What is the 'unexplained wage gap' and how can we close it?

Harvard economic historian and labour economist Claudia Goldin became the first solo woman ever to win the Nobel Prize in Economics for her groundbreaking research on the factors behind the gender wage gap. Her study, which analyzed more than two centuries of labour market data in the United States, revealed how income and employment patterns have evolved. The Royal Swedish Academy of Sciences thus awarded her the prestigious prize “For having advanced our understanding of women’s labour market outcomes.”

Despite the modernization, economic growth, increased educational attainment and rising participation of women in the labour force in the 20th century, the gender wage gap persists. Professor Goldin’s research indicates that, mostly, this wage gap occurs within the same occupations between men and women. The primary reasons for this gap are the “motherhood penalty,” where women’s labour hours and income decrease when they have children, and their lack of choice regarding the pursuit of “greedy work,” which demands more hours for higher compensation.

Since the Equal Employment Opportunity Law was enacted in 1986, Japan has developed and expanded related laws and systems to encourage women to enter the workplace and balance work and family life. The female employment rate in Japan, around 53% in 1986, increased to approximately 72% by 2022. Moreover, the rate of women continuing to work after giving birth to their first child, which had remained around 40% from 2010 to 2014, increased to approximately 70% from 2015 to 2019.

Despite this progress, in 2022, the gender wage gap in Japan still represented a 24.3 percentage point difference between median male and female wages, double the average of OECD countries (members of the Organisation for Economic Co-operation and Development).

One of the reasons for this disparity is the high proportion of women working as non-regular employees and a significant wage gap between regular and non-regular workers. Surveys have shown that the proportion of non-regular employment among workers in 2022 was 22.1% for men and 53.2% for women.

Additionally, according to the World Economic Forum’s Gender Gap Report 2023, Japan ranks 123rd out of 146 countries for economic participation and opportunity, lagging significantly behind other advanced nations. Furthermore, data from the Ministry of Health, Labour and Welfare’s vital statistics show that many women who have given birth choose non-regular employment to balance work and child-rearing or find it difficult to transition back to regular employment after temporarily leaving the workforce following childbirth, often resulting in continued non-regular employment.

The reasons behind wage disparities have yet to be entirely understood. Therefore, there exists both an “explainable wage gap,” influenced by job level, years of service, job type and working hours, and an “unexplained wage gap,” which continues even when these conditions are met.

According to Mercer’s Total Remuneration Survey 2022, which surveyed 1,021 companies in Japan, it was found that the wage gap between men and women due to the unexplained wage gap stands at 6%.

The free-market app giant Mercari announced a 37.5% gap in average wages between men and women within the company. Among regular employees with the same job and rank, it was revealed that women’s wages were approximately 7% lower than men’s. The practice of offering conditions based on the previous salary level for nearly 90% of the company’s mid-career hires is said to have contributed to these unexplained gender wage gaps. The company has taken steps to reduce this gap, lowering it from 7% to 2.5% by August by raising base salaries for certain women and is also reassessing the hiring process.

Skills survey data also reinforces the idea of an unexplained gender wage gap as men and women do not necessarily have different skills for the same occupations. The influence of unconscious bias, such as “this job is not suitable for women” or “this job is more suited for men” can be seen here. In addition to such biases, the causes of wage gaps are complex. They may involve differences in negotiation skills between men and women or characteristics of workers that are not evident in the data.

For companies, establishing clear and unbiased evaluation criteria that do not depend on gender and clarifying job responsibilities and scope can be the first step towards eliminating such disparities.

Professor Goldin notes that in Japan, women often work short hours and are not employed in jobs that offer lifetime employment, which men are offered, and that “simply bringing women into the labour market is not enough to solve the problem.”

To eliminate the wage gap, the government mandated last year that companies with over 300 employees disclose gender wage differences. This requirement applies to all employees, regardless of their status as regular or non-regular workers.

This kind of initiative can pave the way for a broader societal shift in attitude towards women in the workforce and address the unexplained wage gap. In turn, it can become a catalyst for Japan’s economic growth.