Sexual harassment and compensating differentials

By Paul Walker 12/04/2014

While reading a chapter in Ben Powell’s new book Out of Poverty: Sweatshops in the Global Economy I came across the following comment,

If the risk of sexual harassment is part of the working conditions at a factory, them firms have to offer higher wages to attach workers. This is precisely what Professor Joni Hersch found when studying U.S. labor markets. She examines sexual harassment claims and wages by industry and finds that women were paid higher wages in industries in which they were at a greater risk of sexual harassment. She concludes that workers receive a wage premium for exposure to the risk of sexual harassment “in much that same way that workers receive a wage premium for the risk of fatality or injury.” (Powell 2014: 68-9).

The Hersch article referred to is,

Hersch, Joni. 2011. “Compensating Differentials for Sexual Harassment.” American Economic Review, 101(3): 630-34.

The abstract of the article reads,

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

The central empirical issue addressed in the paper is whether sexual harassment lowers wages by reducing productivity or raises wages as workers require a compensating differential to incur this risk. Hersch notes that while sexual harassment is illegal it is, in the same way as other job risks, costly for firms to eliminate, which may result in sexually harassing behaviour occurring in some workplace environments. She also notes that the direction of the relation between sexual harassment and wages is not predictable a priori. Sexual harassment may lead to lower pay if harassment reduces worker productivity by, for instance, inducing inefficient turnover, increasing absenteeism, and generally wasting work time as workers attempt to avoid interaction with harassers. Or harassment could be similar to other jobs in which workers face undesirable working conditions, like a high risk of death or disabling injury, and which generate a compensating pay differential.

Hersch writes,

[…] I estimate wage equations controlling for the risk of sexual harassment and for other determinants of wages, including occupation and the percent female in the worker’s industry. The wage equation estimates show that greater risk of sexual harassment is associated with a statistically significant wage premium. Women employed in jobs with an average probability of sexual harassment are paid a compensating differential of 25 cents per hour relative to comparable women employed in jobs with no risk of sexual harassment.

So labour markets deal with sexual harassment in much the same way as they deal with other on the job risks, That is, on balance, workers receive a wage premium for exposure to the risk of sexual harassment in much the same way that workers receive a wage premium for the risk of fatality or injury.