Gender Arbitrage by Multinationals

Economists often argue that market competition can limit some of the economic inequities from discrimination (this idea goes back at least to Gary Becker’s 1957 treatise The Economics of Discrimination). If some businesses refuse to hire well-qualified women or minorities, for example, that creates an opportunity for other businesses to hire those workers at lower cost. Non-discriminatory companies could then gain a competitive advantage over their discriminating rivals. Over time, the success of the non-discriminators could bid up wages to the disadvantaged group of workers.

The practical impact of such competition depends, of course, on the willingness of some employers to be non-discriminatory in their hiring practices. The week’s Economist reports an interesting example of how foreign multinationals are playing that role in South Korea:

Working women in South Korea earn 63% of what men do. Not all of this is the result of discrimination, but some must be. South Korean women face social pressure to quit when they have children, making it hard to stay on the career fast track. Many large companies have no women at all in senior jobs.

This creates an obvious opportunity. If female talent is undervalued, it should be plentiful and relatively cheap. Firms that hire more women should reap a competitive advantage. And indeed, there is evidence that one type of employer is doing just that.

Jordan Siegel of Harvard Business School [and Lynn Pyun of MIT and B.Y. Cheon of Hanshin University report] that foreign multinationals are recruiting large numbers of educated Korean women. In South Korea, lifting the proportion of a firm’s managers who are female by ten percentage points raises its return on assets by one percentage point, Mr Siegel estimates.

You can find the original working paper here. The money quote from the abstract:

Using two unique data sets from South Korea, we show that in the 2000s multinationals have derived significant advantage in the form of improved profitability by aggressively hiring an excluded group, women, in the local managerial labor market.

Perhaps needless to say, the fact that these firms are earning higher profits indicates that there’s still plenty of room to bid up the salaries of managerial women in South Korea.