Equal pay laws (EPL) typically require workers who are “substantially similar” be paid the same wage within a firm. We study such policies theoretically and empirically. In our model, we show that when EPL restricts firms by protected class (e.g. no man can be paid less than any substantially similar woman, and vice versa) firms segregate their workforce by gender in equilibrium. This endogenously lowers competition for workers, as it becomes costly for firms to poach from one another–doing so exposes them to the bite of the policy. As a result, wages are lower in equilibrium. When there are more men than women, EPL leads to an increase in the equilibrium wage gap. For a sufficiently high ratio of men to women, there exist equilibria with arbitrarily low wages for women, leading to a particularly large wage gap. By contrast, EPL that is not based on protected class can decrease the equilibrium wage gap. We test our model predictions using a difference-in-difference approach to analyze a gender-based EPL passed in Chile in 2009, which affects firms above a threshold number of workers. We find that the EPL increases the share of employees working at gender-segregated firms by 3% and increases the gender wage gap by 3%.
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