University of California Berkeley Department of Economics EC196 Topics in Economic Research Second Paper What Determines Our Wage The Econometric Analysis of Male Female Wage Gap Mentor Shari J Eli EC196 Research Paper 2 Introduction The persistency of differentials by gender in the labor market is one of the key focus points of labor economics Its importance in policy making is vast due to the necessity for mobility and heterogeneity of labor forces It is important to know to which extent does gender play a role in determining wages in order to target specific labor policies in the right direction In addition it is important to observe to which extent do other characteristics such as race nationality religion or marital status differently affect wages between men and women As I demonstrate further in the paper these differences indeed exist and should be taken into consideration when forming future labor policies The main purpose of this report is to examine the impact of gender and race in determining the hourly wage in UK In an attempt to do so I shall first analyze the literature on the topic providing a short historical overview of the dynamics of the labor market discrimination Afterwards a quick analysis of the data is presented outlining the main features and peculiarities of the dataset1 Furthermore a model is estimated and its strengths and weaknesses are analyzed Finally I interpret and discuss the findings and potential policy implications that arise Literature Analysis Economic discrimination in labor markets firstly needs to be defined Modern economics literature conventionally defines it as the presence of different pay for workers of the same ability or in other words it is when equal productivity is not compensated by equal pay Aigner and Cain 1977 175 77 Most popularly a female male wage gap is observed although there are variations to this particularly as a function of ethnicity The black white wage gap has been present ever since measurements on the topic have been conducted The convergence of the black white male wage gap during the 1960s and 1970s has been followed by a stagnation which has continued now for almost 30 years Altonji and Blank 1999 Although I acknowledge that a number of other factors that can affect the amount a person is paid exist such as previous unemployment job characteristics labor mobility etc the focus of this paper will be 1 The data used is the UK Labour Force Survey July September 2007 LFS 2007 2 EC196 Research Paper 2 exclusively on the wage gap Naturally this might lead to a bias in the models presented an issue I will also touch upon One of the advantages of observing hourly wage in comparison to weekly or monthly wage is that it is more precise Some surveys for example Drolet 2002 using Labour Force Survey 1997 show that men work more hours a week than females 43 1 in comparison to 39 for females which leads to severe inaccuracies in estimated models of weekly wages For this reason estimated regressions in the model I present take hourly wages as the dependent variable Another interesting feature I shall explore is the effect of urban environment on wage gap In particular I shall observe whether there are differences between returns for men and women in urban settings such as London and its outskirts and the rest of the country Phimister 2005 argues that the urban premium for women is larger than for men Also he concludes that married or cohabiting women have a substantially larger premium to those who are single Such conclusion is consistent with the hypothesis that the market in urban areas which is denser than that in rural neutralizes the effects of lower spatial mobility Phimister 2005 533 An important continuous variable in the model presented is years spent in education In estimating the effect of an additional year spent in education as well as differences between the returns for males and females it would seem important to take into consideration the relatively recent expansion of higher education in UK However previous research shows that expansion has so far had no effect on the financial returns of education Walker and Zhu 2001 145 Also the same research shows that financial returns of education vary across subjects those in Arts subjects tend to earn less than those in Economics Management or Business related subjects Regarding the male female wage gap with respect to higher education another interesting piece of research is that by Huang 1999 He argues that gender and education have a strong interactive influence on wages All other things being equal an additional year of education leads to higher wages for both men and women however above a certain level2 an additional 2 In his case it is junior college a non bachelor secondary degree in the US A UK equivalent would probably be a vocational degree 3 EC196 Research Paper 2 year of education leads only to a larger increase in wage for females As I shall argue later in the essay this finding has important policy implications Huang also mentions differences between countries He notices that women3 in the UK earn 68 as much as men in France that figure is 79 whereas in Nordic countries it rises up to 89 My analysis will show whether there have been significant changes in the UK labor market since that period mid 90s Data Analysis Figure 1 Overview of the Key Variables Mean Median Maximum Minimum Std Dev Skewness Kurtosis Observations Wage yredu workex 12 751 10 430 512 67 0 020 10 577 17 721 719 76 7645 12 624 11 000 29 000 0 000 2 879 1 327 4 627 36716 9 534 6 083 68 00 0 083 9 658 1 458 4 918 28735 Table 1 shows an overview of the key continuous variables of the dataset As only those who have finished their continuous education and are earning at the time of the survey are taken into consideration the number of observations of wage is 7645 The average hourly pay is 12 75 with a standard deviation of 10 57 The median value is 10 43 Such a value which is lower than the mean suggests positive skewness Such large positive skewness can probably be ascribed to a small number of individuals earning a lot more than the average 3 Employment sector of his analysis is manufacturing yet there should be no specific reason it could not be applied to the entire labour market 4 EC196 Research Paper 2 Figure 2 Hourly Wage adjusted for outliers Figure 3 Years spent in continuing education As regards to education the average person has spent 12 years in full time education whereas