Outside Opportunities and the Gender Gap in Pay

Abstract

We show that men and women respond differently to improvements in outside options, and that these differential responses contribute to the gender pay gap. We develop a simple model of on-the-job search that integrates two crucial gender differences: job preferences and the propensity to renegotiate wages in response to external offers. Both factors contribute to lower wage responsiveness for women when they receive outside offers, and a negative female-male pay gap. However, women's job mobility responses vary depending on the underlying mechanism. To empirically test our model's predictions, we analyze the wage and job mobility responses of men and women to external job opportunities, mediated through family networks. Using Swedish register data, we find that improved outside options are associated with higher within-job wage growth for men but not for women. In contrast, women have greater job mobility, particularly when the new positions offer higher pay and a shorter commute than their current jobs. Importantly, we can rule out that these gendered responses arise from differences in the quality of external offers as these are balanced across genders by design. In light of the model, our findings indicate that women are less likely than men to renegotiate in response to improved outside options. Differences in negotiation behavior between women and men can thus be a significant source of the remaining within-job gender pay gap.