by women working at lower-paying companies than men. That is, more women tend to work at companies that pay all workers less.

Sector sorting

We tracked millions of workers between 2010 and 2018 using tax data. We wanted to figure out how much money different companies paid relative to each other – regardless of the type of worker. To do this, we compared what two companies pay the same worker. We looked at workers who switched companies and compared how their pay changed when they moved to a new company. By doing this for many workers and many companies, we could see how much more or less a company tends to pay people with the same kind of background or job.

In the formal sector in South Africa, women, on average, get paid 12% less than men. We find that about 45% of this gap-5.5 percentage points - is due to women being concentrated in firms that pay less overall (to both women and men).