Obama flunks Econ 101

As co-sponsor of a bill that would bureaucratize most of the labor market, the presidential hopeful is flirting with a very bad idea. Fortune's Cait Murphy investigates.

By Cait Murphy, Fortune assistant managing editor

NEW YORK (Fortune) -- It's baaaack!! Yes, "comparable worth," which faded out around the same time the Bay City Rollers were disbanding, is making a comeback, under the euphemism "pay equity". To wit: the Fair Pay Act of 2007. Introduced by Tom Harkin (D-Iowa) in April (Illionois Sen. and Democratic presidential hopeful Barack Obama is one of 15 co-sponsors) the Act notes the existence of wage differentials between men and women.

This is true; according to the Bureau of Labor Statistics, in 2005 female full-time wage and salary workers made 81% of what men did; (click here on "women's earnings" in PDF). What is more dubious, though, is the assumption that is the heart of the Fair Pay Act: that discrimination is the reason for all or most of the difference. And the act's remedies are absurdly misguided, injecting the federal government into the most routine pay decisions.

Granted, Obama did not write the bill, but he did sign on to it - the only presidential wannabe of either party to do so. Obama is a serious man and a serious candidate who presumably did not go out of his way to associate himself with this legislation in a burst of whimsy. But the Fair Pay Act, despite its anodyne title (who's against fair pay?) is the result of profoundly unserious economic thinking. That Obama put his name to it has to give pause.

Let's start with the dubious. To the Fair Pay Act's backers, the simple fact that women make 81% of men's full-time earnings is in and of itself proof of discrimination, past and present. Only a pig-headed sexist would argue otherwise.

Or maybe not. June O'Neill, a certifiably female economist who served as director of the Congressional Budget Office under President Clinton, wrote a peer-reviewed paper for the American Economic Review (May 2003), trying to account for the pay gap. What she found was that women are much more likely over the course of their lives to cut back their hours or quit work altogether than men. That matters, because even though the BLS was comparing full-time workers, if you go part-time or take years out of the labor force, that has an effect on earnings down the line, due to loss of seniority or missed promotions.

More precisely, of women aged 25-44 with young children, more than a third were out of the labor force; of those women who did have jobs, 30% worked part-time. (The comparable numbers for men were 4% out of the labor force and 2% working part-time).

All told, women are more than twice as likely to work part-time as men and over the course of their lifetimes, work outside the home for 40% fewer years than men. That accounts for a significant chunk of the pay gap. Then there is a more subtle factor. Despite the many advances the women's movement has brought the U.S., what it hasn't done, thank heavens, is make men and women the same. The simple fact is - and there is nothing nasty or conspiratorial about it - the sexes continue to choose different avenues of study and different types of jobs.

Here's an illustrative example. The college majors with the top starting salaries, according to the National Association of Colleges and Employers, are: chemical engineering (almost $60,000), computer engineering, electrical engineering, industrial engineering, mechanical engineering. Men make up about 80% of engineering majors. Women predominate among liberal arts majors - whose salaries start at a little more than $30,000. Putting it all together, OšNeill figures that these differences - in choice of work, years in the workforce, and hours of work - could account for as much as 97.5% of the differences in pay between men and women. "The unadjusted gender gap," she concludes, "can be explained to a large extent by non-discriminatory factors."

The pay equity activists insist that O'Neill (and other economists, most of whom agree with her on the basics) miss the point, which is that the discrimination is not so much against individual women as against women's work. Women are more likely to be in jobs that are dominated by women, such as elementary school teacher and librarian; men in jobs dominated by men, such as engineers and plumbers. And men's jobs, on the whole, pay more.

As Harkin notes in his explanation of why he introduced the Act, social workers (mostly female) make less than probation officers (mostly male), "even though both jobs require similar levels of skill, effort and responsibility." The Fair Pay Act is meant to solve this. But what, exactly, is the problem? If more women than men want to become social workers, knowing full well that this is not a high-paying job - well, so be it. If they want to be paid as well as parole officers, then they should become parole officers.

Discrimination occurs when people are barred from professions for which they are qualified, or paid less for doing the same job. It is not discrimination to freely make a choice that has an undeniable economic consequence. Call me an oversensitive female, but I detect a large dollop of patronization here. The theory behind the Fair Pay Act is that the labor market intentionally sets wages in a way that is unfair to women - and apparently we are so stupid that we fall right into this trap, repeatedly making non-rational choices (not just different ones).

Again, the facts suggest otherwise. Since 1979, as more women have entered and stayed in the labor force for longer periods, the pay gap has narrowed, from 63% then to 81% now. Over the same period, according to the BLS, women's earnings have grown much faster than those of men. Women who work part-time actually make more than men who work part-time; and never-married women make almost exactly as much (96.7%) as never-married men.

If the market was so rigged against women, it's hard to see how we benighted females could have made this kind of progress. Is there such a thing as sex discrimination in the workplace? Of course; most of us have seen, heard or experienced at least one situation in which a certain odor of sexist unfairness has stunk up a personnel decision (sometimes against the male of the species). Perhaps that accounts for the couple of percentage points that OšNeill had left when she had crunched the numbers.

The American Association of University Women favors the Fair Pay Act; even so, in its recent report, "Behind the Pay Gap," it concluded that, "after accounting for all factors known to affect wages, about one-quarter of the gap remains unexplained and may be attributed to discrimination." That comes out to about five percentage points - double OšNeillšs estimate, but less than horrifying.

The Fair Pay Act takes a sledgehammer to deal with this gnat-sized differential. Under its provisions, the Equal Employment Opportunity Commission (EEOC) would create criteria determining whether a given job is dominated by one sex; employers would have to send the EEOC every year a listing of each job classification, the race and sex of those holding such jobs; how much they are paid; and how such pay was determined. The goal of all this is to ensure that people in "equivalent" jobs are paid similar wages. "The term, 'equivalent jobs', according to the legislation, "means jobs that may be dissimilar, but whose requirements are equivalent, when viewed as a composite of skills, effort, responsibility and working conditions." And who would decide what is equivalent? The federal government, of course. Forget the price signal: Congress is on the job!

Barack Obama actually went out of his way to become a co-sponsor of this misguided bill, signing on after it had been introduced. "For too many years, not only have women across America been under-compensated for their hard work, they have been undervalued," went his statement on Equal Pay Day. "Equal work deserves the guarantee of equal pay. We must eliminate the legacy of discrimination that continues to face women in the workplace, by ending penalties for women that choose to have both a career and raise a family and by making it easier for women to organize." There's nothing much to disagree with there, but there is also nothing that effectively addresses the merits (or demerits) of the proposed remedy.

Equal pay for equal work has traditionally meant that people doing the same jobs (not "equivalent" ones) be paid the same. For example, if Hillary Clinton, who has the same job as Sen. Obama and started at the same time, was paid 81% as much, that would clearly be discrimination. But that is not the case - and her book advance was bigger, too. (Clinton, by the way, has not signed onto the Fair Pay Act; she is, however, a co-sponsor of the "Paycheck Fairness Act," which starts with the same misguided principles, but is much less dramatic in its provisions).

The premise of the Fair Pay Act is that it is the duty of government to decide what a job is worth; but value is something that a free market is brilliant at apportioning. First-year chemical engineers make $60,000 because that is what their employers have to pay in order to win their services. Libraries can get excellent new staff for less. Librarians, male and female alike, know this; they may wish it were different but unequal is not the same thing as unfair.

The labor market is not perfect, which is why there are such things as anti-discrimination laws and safety regulations. But there is nothing so wrong with it that the federal government needs to wade in, classify every single job for every company with more than 25 employees, and then assume the right to micro-manage every decision over pay. It's hard to overstate just how radical a policy this is: replacing a well-functioning system that is regarded as a source of U.S. competitive advantage with statist, centralized, bureaucratized mechanism of a kind more familiar to, say, East Germany in the 1980s than to the 21st century American private sector.

The Fair Pay Act is, in short, madness. And it is troubling that Obama has associated himself with this kind of legislation - a position that has the feel of a pander to the feminist left. It is certainly not sound economics.

Obama's Senate website does not feature anything dealing directly with employment or economic management. It does note, however, that more issue papers are being added. So perhaps the Senator is still working out what he thinks. Let's hope he eventually plumps in favor of something that looks a little more like capitalism.  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.