Wage Determinants I: Gender Wage Gap

 

In all forms and colors of societies, the pursuit of acquiring a job is a prominent one. Jobs are necessary in the limited time we have in this world. However, jobs are not all equal and it highly influences what kind of standard we can provide for ourselves and our loved ones. It is because of the wage that the job pays that determines your living standards. How much you are paid is a signal of the value society places on the skills/service you provide.

Little would argue against the fact that, education level and experience are the two most important factors that contribute to someones wage is , but does it stop there? Or are there other characteristics that influences wages as well?

In this post and future posts I will be looking at data from  from the census population survey (CPS) for March 2015 for the United States. Our interest here is trying to consider characteristics that can explain wage differentials. The reason this is important is because it is crucial to know whether characteristics that are endowed to us at birth might be detrimental to determining our wage.

We will be focusing this post by looking at averages, and I will emphasize why looking and comparing averages gives an unclear picture of reality. I will begin by providing some summary statistics for this sample.

Table 1.

Table1 BP

Table 1 tells us that the average hourly wage for our sample is $23/hour, the average age is 39, the average years of education is 13, and average experience is 27 years.

Table 2 (below) tell us more information about the sample. For example, there are 150,907*0.443= 66867 females and so on (Column 5). Column 5 displays how many people are in the data based on gender, race, marital status, the number of children under 18 a person has,  whether if someone is from the south or north, and whether he/she is a member of a union, and race.

Table 2.

TB3.jpg

 

For the purposes of this post we are going to examine Gender  wage differentials. We are interested to see whether being a female or male affects your earnings.

Table 3.

TB34.jpg.png.gif

If we look at the table above,  it seems that being a female is associated with a lower average hourly wage than that of a male. The female earns on average $21 where the male earns $25. In other words, females earn 0.84 cents for every $1 a male makes. But this is a broad statement, isn’t it ? Think about it! we are not really specifying anything about this sample. Could it be that  men are just more educated than females, and that is why they receive a higher wage? We need a more accurate look to start making statements. Let us consider the sample again but this time lets limit our search to males and females that hold Bachelor, Graduate, and High school degrees.

Let us start off with the examining the average wage between males and females at the bachelor degree level.

Table 4.

tb4.png

In table 4, we can see that females with bachelor degrees earn $27 compared to males with bachelor degrees who earn $33 . This is even worse than the average we first computed (table 3). For Bachelor degree holders  females earn 81 cents on the dollar compared to a male.

Let us continue by looking at the average wage between males and females at the Graduate level, (i.e. +18 years of schooling).  Table 5 below surprisingly displays output on the wage differential between males and females and finds that it shrinks at the masters and doctorate level.

Table 5.

tb5

The wage differential now is much smaller at this level of education when comparing between genders. Females earn 97 cents for every $1 a male earns.

Let us now look at High school educated males and females  (12 years of schooling). It is here where we find the largest wage gap .  Females earn 75 cents for every $1 a male earns at this level of education.

Table 6.

tb6

 

This is important to realize, first for policy makers and for people with false perception of reality and no data to back up their assumptions. Gender wage differential does exist, but it is highly dependable on many factors. As I have demonstrated it seems that among High school and Bachelor degree holders the female/male wage gap is largest and starts to get smaller as the level of education gets higher.

It is vital to mention that the magnitude of the gap is not very accurate. Since there are other unobserved characteristics that might be causing these numbers and this data and method (looking at averages) does not take these into consideration. For example, it does not take majors the types of different degrees pursued by either males and females into account. Nor does it consider whether females might be more inclined to attain certain jobs that might be causing a large supply of females in a specific labor market. These issues could potentially be behind  lower wages, regardless of having the same level of education.

Consider the graph below as an example. Many females find it satisfying working in educational institutions because the work time suits their preferences and their ability to work and finish before 3 pm,give or take, which allows them to   be home with their families. This preference is shared by many females and sometimes causes unintended market consequences.

If a large number of females have the same preferences in jobs  that have flexible hours. Then this causes a flood of females in that labor market. In the simple graphical representation (Figure 1.), we can imagine that a flood of females in a certain job can cause the wage rate to go down.

Figure 1.

Capture
A large influx of female labor in specific jobs causes the supply to increase (shift right Labor supply to (2)), and that under perfect market conditions should decrease the wage rate, (W1 to W2).

The implication here is not to say that gender wage discrimination does not exist, and that some other factors are causing a lower wage rate for females. What I am trying to portray is from a policy stand point,  it might be more ideal to create more jobs that are more favorable to women’s preferences, in the effort to induce females to disperse to a wider scope of jobs. Rather than enforce wage floors that goes against market forces. Because enforcing prices can cause unintended consequences, in one extreme a higher unemployment.

 

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Saudi Population 2017: Pyramids & Employment

It is indisputable that Saudi faces problems when it comes to employment and Foreign workers. According to the General Authority for Statistics, Quarter 3 for 2016 the reported unemployment rate is 5.7%. But before we take that seriously, we need to first be clear on what does unemployment actually mean? it sounds trivial, but it’s not.

Unemployment is reported only for those who have been actively looking for work, in other words it only captures those, who for the past 4 weeks, have been actively seeking work.

Therefore, the unemployment rate becomes this limited view of what true unemployment is. This is not something that only Saudis do, most countries around the world report unemployment rate this way. Discouraged workers are not reported in the unemployment rate. The General Authority for Statistics reports roughly 10.6 million individuals outside the labor force 7.8 mil for Saudis and 2.7 mil for Non-Saudis. Around a third of the population is outside the labor force, this includes elderly and children. Therefore,  a population breakdown will be helpful in explaining some of this contrast.

 A population pyramid,  is a graphical illustration that shows the distribution of various age groups in a population(typically that of a country or region of the world), which forms the shape of a pyramid when the population is growing.

Now let us look at the population pyramid for Saudi’s in Saudi Arabia (below). I repeat this is only for Saudis. We can see that pyramid looks normal and growing, equally divided between Males and Females. Most of the population is concentrated at lower three age brackets, that is (0-4), (4-5), and (20-24).

Saudi Population 2017

We can say that Saudi is a young population, which also means that there will be a continuous rise for employment needs to satisfy a younger demographic.

This shape is usually considered normal for most growing countries, because it translates that there is a large, young, and able to work population. That can support the elderly in the form of retirement and pension programs. Problems occur for countries when they have a shrinking young population and growing elder population. In such a case, not enough taxes is being collected to support programs to sustain the elderly. This is not the case for Saudi, but check out the pyramid for Japan (Below Pyramid).

Japan population

Lets focus our attention to Saudi again, but this time on the Non-Saudi population pyramid below , it tells us something about the 12.1 million foreigners in Saudi. We see a completely different shape and dynamic of the population for Non-Saudis. Males are the largest population, and the concentration of age groups exists in ages (35-39) and (40-44). The Non-Saudi population is highly concentrated in the middle, which distorts the image of pyramid. Does this image have any implications for employment?

Saudi Population Non 2017

Well if you look closer, you will begin to realize that some of the concentration in age groups by foreigners exceeds that of Saudis. I mean look at the graph above, for the (35-39) age group for Males there is about 1.4 million foreigners, compared to 0.7 million Saudis in that age group, almost double.  The table below gives a clearer picture, it has three columns. The first is age groups, second is foreign population for every 1000 Saudis (males) and the third column is foreign population for every 1000 female Saudis.

They are computed as follows:
Pop2

Pop

The above computation above is to be interpreted as, for every 1000 Male Saudi’s in ages 0-4 there are approx. 259 Non-Saudis in that age group. I do this for all age groups and the table above are the numbers. Now after examining the table we see a red highlight for certain age groups. I do that because in these age groups Foreigner population exceeds Saudis. For example, for ages (40-44) there are 2041 Male foreigners for every 1000 Male Saudis in that age group, more than double.

Here is the total population pyramid for both Saudis and Non-Saudis.

Total Saudi Population

What does this mean? Well it means that Saudis face high competition now and in the future in the labor market. However, not only from themselves but also from foreigners. Ironically, it also means that Foreigners are more employed than Saudis in Saudi Arabia. As of Quarter 3 2016, there are approximately 5 million Saudis employed and 7 millions Non-Saudis employed.  In other words, for every 1000 Saudis employed there is 1,465 Non-Saudi’s employed in Saudi Arabia.

SAUDI GDP: Using R visualization

There is an important distinction to be made when anyone examines Gross Domestic Product (GDP). Before we go deeper let’s clarify what it means. Gross domestic product is the monetary value of all the finished goods and services produced in a country in each year. It entails all private and public consumption, investments, adding exports and subtracting imports. Simple equation illustrates,

GDP = C + I + G + (EX-IM)

GDP is an important indicator of economic health of a country, used by many as proxy for standard of living. Is it the full picture? what about the pulse of the economy?

Note: arguments that relate how GDP does not capture standard of living is for another post.

I will consider the case for my country Saudi Arabia. The graph below shows the GDP level for Saudi Arabia across time (in millions), specifically 1970-2016.SAUDIGDP1970-2016

We see a rise from 1970 level compared with 2016 level, a large dip in the 80s, and a somewhat steady continuous rise. Consider now the growth rate of GDP. The growth rate of the economy is the percentage change of the GDP from one year to the next. Which explains how fast an economy is growing.

Gdp Growth 1960-2017.png

The graph above shows the growth rate of 46 years of Saudi Arabia. This graph does does not look as consistent as we thought it is by checking the first graph, when looking only at GDP level. Growth rate tells us a different story about the pulse of the economy, one that is far more interesting than the GDP level, where the only story is during the 80’s, which we can relate to in the growth picture. In that time frame Saudi’s GDP year on year declined by 20%.

Moreover, considering the case for Saudi we can see that it is far from being consistent or stable. However, if one would look at the level of GDP Saudi starting in 1970 compared to 2016 we can safely say that on average the growth rate for 46 years was 3.7%. Yet that is far from the truth now isn’t it.

Saudi GDP.png

As we know Saudi’s GDP stems from its oil production, then there must be a considerable effect from the oil price fluctuations. Oil prices are very volatile, check the two comparisons below. The left graph depicts the price of oil since 1986, where the right graph entails the change of oil prices year on year. We see that oil is very volatile across time.

Rplot03

Now let’s see how oil price fluctuations looks with Saudi GDP growth. Below we can see that there exists some sort of lag effect from oil prices on GDP. By lag I mean it might be that last year oil price change effects the following year in GDP growth.Oil GDP growth 86 vs Oil price change.png

There exists an intimate relationship between the change in oil price and GDP growth for Saudi Arabia. When one looks at GDP level we do not see the whole picture of the pulse of the economy. For a natural resource driven country we see plenty of volatility from its reliance on oil as main source of income. Yet we can conclude that in the long run (46 years) Saudi has grown on average 3.7% per annum.

Update* June 20th 2017

I acquired data that explains this relationship better. As the graph below shows, the Real GDP Growth of the Saudi Economy and Oil Sector growth. They exhibit a 0.77 correlation which indicates the intimacy mentioned previously.

Saudi RGDP growth and oil sectory growth.png

Understanding the Oil and Saudi Dilemma

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The Black Gold

Oil is undoubtedly the most important natural resource of the industrialized world, due to its vast functions for most technological, and manufacturing processes for many different sectors. Thus, its price plays a major role for most economies. Saudi Arabia, being blessed with such vast oil rich lands, accounted for 18.5% of total crude oil exports worldwide in 2014. It has been the most dominant player in the oil production market since the 1960’s; back then it co-created the organization of petroleum exporting countries (OPEC), a monopolistic cartel that united the five top oil producing countries –Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela. OPEC exploited its power to control the market and gain supernormal profits by limiting overall supply. By 1973, OPEC has become a 12 country band accounting for two-thirds of the world’s oil production; and by 2010, 79.6% of the world’s oil reserves was under OPEC member nations. In 2014, oil came crashing down, (as figure above shows), from an overall increase in supply, with weak demand especially from the Asian markets. These  realities wreaked the oil market causing it to fall from a peak of $115 in mid 2014 to a mere $30 in 2016. This has led to financial turmoil for OPEC countries. Not only are less affluent OPEC members such as Venezuela hurt by the lower oil prices, but even rich Gulf States, including Saudi Arabia.

 

An Oil Party

Shale oil, oil found within rock fragments, was discovered in the 20th century and was seen as a gold mine of oil. However, the technologies needed to extract it was not available and was too costly when it was. In 2009, horizontal drilling, a drilling process in which the well is turned horizontally at depth, bundled with hydraulic fracturing, using pressurized water and liquids to break rock fragments to extract oil and gas, have become cost and operationally efficient to be used assuming oil levels remain above $45. This led to an ocean of investment into shale oil fields and created a new key and major player in the oil market.

 

EXCEL
Saudi(Orange-line) increased production, while oil prices(Blue-line) was plummeting.

Saudi fights back

For Saudi Arabia, oil accounted for roughly 80% of its exports and thus, the so called “Black Gold” source of revenue for the country, has turned from being its greatest feat to its greatest threat. Moreover, Saudi Arabia’s strategy towards declining oil prices have been surprising. Referring to the graph above, unlike most of the other countries, Saudi Arabia, extracts oil at a price of $8 in comparison to the world average of $40.This cost-advantage has allowed Saudi to boost production levels to further drive prices down to drive out competitors while maintaining minimal profits, however not enough to maintain a balanced budget. We can observe a simple decision tree in the chart below to better understand the decision behind the strategy.

Decision Tree Saudi
The best decision was  Saudi to not cut its production to yield                                              [Increase Price and Gain Market Share]

Is the Oil party over?

The amount of Shale Oil Rigs have decreased by 70% since 2014 but production of existing rigs have increased and thus overall, production capacity has not fallen significantly. However, R&D into oil fields have ceased to exist with many firms selling exploration lands at huge discounts. Moreover, Blackrock, the world’s largest asset management firm, has announced that if prices remain low in 2016, over 400 companies will declare bankruptcy and all other firms will have to take loans and lay off a large chunk of their workforce.  If oil companies default on their loans, banks get affected,  causing a domino effect throughout the economies of the world.

Competitors and the world have been enduring much more than Saudi and OPEC have expected. This has caused oil economies (OPEC) to use their foreign assets (figure below for Saudi’s NFA) to fund their budget deficits which for Saudi was at 15% in 2015. Other examples of large downfalls is the Russian Rubble depreciating by 70% since 2014 and Venezuela’s inflation reaching 140% in 2015.

SAUDI net foriegn assets

 

Time to diversify?

Oil-rich countries are battling to reform their countries, lowering oil dependency. Saudi Arabia is implementing policies under the new King to diversify the economy, and promote growth of the private sector. The Finance Minister Ibrahim Al Assaf stated on national television during an interview, that the ministry is willing to guarantee bank loans on small and mid-sized businesses, also known as SME’s. In response to a fearful market where banks might be hesitant to lend. By easing credit, young Saudi entrepreneurs will be able to start new businesses and grow current businesses at a faster rate than it normally would.

Furthermore, another initiative that Saudi is considering to implement is to privatize some of the government-owned entities, such as electric companies, airlines, and others. The most controversial privatization proposition, that created a thrill in markets, is the possibility that Saudi might initiate an IPO for Aramco, considered to be the most valuable company in the world, it aims to generate an excessive amount capital.

Saudi Arabia’s oil reign will definitely be marked in history as one of the major and most successful players in the oil market. However, times have changed as technological advances in clean, and renewable energy  develops, along with breakthrough in innovative oil extraction methods. Saudi Arabia must break the dependency on oil, and diversify its economy. To make it less susceptible to volatile oil prices, so it can preserve safety and stability for generations to come. 

Short term effect on the average consumer as oil prices drop. (Theoretical approach)

Most economists agree that Oil is considered to be a normal good, by normal we mean that as your income goes up you would buy more of that good, that is a basic definition. As  oil prices fall you would expect that oil consumption would increase, however in the short-run that is not the case. Oil in fact is inelastic in the short run, inelastic means that its consumption is not sensitive to price. Companies still need to operate at the same rate to satisfy their operations and people still need to drive to get to work. It takes time for markets to adjust and people to change their way of living. The long run is a different topic by itself and is out of the scope of this post. You are not going to buy a 8 cylinder pick up after you hear oil fell this month are you?

We can then agree that oil consumption would not change in the short run. Now we can check the graph that I have made to illustrate a theoretical approach of what consumers are going through at this point of time.

Lets say that you pay $500 rent a month for 5 years. Suddenly rent became $300, means you have $200 more to spend on other things other than rent or you could decide to save it. So in simple terms lower oil prices has caused income to increase, which means people can consume or save more than they previously could.

Check below for technical details on how I reached this conclusion using Consumer behavior theory.

The graph you see is the consumer theory diagram.

First be noted of the following.
  • The Vertical Axis labeled “A.O.G”(All Other Goods)- In terms of Quantity. (The farther up means more)
  • The Horizontal Axis labeled “Oil”.- In terms of Quantity (Further right is more)
  • The red line depicts a budget. Where “I” is the starting point. The Horizontal intercept of the Budget at I & I*, to be known as (Income/Price of Oil). The Vertical Intercept is unchanged since their prices are presumed to be constant,Ceteris Paribus.
  • U-shaped curve depicts the indifference curve.
  • The green dotted line is Hicksion line, a line parallel to the new Budget line and tangent to the old Indifference curve.

A decrease  in the price of oil would shift the Horizontal-intercept on the Oil axis to the right, meaning that “Income has risen”, as indicated  I —> I*, where I*>I. Using the Hicksion method we find that initial change for the substitution effect, for as Income goes up we would have to consume more, for the normal good condition. Moving oil Consumption from X*—>X and shown on the original indifference curve Point (A) to point (C). Since we have established that oil is inelastic in the short run, so that would mean that consumption levels of Oil would go back to its initial starting level X* but on the new Indifference curve on the new budget line resulting in tangency of Point (B), which satisfies the inelastic condition, where consumption for oil does not change. However that results in A.O.G consumption  increase from Y —> Y1. Which satisfies that a drop in oil prices in the short run leads consumers to spend more on other goods, Ceteris Paribus.


In summary

A—->C = Substitution Effect

C—->B = Income Effect

A—->B= Total Effect