Does Unobserved Heterogeneity Matter? A Panel-Data Analysis of the Gender Pay Gap

Abstract

This paper provides evidences on the effects of unobserved individual heterogeneity on estimated gender pay differentials. Using the European Community Household Panel (ECHP), we present a crosscountry comparison of the evolution of unadjusted and adjusted gender pay gaps using both cross-section and panel data estimation techniques. The analysed countries differ greatly with respect to labour market legislation, bargaining practices structure of earnings and female employment rates.. Once adjusting for unobserved heterogeneity, we find a narrowed male-female pay differential, as well as significantly different rates of return on individual characteristics. In particularly, the adjusted wage differential decreases by 7% in Belgium, 14% in Ireland, between 20-30% Germany, Italy, the Netherlands and Spain and of 41% and 54% in the UK and in Denmark respectively.

The pursuit of a remedy for gender inequality in wider Europe: Comparison of policies and indices in the EU, Nordic countries, and south east Europe

“…'Unobservable' differences, often referred to in the literature as The current situation of gender equality in Croatia -Country profile 2012, European Commission "unobserved heterogeneity" (labour market characteristics, psychological factors influencing behaviour such as motivation and ability, etc. ), are contained in the largest part of the adjusted gap (69%) and seem to discriminate against women (Gangji, Orsini, and Sissoko 2010). When observing the wage gaps in public versus private sectors, the results show that the unadjusted gap is higher in the private than the public sector (17.7% versus 4%).…”