Pay Equity Is Not Fair

John B. Moore

Do you believe in pay equity? Arguments for “Equal Pay for Work of Equal Value” and “Equal Pay for Equal Work” share the idea that gender should not be a factor in determining a person’s pay. In this article the term “pay equity” is used to include both definitions. Because there is a significant gender-based pay gap in our economy, there are large numbers of people who would benefit financially by enforcing pay equity. Furthermore, the existence of pay equity appeals to our sense of fair, impartial and non-discriminatory practices. The thesis of this article however is that enforcing pay equity propositions through legislation has two negative effects — increased costs to non-beneficiaries and more importantly, it undermines the principle of free enterprise as one of the foundations of our economic prosperity.

What is Employment?

In simplified terms employment begins with a transaction involving:

• an employer and an employee
• a contract (usually written) describing
  - the work to be done by the employee
  - the remuneration to be paid by the employer to the employee
  - terms and conditions covering the lifetime of the contract
  - (usually) many other clauses defining obligations of the two parties
• agreement that the contract is acceptable to both the employer and the employee

Unlike a retail purchase that has a buyer and a seller, an employment contract is more like a negotiated trade involving two sellers (and hence two buyers) — one selling the benefits of employment, the other selling the services of the employee. Through negotiation the parties attempt to achieve their respective objectives, one important component is the level of remuneration. A second important difference is that the customer in a retail purchase controls the purchasing decision whereas when offering employment, the employer controls the hiring decision.

Four Arguments Against Mandatory Pay Equity

1. Free Will. The employer and the employee should be free to accept or reject the terms of an employment contract. This means the person seeking employment must be free to offer his/her services to the highest bidder and the employer must be free to offer employment to the lowest bidder. It follows that employees forego the right to a higher level of compensation based solely on perceived differences in work done and/or the value of work done relative to other employees. To put it simply, an employer may say “If that’s not enough, don’t take the job” or “I’m sorry, you’re asking too much”. An employee may say “Sorry, I think I’m worth more than what you have offered”.
2. “Work” vs. “Value”. Payment is made to a person, not to “work” per se. Therefore, a more meaningful phrase is “to persons of equal value”. Even though individuals may have the same “job”, differences in education, seniority, experience, skills, attitude, altruism, risk tolerance, physical characteristics, tolerance for working conditions, etc. may make one potential employee more valuable than another. Clearly It would be an challenging task to assign weights to these characteristics let alone values for each that would produce a numeric rating of a potential employee’s worth to an employer. Yet, when arguing for pay equity, these characteristics are replaced by using the word “work” as a surrogate for the collective value of a person for a position. (Note: some existing laws regarding Pay Equity do include factors other than a job description to consider when pay equity is justified.
3. Supply and Demand. With few exceptions (governments come to mind) prices for goods and services are determined by supply and demand. The compensation amount specified in an employment contract is simply the price agreed by the buyer and seller based on their respective objectives and assessments of supply and demand for the services offered by the employee. A prospective employee’s satisfactory level of remuneration may be based on his/her knowledge of what others performing the proposed work are receiving. In an economy based on free enterprise principles, the market price is the fair price in a freely negotiated transaction.
4. Business Objectives. The primary, but not the exclusive objective of most businesses in the private sector is to make a profit. This objective is difficult to achieve without treating employees fairly in the long term. Achieving the monetary objective means paying the market price for employees even if pay uniformity does not exist.

Pay Equity Implementation

Efforts have been made by governments and special-interest groups to control market-based pricing of employee compensation in numerous ways. In Western societies we are far-removed from slavery, indentured servants and feudalistic employment. Exceptions do exist even in democracies. Independent of any pay equity initiatives these practices should be eliminated.

Government Interventions. National governments are strong advocates of pay equity. They have the authority to impose selective taxes, tariffs, subsidies, financial incentives, levies, price controls and myriads of regulations that have financial implications. These enactments attempt to control any or all of supply, demand and prices of goods and services. Pay Equity laws are no exception. These controls are always justified by claiming that some or all citizens will realize a net benefit from these measures. Pay equity legislation uses fairness as the justification for those who benefit from its implementation. However, what is fair to some is often unfair to others. Minimum wage laws are an example. This type of wage and price control benefits low wage earners but penalizes employers of low wage earners.

Corporate and Special-Interest Group Interventions

Monopolies and oligopolies have tremendous power to control prices and wages. Governments have an unequivocal responsibility to limit monopolistic power and foster competition which will result in market-based pricing of goods and services. This will produce the greatest benefit for the largest number of citizens.

Special-interest groups include corporations, unions, political action committees, lobbies and many other organizations that attempt to influence legislation that has financial implications that will benefit or penalize the group or its members. For example, big tech companies spent $47 million in 2018 lobbying Washington organizations and persons. Employee associations — whether representing wage earners or professions such as teachers, dentists or engineers, provide significant benefits to their members. These benefits however do not typically result from getting fair-market compensation for their members but rather by publishing price schedules that must be adhered to as a condition of membership. These schedules focus on task descriptions. Gender-based pay equity is typically not an issue for most special-interest groups.

Pay Equity Losers

Governments typically have a smaller gender-based wage gap than non-government organizations. Because governments are not required to balance the books the increased costs of pay equity requirements are usually passed on to taxpayers by increasing government debt. This allows governments to hide the true costs of pay equity by not explicitly accounting for it. More generally, pay equity in governments is one factor for the (growing) wage gap between public and private sector employees. (Several studies report that civil servants receive an estimated 30% more in salaries and benefits than employees in the private sector doing comparable work.) It is ironic that the public-private wage gap is partly caused by pay inequity being practiced by governments.

United Nation Declarations
The United Nations published the following four tenets regarding the Right to Work and Pay Equity. The author’s comments appear within << >> characters following each declaration.

1. Everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.
   << agreed with emphasis on ‘free choice’>>
2. Everyone, without any discrimination, has the right to equal pay for equal work.
   << disagree. It ignores the right of free choice of the employer to determine the level of pay>>
3. Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. <<partially agree: provided the terms of employment are mutually agreeable>>
4. Everyone has the right to form and to join trade unions for the protection of his interests.
   <<agreed>>

Conclusions

• Enforcing pay equity negates the principle of free choice in determining the rate of compensation for employees
• Pay equity increases benefits for some at the expense of others
• Organizations that implement pay equity should base it on the worth of a person rather than a job definition
• Pay equity within government organizations has increased the pay gap between the public and private sectors and has increased the cost of government

About the Author

John B. Moore has been a professor of Management Sciences at the University of Waterloo. He is the CEO of RunPlusMinus Inc. His email is jbmsavvy@gmail.com