Equality around the world: How Germany could close its gender pay gap

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In every corner of the world, many women still don’t have the opportunity to fulfil their potential, for the sole reason of their gender.

Despite a major push in recent decades to improve equality, women continue to enter and evolve in the job market on an uneven footing. They also face slower career progression and a far lower earnings capacity compared to men.

The World Economic Forum (WEF) estimates the global gender pay gap is 37%. What’s more, according to the consultants McKinsey, women only contribute to 37% of the global GDP despite making up half the working-age population.¹

But a greater number of institutional investors are starting to play an active role in promoting equal opportunities. Engagement with investee companies has focused largely on breaking the glass ceiling that is typically blocking women’s route to senior management positions and board directorships. The 30% Club is arguably the best known of this type of initiative.

But while we view the issue of entering the board room and the C-suite as important, more needs to be done at earlier stages to address the challenge holistically.

In a new series of articles, we look at the dynamics of gender inequality throughout a woman’s entire working life, taking four key capital markets as examples.

Beginning with Germany, and later looking at Japan, China and India, we identify the drivers of inequality, assess local company practices and highlight recommendations for investor engagement.

Women in Germany: Under-paid and under-used

In Germany, female participation in the labour market is high and increasing. However, it’s the quality of jobs held by women in Europe’s largest economy that gets a red flag.

Perhaps surprisingly, Germany has the third-largest gender pay gap in Europe.²  This is largely due to the low number of hours worked by women and gender segregation in lower-paid economic activities. Part-time working then excludes women from a wide range of corporate benefits, putting them at a further disadvantage.

We believe that developing family-friendly policies and switching contracts to full-time employment are priorities in closing the pay gap.

Let’s look at the picture in more detail. Female participation in Germany’s labour market is 74%, compared to 65% for a peer group of wealthy countries³ . This has increased by 30% since 1990.

Girls and boys have equal access to education as – they are as likely to graduate from university⁴ . And let’s not forget that Germany is one of the few countries that is led by a female head of government.

At first sight, Germany appears to be doing well on gender diversity and equality. Still, the main point of concern is the low quality of women’s jobs and pay. This widens inequality and prevents female career progression and ultimately economic empowerment.

In the workplace: A laggard in Europe

Germany’s gender pay gap of 21.5% is the third highest within the European Union (EU) where the average is 16%. Approximately two-thirds of it – termed the “explained gender pay gap” – is linked to personal, job and enterprise characteristics.⁵

Of this set of observable characteristics, working time (including the difference in part- and full-time employment) accounts for 5% – much more than in any other EU countries⁶  This is followed by economic activity, meaning that on average German men work in better-paid industries than their female counterparts. Even in some fields dominated by women, men can be found to be better paid than women, according to the German Institute for Economic Research.

Low working hours is clearly the main challenge, as the high share of women not in full-time employment impacts salary progression. The glass ceiling is hard to break in this market.

Full-time female employees account for 60% of minimum-wage workers. Women also account for two-thirds of people in precarious and very low paid roles.⁷  These are dubbed “mini-jobs” and pay less than €450 a month.

This kind of job was originally introduced in the 1960s to allow women who were housewives to take up a marginal job and help bridge the labour shortage at the time but have remained popular despite an obvious change in the country’s economic situation.

This employment status excludes workers from a wide range of benefits including the social security system. Studies have pointed at discrimination against mini-jobbers in terms of working conditions, especially around entitlement to paid annual leave and public holidays as well as paid sick leave.

Most women – at 57% versus 12% of men – work part-time in Germany⁸ . This is the case with women of all levels of educational achievement and professional qualification, according to the Organisation for Economic Cooperation and Development (OECD). Although part-time employment can be a boon for women and men willing to find a better balance between work and home, in Germany many women are given little choice but to accept part-time work. In some cases, it can be directly imposed from companies seeing it as a new standard, according to CAIRN, an online bank of scholarly articles on the humanities and social sciences. This is also a direct consequence of the lack of flexible working policies from many German companies.

The split between East and West Germany between 1945 and 1990 created some pronounced differences in terms of things like availability of childcare facilities, and while many of these differences have diminished since reunification, women in East Germany are much more likely to be employed full time for a handful of reasons ranging from childcare facilities, attitudes and traditions, and economic needs.

Two-thirds of women in eastern Germany said they accepted a part-time job because there were no full-time positions available⁹ . In western Germany, women cited family care as one of the main reasons for taking a part-time contract. Women seem to be looking for more working time, but at the same time lack of childcare facilities and persistence of traditional roles have been clear inhibiting factors.

A gender gap at home

When it comes to home life, Germany isn’t exempt from a division of gender roles. Full-time female employees in two-income households were spending approximatively three hours more on domestic tasks per working day than men¹⁰ .

Women are still entrenched in traditional roles through which they are expected to take care of the kids. While German fathers usually take one to two months of parental leave, it is common that women will take one to two years, weighing much more in terms of career breaks. In West Germany, only one-fifth think that mothers of young children should work full-time.¹¹

How investors can make a difference

In recent years, Germany has implemented two laws aimed at improving gender equality and tackling the significant gender pay gap. The first one required large companies to appoint at least 30% of women onto boards. It had the intended effect of increasing the share of seats granted to women from 26% in 2015, to 32% in 2017¹² . The second one – through Germany’s Wage Transparency Act – enables employees to ask for the disclosure of men and women doing similar work.

But there is still more than needs to be done. As investors, we intend to engage with German companies around four key pillars:

• Transparency and targets around the proportion of women in managerial and leadership positions. In a developed country like Germany, where the initial talent pool is equally made of men and women, the persistence of a glass ceiling prevents women reaching the top positions. Germany ranks just below the OECD countries average for women in management positions. While the introduction of the quotas enabled some women to be nominated to the board, we would like to see similar progress at middle and senior managerial positions, such as percentage of women executives and targets/timeline.
• Transparency around contract status of women and men. In companies where women make up most of the part-time contracts, our focus will be to understand to what extent female employees have voluntarily chosen these conditions. We would welcome the development of family-friendly policies (childcare facilities, flexible and home working) as we expect them to go hand-in-hand with more voluntarily chosen part-time jobs.
• Enabling men to take paternity leave and making leadership accountable. Germany’s parental leave system is relatively gender-equal. Mothers and fathers are entitled to the same leave to take time off for the family, and their job is protected until the child turns three. Still, almost two-thirds of fathers don’t take up the opportunity. Most of them do not because of career disruption fears or resistance from line managers. We would expect the company’s mindset and practices to genuinely support paternity leave.
• Encouraging open dialogue on the gender pay gap. What gets measured get managed. Ultimately, taking a proactive approach towards the gender pay gap is a positive signal that the company has started to think about the best ways to tackle the issues preventing the advancement of gender equality.

Ultimately, we believe the persistence of the gender gap threatens the success of companies and economies, as it leaves $160 trillion of unrealised wealth on the table (according to World Bank estimates). For investors, we believe the issue risks potentially dampening long-term returns – research from AXA IM’s Rosenberg Equities in 2018 suggested that diversity can act like a protective moat for profitability.

Furthermore, gender equality is also one of the United Nations’ Sustainable Development Goals – which the UN describes as “not only a fundamental human right, but a necessary foundation for a peaceful, prosperous and sustainable world”.