Are public sector policies keeping women out of the boardroom?

As I’ve mentioned in an earlier post, the public sector and public servants in Denmark are praised very highly by the left, to the extent where they reached a kind of cult status. For example, the Red-Green Alliance (Danish: Enhedslisten) in Denmark is currently campaigning on the Unions’ side of the ongoing collective bargaining, calling the public employees “the heroes of the Welfare State”. The public sector is often invoked as a magical solution to the equality differences between men and women.

Granted, the Nordic public sector did bring about high employment among women by providing jobs by expanding into sectors where jobs are dominated by women, and also by providing services that enabled women to combine work and family. But as Nima Sanandaji points out in a recent paper for the Cato Institute: the employment rate is not the only measure of women’s professional successes. When it comes to a different measure, number of executive positions among women, Sweden lags behind countries such as the US and the UK. How to tackle this problem is heavily discussed in the Nordic countries with quotas being one of the recurring proposals.

But quotas aren’t the answer. In 2003 a gender quota law was passed, requiring 40% of board members of public companies to be women. The law came into effect in 2008 and the consequences were swiftly seen - or rather, they weren’t. According to the Economist, a study in Norway found that quotas had no effect on representation of women in senior management. Changes in female CEOs were small as well, although they did double from 2% to 5%. Hardly the seachange promised by the law’s campaigners. Similar figures are seen in Denmark.

In addition, the otherwise law abiding Norwegians circumvented the new instated law. Although it looked like the publicly listed companies did follow the law and ended up with 40% of the boards being women, this was not the case. 100 of the 500 publicly listed companies changed their status and chose to delist from the Norwegian stock exchange in order to avoid the quota.

According to Sanandaji, the quotas led to firms’ valuations falling by more than 12% with every 10% increase of female board members. Overall, the quotas led to less experienced board members, because the pool of women with the high level of experience expected of board members was, at that time at least, very small in the Nordic countries. It’s been proven that more women on boards add value to companies with bad governance, as well. Board members have several tasks, but most importantly they have to determine which competencies are important. Therefore, effective board members with senior executive experience will know best what to look for in their CEO. In addition, women on boards are not judged by their gender per se but rather on their experience. So when women are put on boards because of their gender rather than their experience, the value of those women will be predisposed by their male board members. Quotas might therefore lead to those women without the senior executive experience to be overall less effective board members and end up giving diversity a bad name.

Instead of trying get more women on boards by compulsion, we should have a look at what is stopping women from getting the proper experience to get those executive positions themselves in the first place.

A big part of the explanation lies in the infamous and ubiquitous Nordic welfare state. In the Nordic welfare system parents are encouraged to participate in the labour market through child support and other publicly funded initiatives, but as we know, there is no such thing as a free lunch. Although these policies have helped women into the labour force, they must be paid for somehow. In the Nordic countries, they’ve decided to fund this through higher taxes, meaning the people in the Nordic countries have accepted a higher tax percentage.

It’s established that women tend to do more household chores than their male counterparts and that higher taxes tend to distort behaviour creating disincentives. Sanandaji draws a scenario of what taxes can do:

For example, highly skilled individuals such as professors often paint their own houses during the summer holidays. But a professor who sets aside an hour a day to paint her or his own house could spend the same time teaching a class. Teaching provides greater economic value because the professor is specialized in the task. It is therefore economically rational to spend the time teaching and pay for a professional painter, but high taxes change this decision. So Nordic professors and other workers are more inclined than their lower-taxed American counterparts to devote unpaid time to domestic work rather than work longer hours in their paid work.

In a study of how income taxes affect time allocation outside of work, they find that when economic rewards for participating in the labour force increase, paid work increases while housework decreases. The study found that high taxes have little to no effect on men. So when women have to decide between paid work or time spent at home doing other productive work, the opportunity cost of engaging in paid work compared to doing other productive domestic activities for women is too high and they choose the latter. In turn, according to the study, expenditures on goods substituting housework increases when incentives to move into work increases.

And being able to buy substitutes for household work is important if we want to see a shift of women to higher earning jobs, according to this study. In the paper, the authors find that temporary foreign domestic workers had a sizeable impact on increasing domestic female labour participation and allowing mothers to go into higher paying jobs.

Another part of the reason women aren’t getting the requisite experience is because of the public monopoly on generally female dominated sectors. Wages in these sectors are set at a flat rate centrally with the possibility of rising in pay mostly available just by rising up through the ranks. There are of course managerial positions but compared to the private sector the possibilities are limited. In addition, the public sector provides favourable deals for mothers, making it more attractive for them to go into this sector and go part-time instead of full-time. Combining this with prospects of long paternal leave, it is effectively making it attractive for women to withdraw from the labour market for long periods of time and inevitably making them lose out on precious experience to their male competitors.

The Nordic model has got a lot of things right in trying to equalize opportunities for men and women. However, it is not necessarily the ideal model as some try to make it out to be. One key aspect is the number of women who manage to reach the top and break the glass ceiling. Today very few women actually manage to do that and a lot of it comes down to the perverse incentives created by the big Nordic welfare states. If we want women to succeed we should enable them to do so by reducing the monopolies in the public sector and reducing taxes on work giving better incentives for women to work more and gain more experience. Overall, this would provide new choices for women to seek bigger and better opportunities for themselves.