Thursday, 30 July 2009

Discriminating Against Women in the Job Market

(off global economics)

At the apropos of an FT article about the small rise of the gender pay gap in Britain, I thought I would share an anecdote.

After my years in Cambridge I took a gap year from academia, which turned out to be a gap decade. I was running a smallish research consultancy, seated in Hungary, but covering the macroeconomics and fixed income markets of many emerging markets. Our main client and almost all our smaller clients were in Western Europe. The size of the unit, at its peak, was 25 people. All our admin personnel were local Hungarians, but the analysts were not, we always tried to hire people from countries that we were covering. That gave me an insight into both how the labour market works in a host of emerging markets, but also the kind of decisions an entrepreneur has to face.

One of these was about discrimination.

We tried to be an equal opportunities employer. It so happened that as the research team grew it was entirely made up of white men. The two admin personnel were women, and the IT guys were, well, guys. Very traditional indeed. So, at one point, I thought that we should do something about this. We tried to hunt down a Roma analyst, but the market was illiquid, to say the least. We also decided to hire a female analyst. At the time, we were looking for someone from Turkey, and thus we advertised an analyst position in the Turkish media. We had a lot of applications, but all of them were men. Damn it! After some internal debates, we re-ran the ads, but with the line added that women are especially encouraged to apply. Now we got fewer applications, but all of them were women… (This probably is telling about Turkey as well…) We hired a well qualified woman, a really nice person.

But the story does not end there. In our business, our human resources model was that we were aiming at young macroeconomists or finance professionals who had a couple of years of work experience. Then we’d train them in-house, which was mostly on the job training. We had a rule of thumb that a new analyst would take one and a half years on average to become a fully functional, ‘useful’ part of the team. That took a lot of investment, and obviously only made sense if then our colleague would stay on after that period (which most of them did). Except that the nice Turkish lady started to try to get pregnant right after having moved to Budapest with her, also rather nice, husband. We discussed this, she was forthright about it, and Liz and I gave her advice (we just had our first baby a bit before) with regards to doctors and hospitals. It was all fair and fine.

Except for the fact that at the same time, our small company was pouring resources into her. Her, as an analyst. There was no way that we would ‘punish’ her for having a baby by not teaching her. But she ended up having a complicated pregnancy, and was away a lot from her job. And, after the baby was born, she decided to be with the baby a lot, and not to follow up on the previous plans of becoming a professional investment banking analyst. In other words, she made a set of personal choices: getting pregnant, long absence after the birth, and eventual departure from the career path, coupled by some uncertainty linked to her medical difficulties linked to the pregnancy. All of these were her decisions, and all of these bore costs for our research company. Part of the cost was personal: we had to fill in for the unexpected time she was not there, and thus some of us had to cut down on our holidays. One analyst, and good friend, in particular did not have a summer holiday that year, at all, as a direct consequence. Furthermore, her costs both in terms of her wage, taxes, the relevant overhead, and the time we had spent on teaching her were all lost, as well as the search cost that we had spent on a replacement. In a small company this is a lot. There was considerable amount of tension. We did hire an other female analyst from Turkey afterwards, but only because we could not live with the idea of not doing so. We knew however, that if she was to become pregnant too, our company would be in serious trouble.

I have recounted this story here to highlight an issue that is a taboo when talking about the pay gap. We like the fact that women can chose if and when they have babies. We also like the idea of equal pay. The two are in contradiction, and the cost of this contradiction is being forced onto the companies by our societies. In our story above everybody was a nice person, and all of them I count as my friends still now, six years later. But I cannot deny the fact that it would have made business sense to either hire a man for the same cost, or hire a women at a lower cost instead.

Most of my friends would throw hard objects at me at this point…

There are two observations on top of this. One. Obviously, there will be substantial variation among sectors. Some of this will come from economic rationality along the lines we faced, that is, long on-the-job training period of employees, and some along plain misogyny. One would expect that there would be sectors typically female or male due to economic reasons, and others due to ‘tradition’. When the society forces every employer, in every sector to offer exactly the same conditions for young men and young women, it may effectively counter some prejudices, but may, at the same time, force some good guys and gals into an awfully tricky situation.

Two. Perhaps part of the problem is that the feminist movement that highlighted the gender gap issues tends to have an ideological, political agenda. It seems that it is all too tempting for some proponents of the women’s issues to pour an anti-capitalist, anti-market sauce on labour market discrimination. However, unfortunately, this might weaken rather than strengthen the attack.

A solution suggested. I would think that there are two real questions here. First: who should pay for the kids, and second, how to reduce the cost of the inevitable uncertainty, by insuring the risk.

The current solution seems to be partial cost sharing, and coverage of a part of the risk. In the developed world, it does not make economic sense for the individual to give birth to babies, a marked departure from the past. Therefore, some of the cost is being born by the ‘pleasure parents’ who enjoy having kids. Some cost is being covered by the society, by providing education, playgrounds, healthcare, etc., when it does. There is a host of arguments why it may make sense for the society to invest into the future generation. But some costs fall on the employers. They do not get anything in return. Thus they discriminate. Once there are laws against discrimination, I suspect that there will be silent discrimination. The kind of pay-gap that we see, perhaps. (By the way, it is interesting that the gender pay-gap rises during a recession, perhaps a signal that the policy, at least in its current form, is a societal luxury.)

I would think that an insurance scheme to which everybody contributes up until the end of fertility (mid 40’s), or pension age (if you want to take into account that men have a longer period of fertility), which then compensates the companies once their employees go on a maternity or paternity leave, and then which gives a return of funds to those who did not have kids, would be a much fairer system. Companies would not feel an economic need to discriminate, thus real prejudice-based discrimination could be outed, and people who opted (or were unfortunate enough) not to have kids would not have to pay for them. If the society wanted to ensure future generations, then the investment into public education, health care, and child care in general should be increased (by the way, that is the model that seems to have worked for the Scandinavian countries).

You might think that this solution would essentially punish people for having children. You are right, in a way. It is a personal choice with cost consequences, and as long as I should have a control over it, I should pay for it. If you think that this is silly for then people will not have any kids, then your worry is probably about the future generations, and thus a societal function. You can solve this by increasing the state investment into kids.

However, for this, or any other solution to the opposing values of equal opportunity, personal liberty, and social fairness, to work, one needs to accept that the problem is much more complicated than just traditional prejudice lingering on. And talking about it should be a taboo no longer.

Monday, 27 July 2009

Taking Count

In academia - unlike in my previous profession - one might occasionally be asked to check out his own previous forecasts. So here it is: a qualitative revisiting my global economics forecasts of the past two years.

One. About the nature of the current crisis. The argument originally put forward was that the current crisis is that of models and not that of over-hype or under-regulation, as suggested by most commentators. In particular, the observation went, the underlying problem was not that risk was ‘excessive’ or that ‘shameless finance professionals sent the world to the brink’ and not even that ‘corrupt politicians deregulated the banking sector to the extent that the world turned into a gold rush town’.

The argument was that instead of risk being badly structured and managed, the root cause of the crisis had been the improper valuation of risk. Which, in turn, was due to the lack of adequate economic models. The global economy had bloomed into something entirely new, while the economic modelling and forecasting profession still treated the national economies as the unit of analysis.

The evidence came in (a) observing that such an uncertainty about global processes increased in several other areas as well (global c/a imbalances, emerging markets), before the crisis took the particular manifestation it did; and (b) demonstrating how the IMF, albeit keeps pretending otherwise, has no clue as to what will happen next (which is bad news as they do have the best global economic forecasting system to date).

The forecast was then that there surely will be a new breed of models, or at least a call for them, that would explicitly make the global economy its primary subject matter. Furthermore, the suggestion had gone that this new, global economics, will be as different from macroeconomics, as Keynes’s innovation seemed compared to the microeconomic mainstream of his day.

This forecast failed totally. The consensus of the economics profession - after some early hesitation - has become that all what we had seen is originating in the US banking sector, and is primarily a regulatory failure, although with systemic consequences. Furthermore, there seems no global Keynes in sight. At least I have not seen any breakthroughs that would offer a whole new theory passing as global economics. And those who have called on the economics profession to generate new ideas, stayed - disturbingly - in the language and theoretical framework of macroeconomics, or even worse, the engineering science of economy repair and management...

(And certainly, my hopes that my global models based on networks would bring one of the new insights, I am sad to report, were also unfounded. The network dynamics - I think now - does seem to reveal some structural properties, but will - at best - offer only a refinement to a macroeconomics based global view, rather than a completely new one.)

Two. About the global policy institutions emerging. The argument on this one was really a consequence of the above. If there is a global economy out there which contains all the national economies, but which at the same time, is really an entity in itself, then no policy could work unless it was on that, global level.

The rest is fairly straightforward. National level economies will have only a limited reaction to the national level policy mix. National level regulation will not work, as they have not in the years before the crisis broke (and on this point I agree with those advocating that there was something wrong with the regulation of finance); national level monetary policy will be very limited in its extent; and national level fiscal policy will have long term negative consequences - although might work in the short run. My forecast was that all of this will result in the emergence of a whole new set of global economic policy institutions. An effective global regulatory framework, with enforcement ability, not just information, a cooperation among central banks so strong that in itself could be regarded as a global monetary authority, and global fiscal policy of some sorts - perhaps Maastricht like limits and some global emergency intervention authority (an extended IMF like role).

And thus another failed forecast had been revealed. The worry that instead of going global, super-costly protectionist measures will be implemented on national level is becoming the reality. Early, and way too weak attempts towards a global regulatory framework seem to be falling through. Fiscal policy never really was meant to be harmonised (although there were lots of talk about it, mostly after summits, followed by a renewed set of rather local fiscal action). And early harmonisation of monetary policy is turning into a currency feud, especially between the Fed and the ECB.

One should learn from his mistakes. But a habit is habit. I still agree with my original analysis, as well as the forecast that came out of it. Despite the occasional talk about green shoots (the latest is the ADB’s forecast for Asian growth returning to 6% next year, published yesterday), I can’t see any apart from wishful thinking, and I cannot see how the current policy mess will be sorted out following the current trajectory.

The trouble is that if the above argument happens to be right, then the times coming will be much worse than what we have seen so far. High global inflation, low growth, jerky policy moves (probably around taxation and desperate ‘policy innovation’), and plenty of protectionism. Apart from being a tough time, the Earth might not even be such a safe place to be in.