Flexible Wages, Bargaining, and The Gender Gap

Women are often believed to be reluctant to negotiate for higher pay. This could give a workplace advantage to men and exacerbate gender pay gaps. Evidence from lab experiments generally supports this hypothesis, showing that women avoid situations in which they have to negotiate or bargain. As individually based compensation becomes more prevalent even in traditionally unionized sectors, due to the passage of right-to-work laws, understanding whether flexible pay penalizes women is key to understanding the sources of the gender wage gap.

We use the passage of Wisconsin's Act 10, a state bill that dramatically redefined the rules of collective bargaining for public sector employees, to test whether and how the introduction of flexible pay affects the gender wage gap.  We focus our analysis on public school teachers, a class of workers whose pay before Act 10 was strictly based on seniority and academic credentials, using rigid schedules that school districts negotiated with teachers' unions. After Act 10, unions lost the authority to bargain over these schedules. Instead, upon the expiration of pre-existing collective bargaining agreements (CBAs), districts became free to adjust teacher pay on an individual basis and without union consent. Some districts opted to switch to entirely flexible pay, while others opted to keep a salary schedule; even in these districts, however, teachers could negotiate their place on the schedule.

We use variation in the timing of CBA expirations, due to long-standing differences in districts' negotiation calendars which pre-dated Act 10, to estimate the effect of the introduction of flexible pay on the gender pay gap for teachers. Prior to Act 10, no gap existed between and men and women because all employees were paid with a salary schedule. However, the introduction of flexible pay led to a 0.8 percent decline in women's salaries relative to their male counterparts. This gap corresponds to 1.2 times the pre-Act 10 increase in pay associated with one additional year of seniority and 8 percent of the increase associated with obtaining a Master's degree. The gap is also 1.6 times the post-Act 10 difference in pay associated with a one-standard deviation higher value-added.

Some classes of workers appear to be particularly penalized by flexible pay; these include younger and less experienced teachers. Larger estimates for young teachers imply that, if the gap persisted over time, women would lose an entire year's pay over the course of a 35-year career relative to men. We also find that the gender wage gap is larger in schools and districts led by a man.

The emergence of a gender wage gap following the introduction of flexible pay suggests that gender differences in teachers' willingness to bargain or their bargaining ability could be driving part of the observed pay gap. In an attempt to test this mechanism, we ran a survey with all current Wisconsin public school teachers. We asked respondents whether they have ever negotiated their pay or plan to do so in the future. We then asked teachers who opted out of bargaining why they chose to do so; to those who did bargain, we asked whether they believed the negotiation was successful.

Survey responses indicate that women are between 12 and 23 percent less likely than men to have negotiated their pay at various points in their careers and 13 percent less likely to anticipate negotiating in the future. These estimates suggest that the observed gender differences in the propensity to bargain might be an important determinant of the gender wage gap. The magnitude of the estimates is significant: An 8 percentage point difference in the likelihood of negotiating, combined with an aggregate wage gap of one percent, suggests that differences in bargaining could lead to a gap as large as 12 percent.

In line with our wage results, we also find that gender differences in negotiating behavior are entirely driven by men being more likely to bargain under a male superintendent, whereas men and women who work under a female superintendent are equally likely to negotiate their salaries. When asked why they did not negotiate, women are 31 percent more likely than men to report that they do not feel comfortable negotiating pay. Instead, differences in the perceived returns to bargaining and beliefs about one's teaching ability do not explain our findings.

One limitation of our setting is the inability to link survey answers to administrative records, which prevents us from exactly estimating the portion of the post-Act 10 wage gap attributable to differences in bargaining. To make progress, we test three other possible determinants of the gap. First, we study whether the gap is explained by gender differences in teaching quality, as districts may have used flexibility to pay better teachers more. Our data do not support this hypothesis: Women's value added is slightly higher than men’s and controlling for value-added does not affect our estimate of the gender pay gap. Furthermore, the returns to a high value-added are positive after the introduction of flexible pay for men, but not for women. This suggests that women are not rewarded for their teaching ability at the same rate as men.

A second explanation relates to differences in job mobility and the returns to moving.  If women are less likely than men to move, they might be unable to increase their pay by moving to a different school or district or garnering outside offers. We find that women are as likely as men to move, and differences in mobility alone cannot explain the pay gap. Suggestive evidence indicates that men might be able to use outside job offers to bid up their salary at their current school, which points to bargaining as a primary channel driving the observed gender wage gap.

Finally, the gap could be driven by a higher demand for male teachers. To explore this hypothesis, we identify three instances in which this demand might be higher: (i) schools with fewer men, (ii) schools that lost male teachers immediately before Act 10, and (iii) schools enrolling a higher share of male students (where men could serve as role models for boys). In line with the hypothesis, the gap is larger in schools that lost more men or enroll more male students. Both variables, however, only explain a very small portion of the total gap.

Our results indicate that flexible pay, while possibly beneficial to incentivize workers to exert more effort, can be detrimental for the outcomes of some subgroups of the workforce. Workplace environmental factors likely play a role in the observed disparities in negotiating outcomes between men and women, even in a female-dominated occupation like public school teaching. Our findings also suggest that institutions, such as unions, can mitigate the rise of gender wage gaps by setting rules that govern pay. Importantly, our findings do not necessarily imply that it is suboptimal to pay workers based on productivity. Rather, our results call for more exploration of policies which prevent some workers from taking advantage of performance pay, simply because they are less likely to negotiate.

The paper is published in Quarterly Journal of Economics, vol. 137(1), pp. 215-266 (2022).