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  • Laura Freschi

Three Takeaways from the Gender Profit Gap Literature

Updated: Jun 15, 2021

Trust, trade-offs & metrics

Last week FAI hosted a webinar on Accounting for the Gender Profit Gap, with Nava Ashraf, Morgan Hardy, Rachael Pierotti, and Tatiana Rincón, and with a special appearance from Emma Riley (watch the recording here). It was a fantastic conversation where we talked about why women’s businesses are smaller, grow less, and earn less, than men’s businesses, and what can be done to empower women and support women-led businesses. There are many factors to consider at the level of the individual, the household, the firm, the industry, the market, and society as a whole, and the interplay of different factors within different contexts creates an infinite set of explanations to explore.

Before we get to the “what we do about it” part of the conversation, my first observation is that this is an incredibly exciting area of research, in terms of methodological innovation and the opportunity for cross-disciplinary collaboration. See the experimental design in the new paper out from Delecourt and Ng, in which they set up and ran market stalls in Jaipur in order to hold constant factors usually outside the control of experiments. Or Morgan Hardy’s quantitative case study on profitability of garment businesses in Ghana’s Volta region, combined with a market research survey to understand the composition of demand by gender, followed by a demand-shock experiment to test and verify her findings. It is an area where a sociologist can team up with an economist to look at not just the “proximate determinants” (that is, immediate causes) of the gender gap but also the “deeper tides under the waves” as Morgan put it—that is, the deeper social and cultural factors at play that shape people’s decisions in gender-specific ways.

Beyond marveling at the ingenuity, though, seeing an accretion of carefully designed studies is promising, because when it comes to drawing conclusions and taking action in areas that touch on complex social structures created and perpetuated for all the years of human existence….we best build up our understanding slowly. Taking action based on any one individual study can lead to major blunders and a world of unintended consequences.

In terms of figuring out how to apply what we have learned so far, it’s certainly a good political moment to do that as there is and will be a growing appetite for ways to mitigate and reverse the pandemic’s devastating effects on female labor force participation worldwide. So, here goes.

First, local institutions matter. It’s always striking to see evidence of how fairly abstract concepts like “rule of law” and “contract enforcement” drive specific behaviors far downstream like whether a woman will open a business in a certain industry, where she will locate that business, and whether she will feel comfortable doing business with a stranger. Specifically, places with stronger contract law, less discriminatory family law, and fair local adjudication bodies empower women to trust more, collaborate more, invest more in their own businesses, and become more profitable. In Zambia, Nava Ashraf found that women manufacturers collaborate less, choose to enter more crowded and less profitable industries, and ultimately earn less, in places where local institutions do not favor women, because they fear that their businesses and profits will be expropriated by men.

Nava’s research points to ideas for more “indirect” routes for supporting women-led businesses—such as finding ways to lessen discrimination within local bodies that adjudicate commercial disputes, perhaps leveraging the power of existing microfinance or group lending collectives; or teaching girls and young women bargaining skills that allow them to increase gains for all parties and thus get more for themselves, but without threatening existing gender norms in ways that might put women in danger.

Second, it is important to avoid imposing externally-assumed goals through what we choose to measure. Possibly it should go without saying that this applies to the goals of all people, not just women, but in this case in particular we get in trouble if we assume that women are making decisions that are not rational (or not “utility maximizing”) when in fact we are simply taking too narrow a view of what constitutes their well-being, from their perspective. Several studies have shown that women in various contexts, given loans or grants to invest in their business, choose to invest less than their male counterparts, and as a result, profit less. The answer to what drives these decisions is complex, politically-loaded, and culturally-informed.

Rachael Pierotti’s study of women entrepreneurs in Ghana found that for some women, in some types of marital relationships, it was more important to maintain pressure on their husbands to support the family, than it was to invest in their business profitability. For them, investing in their children was a more likely source of long-term support and stability than their business. Other studies have shown that in households where both men and women own businesses, cash and loans given to women often end up invested in men’s businesses instead. For women in certain cultural contexts investing in their own business profitability may signal to their husbands that they value the business over the mariage. To paraphrase Nava translating this into economist-speak, “we fault them for failing to maximize the utility function of business profitability, but in fact they are maximizing a larger utility function, which is their marital happiness.” Now, from a doctrinaire “women’s empowerment” perspective this may appear to be a poor outcome but frankly these semi-competitive intra-household dynamics and rigid gender roles don’t seem all that great for men either.

In any case it’s clear that it can be useful to think more broadly about how to conceptualize and measure success, to encompass a more comprehensive picture of both women’s and household well-being. For example, as Tatiana Rincón suggested, collecting detailed time-use data (while difficult to do!) reveals how interventions change the amount of time that men and women spend on household chores, building their business, or taking care of the kids.

Finally, beware unintended consequences, backlashes, and spillover effects. Per nearly every paper cited so far, there is a lot going on under the surface as families make decisions about how to spend resources, especially in conditions of scarcity and precarity. Women are trading off many different priorities (short-term income vs long-term stability; business profitability vs marital harmony; meeting additional business demand by collaborating with strangers vs maintaining personal safety and holding onto profits). Not all of these are obvious. And, as Nava said, “if we don’t understand all that we really risk creating interventions that will improve women’s welfare in one aspect and decrease it in another.”

This month, which marks the 110th anniversary of the Triangle Shirtwaist Factory fire that killed 146 immigrant workers and accelerated working condition reforms for women in New York, is a reminder of the different ways that social progress happens: incremental and slow, from painstaking study and grass-roots activism, and then all at once from some unexpected terrible or glorious event that seems to change everything. Within the scope of human control, there are many different dimensions on which we can work to empower women and improve lives, as long as we approach the work with humility, and seek constantly to understand the ways that both women and men live within gender-specific cultural and social structures that shape our decisions and our priorities.

This blog was cross-posted from the Financial Access Initiative.

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