Exploring the labor productivity gap between businesses run by women and men

The Covid-19 pandemic has taken an immense toll on businesses across the globe. Companies large and small had to learn how to cope with new business realities –government lockdowns, a remote workforce, supply chain disruptions, falling consumer demand, to name just a few – and bankruptcies are on the rise. And yet there are mounting concerns that female entrepreneurs may be hurt disproportionately, and that women may be facing even more economic hardship than men. In the quest to understand the unique challenges of female entrepreneurs during the pandemic, some clues can be found in the exploration of gender gaps that existed for these businesses prior to the pandemic.

This is the focus of a recent study by Islam et al. (Feminist Economics, forthcoming) who use data spanning 126 (mostly developing) countries and covering more than 46,000 firms to take a close look at gender gaps in labor productivity in the formal private sector. The data were collected between 2009 and 2016 under the umbrella of the World Bank’s Enterprise Survey program. 

The study reveals a sizable gender gap in labor productivity, with women-run businesses being about 11 percent less productive than men-run businesses. In other words, an extra worker in a women-run business generates about 11 percent less profit than an extra worker in a male-run business. Unlike other studies, this gender gap does not decrease when controlling for a range of firm characteristics, including the broad sector in which the business operates. This suggests that gender gaps in labor productivity are not driven primarily by differences in other observable enterprise characteristics. 

What explains this gap? We use decomposition techniques to separate the male-female productivity differential into a portion that is attributable to gender differences in firm ‘traits’ (for example, use of ICT, foreign investment or power generators, access to finance, but also exposure to crime, etc.) and a portion that is structural (i.e. related to ‘returns’ to these endowments but also capturing unobserved factors). We find five key results.

Figure 1: Contributors to the labor productivity gap due to gender differences in firm traits

1. Adverse business environment hurts women-run businesses

Clearly, the business environment matters. Women-run businesses are more likely to face losses due to crime (21 vs. 19 percent), less likely to pay for security (51 vs. 55 percent) and less likely to own a power generator (26 vs. 34 percent). While our study cannot establish causality, these results suggest that female entrepreneurs’ lower spending and ability to protect against crime is associated with a 6 percent widening of the gender gap in labor productivity (figure 1). In addition, the lower adoption of power generators is associated with a 13 percent increase in the labor productivity gap. This is the largest contributor in terms of ‘traits’ that widens the labor productivity gap between women-led and men-led businesses. The inability of women-run business to guard themselves against crime and power outages probably reflects well-documented hurdles faced by women entrepreneurs in accessing finance for productive investments.

2. The digital economy is key for women-run businesses

Women lag behind men in digital economies. Businesses led by women are less likely to own a website than those run by men, and this is associated with an 8 percent widening of the gender gap in labor productivity. This is consistent with the evidence of a digital divide between women and men in most developing countries (see for example, the 2020 Mobile Gender Gap report). These findings suggest that narrowing the gender digital gap could be an important pathway to supporting female entrepreneurs. This policy assumes even greater urgency with the unfolding COVID-19 pandemic, as more and more businesses are going online to compensate for the lengthy closures of their brick-and-mortar stores.

3. Lack of access to foreign investment and firm age disadvantage women-run businesses

Foreign ownership is an important channel through which technology and human resource transfer can improve firm performance. However, foreign investment is not reaching women-run businesses, and this is associated with a 12 percent increase in the labor productivity gap. Unfortunately, this may lead to a vicious cycle where barriers faced by women-run businesses render them less productive, and thus less likely to receive foreign investment, which in turn decreases opportunities for such businesses even further. In addition, women-run businesses are on average two years younger than those run by men and this is associated with an 8 percent widening of the labor productivity gap.

4. The size and sector of women-run businesses confer an advantage

We find that women-run firms are smaller – in terms of the number of employees – than male-managed firms. They are also overrepresented in the service sectors, where they generate above-average returns, while male-managed businesses have a higher presence in manufacturing. These two factors narrow gender differences in labor productivity, thus challenging the notion that female-managed firms are less productive because of the small size of their operations and because they are disproportionately represented in service sectors. The policy implication of this is twofold. First, improvements in the business environment in the retail sector would infer direct benefits to female-managed businesses. Second, specific interventions might be taken to improve the lagging labor productivity of female-managed firms in the manufacturing sector. However, in times of COVID-19, women businesses’ concentration in the retail sector, which is typically client-facing and therefore susceptible to shutdowns, could also bring unique vulnerabilities.

5.Further investigation needed to understand cultural norms or institutional factors

There is still much to learn about the labor productivity gap between businesses run by women and men. The analysis shows a large residual gender gap in productivity that could not be explained by gender differences in observable traits or characteristics of the businesses, or by returns to these characteristics. Most likely, country-level institutional factors or cultural norms are part of this story and these require further investigation. Other studies point to the importance of norms around the intrahousehold allocation of productive resources, which may leave women’s businesses undercapitalized and underperforming, and the gender gap in time allocated to unpaid domestic work, especially child and elderly care, which limits the amount of time women entrepreneurs can devote to their businesses.