Is the gender pay gap a source of market failure?

Chloe Jones

The most persistent myth about the gender pay gap is that it doesn't exist at all. Influential figures like Charlie Kirk and Candace Owens have dismissed it as liberal propaganda. In reality, the term ‘gender pay gap’ is often misunderstood. It’s not about paying a woman less than a man for the same job - that’s illegal under the Equality Act of 2010. Rather, the gender pay gap refers to the fact that the average salary of a UK woman is 7% lower than that of a UK man. In the US, the gap is 14%, and in South Korea, it reaches a staggering 30%.

This article does not aim to argue whether the gender pay gap exists or dispute its potential causes and solutions. Instead, it will discuss whether or not it is an example of market failure. 

What is market failure?

Market failure is defined as the misallocation of goods and services by a free market economy (one without government intervention), which does not maximise society’s welfare (happiness). In this example, the gender pay gap is arguably a partial market failure: although the labour market functions, outcomes are inefficient and inequitable. 

Is the gender pay gap a partial market failure?

Adam Smith’s concept of the ‘invisible hand’ suggests that, in a truly free and competitive market, resources will be allocated efficiently and fairly. Yet, if markets consistently produce unequal outcomes for men and women - despite equal capability and effort, this signals a failure in the system. One common misunderstanding is that the ‘natural’ market forces are, in fact, outcomes of trillions of decisions made by real human beings (where there is room for error and biases).  

If women are discouraged from entering higher-paid sectors, their potential has been wasted. This argument is contrasted by the suggestion that women choose lower-paying jobs (so it is not an example of market failure).

However, these ‘choices’ are shaped by societal pressures:

What’s a stereotypical job for a woman? A teacher? A nurse? A hairdresser? 

What about a man? An engineer? A CEO? A scientist? 

Many economists argue that government intervention is essential to challenge the stereotypes perpetuated by systems that, for example, fail to provide equal parental leave. Without such policies, traditional gender roles are reinforced, limiting women's participation and progression in the labour market.

Will inequality diminish over time?

Another common counterargument is that in a free market, the gender pay gap should correct itself over time. The logic is that any firm that discriminates against women will eventually lose out - either by missing top talent or by underperforming competitors who hire more fairly. In theory, market competition punishes discrimination, making it unsustainable in the long run. 

However, this assumes that discrimination is always obvious and intentional, which is rarely the case today. Modern workplace inequality is often subtle, shaped by unconscious biases rather than overt sexism. As behavioural economist Iris Bohnet points out, when firms evaluate employees for promotion, they generally consider two things: performance and potential. While performance is relatively objective, assessments of potential are more subjective, and this is where gender bias creeps in.

Unconscious biases in career progression:

Women are often unfairly judged as being less committed or less ambitious, especially if employers assume they might take time off for children. These stereotypes, even when unconscious, systematically disadvantage women and limit their career progression. As a result, the market does not self-correct as efficiently as theory suggests. Instead, deep-rooted social biases persist, distorting it and preventing true equality, ultimately limiting the economy’s overall potential.

Conclusion:

Therefore, while free market economists may argue that government intervention distorts natural market forces, the persistent gender pay gap reveals a partial failure of the market.  The lack of fairness reflects deep-rooted biases and structural barriers that the market alone cannot correct. Moreover, initiatives promoting women in finance (for example, by companies such as Deloitte and BCG) demonstrate that companies are recognising a market failure and investing in a strategy to counteract it. With their motives not simply being positive PR, it is evident that they genuinely believe they are missing out on profit by not recruiting an equal proportion of women. Thus, the gender pay gap is not just a social issue but a genuine case of partial market failure - one that requires government intervention.