What is Pay Gap, and why does it matter?

In today's developing workforce, the discussion around pay equity remains at the forefront of social and economic discussions. The concept of the 'pay gap' does not simply comprise the

representation of inequality but is a method for addressing the underlying systemic issues in labor markets worldwide. The term captures a range of inequalities, from gender-based discrepancies to variances stemming from racial and ethnic backgrounds. Understanding what the pay gap truly signifies and why it matters is crucial for fostering a fair and just workplace and driving forward a more equal society.

Defining the Pay Gap

The term 'pay gap' refers to the difference in average earnings between different groups of individuals in the workforce. The most commonly discussed is the gender pay gap, which refers to the average difference in pay between men and women. However, the scope of pay gaps extends beyond gender and includes race, ethnicity, and other demographic factors.

To quantify this, the pay gap is generally expressed as a percentage that illustrates how much one group is paid relative to another. For instance, a commonly used gender pay gap statistic is that women earn, on average, approximately 82% of every dollar earned by men. The pay gap will vary greatly depending on factors such as the industry, occupation, age, and geographic location.

It is important to distinguish between 'equal pay' and 'pay equity.' Equal pay refers to the legal requirement that individuals in the same workplace are given equal pay for equal work or work of equal value, regardless of gender or other characteristics. Pay equity, however, is a broader term that addresses systemic pay disparities across entire sectors or economies.

When determining the internal pay gap of a company, it is important to consider the multitude of factors that go into assessing differences in pay amongst employees and across groups. The simple approach of applying the average pay for one group of employees and comparing it to a different group does not account for ‘Equal pay for equal work’. To do so, a pay gap analysis must account for all the underlying components that make up the pay for each employee group, and factor these in relative to each employee.

The pay gap is not merely a question of base pay but includes other forms of compensation, such as bonuses, overtime pay, and benefits. Understanding the nuances and breadth of the pay gap is the first step in addressing its root causes and working towards a labor market where compensation is fair and equitable for all.

Legislative framework

The principle of pay equity and equal pay is deeply rooted in a range of legal frameworks around the world, underlining the importance of legislation for addressing and mitigating pay gaps. Local, regional, and global companies need to understand the different legislative tools that are used to tackle pay inequality, to remain a compliant and attractive employer.

Global Perspectives

Internationally, the principle of equal pay for equal work is written into several key documents. The Universal Declaration of Human Rights, adopted by the United Nations in 1948, asserts the right to equal pay for equal work without discrimination. Furthermore, the International Labour Organization's Equal Remuneration Convention, 1951 (No. 100), solidifies the principle of equal pay for men and women for work of equal value.

‍European Union Directives

The European Union has been particularly proactive in addressing pay gaps through legal frameworks. Most recently through the landmark directive, EU Directive 2023/970, which specifically strengthens the application of the principle of equal pay. This directive enhances transparency in pay structures, by mandating firms to regularly report on pay gaps and introduces legal mechanisms for enforcement of the directive, including underlying remedies. It recognizes not only gender-based pay differences but also emphasizes the need for pay equity across various demographic groups.

You can read more in-depth about the EU Directive 2023/970 in this article.

United States Legislation

In the United States, the Equal Pay Act of 1963 was a significant step towards closing the gender pay gap. This law makes it illegal to pay different wages to men and women if they perform equal work in the same workplace. Additionally, the Civil Rights Act of 1964, particularly Title VII, prohibits compensation discrimination based on race, colour, religion, sex, or national origin. Additionally, many states in the US have started to introduce state-wide regulatory frameworks that enforce these principles and mandate reporting from firms.