Equal Pay Won’t Help GDP

I stumbled across an In These Times article by Amy Domini and Sofia Faruqi called “5 Ways To Reduce Inequality By Holding Corporations Responsible.” It’s pretty much the usual progressive game plan, but one particular sentence in the last proposal caught my eye (emphasis mine):

5. Help women to prosper: Women are twice as likely as men to work for minimum wage. The gender pay gap in the retail sector alone costs women $40 billion annually in lost wages. This wasn’t so bad in 1960 when only 11 percent of American households had a female head, but it’s dire today when women are the primary breadwinners in 40 percent of homes. Plus, it’s bad for the economy. Equal pay would raise American GDP by 2.9 percent, or $448 billion.

The numbers in that last sentence are stunning, but I couldn’t see how equal pay legislation could increase GDP.

Tracing the link in the original article leads to last year’s U.S. Senate Budget committee testimony by Heather Boushey, Executive Director and Chief Economist for the Washington Center for Equitable Growth. She in turn cites a 2014 briefing paper titled “How Equal Pay for Working Women would Reduce Poverty and Grow the American Economy” by Heidi Hartmann, Jeffrey Hayes, and Jennifer Clark of the Institute for Women’s Policy Research.

Here’s what that paper has to say in the summary of its findings. Notice the very careful phrasing (emphasis mine):

The U.S. economy would have produced additional income of $447.6 billion if women received equal pay; this represents 2.9 percent of 2012 gross domestic product (GDP).

The paper gets to those numbers by using data from the 2010-2012 Current Population Survey Annual Social and Economic Supplement to estimate the pay difference between men and women, controlled for age, education, annual hours of work, metropolitan residence, and region of the country. The authors then use those figures to project how much more money women would have made if they had been paid the same as men.

The authors calculated that women earned an average of $36,129 a year, and that their pay was 85% as much as men for the same work. So if women earned as much as men, they would be earning $42,380 per year. That’s an increase of $6,251 a year for all 71.6 million working women. Multiply it out, and you get $447.6 billion, which is 2.9% of GDP. (I get a slightly different figure when I do the math, but it’s close enough.)

Income and production are two sides of the same process: We earn our income by selling our production of goods and services, and we spend that income buying and consuming the same goods and services. So if our collective income increases, production must also have increased. Consequently, if women earn more money, and they do not do so at the expense of anyone else, then the additional income would have to increase gross domestic product.

(There are actually many variations on income and production figures, depending on which components and flows are included in the calculations, and care has to be taken to add and subtract the right components when transforming numbers between two national accounts. In the U.S. we calculate GDP from both production data and from income data. In theory, this is an accounting identity, but there are always data discrepancies that keep income and production figures from matching exactly.)

The point of the careful phrasing in the summary is that $447.6 billion is the estimated amount that GDP would have been higher if women had somehow earned at the same rate as men, all other things being equal. How exactly that could happen is carefully left unsaid. In particular, the study does not say that equal pay legislation would increase GDP by that amount.

If we just passed a law that forced employers to pay women 17% more for their work, that would increase women’s paychecks, which would increase the national income accounts…but not really.

For an economic story to make sense, it has to make sense when applied to the real economy of goods and services. So even though U.S. GDP is expressed in dollars, what really matters is the total amount of goods and services that are produced. So in order for GDP to increase by $447.6 billion, it’s not enough for paychecks to increase by $447.6 billion. Our economy must actually produce $447.6 billion worth of additional goods and services.

But by definition, the equal pay legislation is simply giving women more money for the work they are already doing, which means that the increase in paychecks is not accompanied by an increase in the production of real goods and services. We’d be paying more money for the exact same stuff.

When you pay more for the same thing, we call it inflation. The U.S. Bureau of Economic Analysis calculates both nominal GDP, which is inflated, and real GDP, measured in constant dollars adjusted for inflation. The increase in women’s nominal earnings would show up as inflation of nominal GDP, while real GDP would be unchanged.

Since we’re not raising men’s incomes, the inflation would actually eat away at their real earning power. So the benefits to women would come at the expense of men. Women would be getting a larger share of the pie, but the pie would still be the same size. The deadweight $447.6 billion gain to GDP that Domini and Faruqi envision from the simplistic IWPR calculation is a fantasy.