Product Market Structure and Labor Market Discrimination

4. Gender and Wages in Germany: The Impact of Product Market Competition and Collective Bargaining

Chapter 4 Gender and Wages in Germany The Impact of Product Market Competition and Collective Bargaining Uwe Jirjahn and Gesine Stephan Introduction A substantial literature confirms the existence of a significant gender wage differential, even controlling for productive worker characteristics. Yet, the size of the gender wage differential varies substantially across countries.1 These remarkable differences raise an interesting question, Do differences in institutions and markets influence the extent of discrimination? We address the question by studying blue-collar workers in West German establishments facing different market forces and institutional influences. Specifically, we investigate the impact of product market competition and collective bargaining agreements on the gender wage differential. In the theoretical part of this chapter, we argue that it is important to consider the agents of discrimination and the channels through which discrimination occurs. In the presence of equal employment opportunity and equal pay laws, actors cannot avowedly discriminate against women. To continue in the practice they need to hide discriminatory practices. Hiding discrimination requires discretion in hiring, job evaluation, or performance appraisal. Market forces and institutions influence the degree of discretion and, thus, the degree of discrimination. These forces and institutions may influence the use of payment schemes within establishments that reduce the degree of discretion. Thus, product market competition may force management to reduce slack and improve efficiency by adopting payment schemes. Collective bargaining agreements reduce the degree of discretion in performance appraisal if they contain detailed 59 regulations concerning the design of payment schemes. Moreover, collective bargaining may influence the creation of a trustful employer– employee relationship within establishments, which is crucial for the adoption of particular payment schemes. The empirical analysis uses matched employer–employee data from manufacturing establishments in the German federal state of Lower Saxony . The analysis proceeds in three steps. First, we investigate the determinants of piece rates. The focus on piece rates is motivated by the idea that piece rates provide less discretion for performance appraisals since the quantity of produced output can be easily verified (see Heywood and O’Halloran in chapter 9 of this volume). In the second step, we estimate wage regressions with fixed establishment effects on wages to analyze the impact of performance pay on wages of male and female employees at the individual level. However, performance pay is only one element of the firm wage policy and further unobserved elements may influence the gender wage gap too. The impact of the unobserved firm wage policies on the gender wage gap is reflected by differences in fixed firm effects on the wages for male and female workers. Thus, in a third step we analyze determinants of the gender-specific differences in establishment effects on wages. In particular we investigate the role of collective bargaining and product market competition. Theoretical Background and Hypotheses There are two controversial interpretations of the unexplained gender wage gap. While some researchers view this gap as a result of unobserved productivity differences between men and women, others view it as evidence of gender discrimination. A theory of gender discrimination has to answer three crucial questions, Who discriminates? What are the channels through which discrimination occurs? How do market forces and the structure of collective bargaining influence the channels of discrimination ? We organize our theoretical discussion around these three questions. THE AGENTS OF DISCRIMINATION Becker (1957) distinguishes between discrimination by employers, employees, and customers. Prejudice is the source of labor market discrimination in each of the three cases. If members of the majority group are prejudiced against the minority group, they prefer not to interact with members of the minority group. Employers with distaste for female employees will hire fewer women than profit maximization would imply. 60 Uwe Jirjahn and Gesine Stephan If male employees are prejudiced against female colleagues, they will not work with women without a compensating payment. If consumers dislike women, they receive less utility, and will pay less, when they purchase from women. In considering the role of the employer in more detail, it is important to emphasize that since Berle and Means (1932) the separation of ownership and control has received attention by economists. If the owners of the firm can monitor the executive managers’ actions only imperfectly , managers have scope to pursue their own goals. Ashenfelter and Hannan (1986) argue that managers can use this scope to discriminate against workers beyond the level preferred by the owners. Even if owners are solely interested in profits, discrimination...