Ken Mulkearn | 09 Dec 2020

Why employers should care about ethnicity pay gaps

In the time since the official consultation on ethnicity pay reporting closed, nearly two years ago now, we have experienced both the ‘Brexit’ election and a global pandemic. Both might justify a delayed response to the consultation, but the timelines are much longer than they were around the introduction of gender pay gap reporting. In the Government’s defence, however, this area is more complicated than gender pay. For example, different ethnicities mean there is more than one ethnicity pay gap and collecting the data can raise issues around confidentiality. Given these complexities, all concerned remain hopeful that a response will eventually be forthcoming, and regulations enacted.

Meanwhile, the global Black Lives Matter movement has pushed issues of equality, diversity and inclusion further up the HR agenda. As a result, many employers are getting on with the task of collecting ethnicity pay data, sharing it with staff and deciding how to address the issues raised, particularly in cases where gaps are wide. Our recent survey of employers’ reward plans for 2021 found that nearly a fifth of respondents had already calculated ethnicity pay gaps. A third of these have shared their findings internally with staff, and some have also published figures externally. Meanwhile, other respondents, such as brewer Molson Coors, plan to start conducting such analysis regardless of legislation.

Why do ethnicity pay gaps matter? It is important that employers foster genuine diversity, equality and inclusion. Since this means ensuring progression and promotion opportunities for minority ethnic staff, it includes having a strategy for the identification, analysis and eventual reduction of pay gaps at all levels. The barriers to advancement for minority ethnic staff that can produce pay gaps can also lead to disengagement. If employers engage all staff to the same extent, they will provide better places to work, which should lead to enhanced contribution from staff in every area.

Some employers might be worried that calculating and sharing figures on ethnicity pay gaps could lay them open to claims of direct or indirect race discrimination. However, one of the lessons of the gender pay reporting regulations is that having such a gap is not necessarily the same as being guilty of discrimination.

Reasons for pay gaps vary from case to case and are due to a mix of ‘explained’ factors – for example, educational attainment – and ‘unexplained’ factors, which are unrelated to the characteristics of the job or the individual doing the job. In the case of ethnicity pay gaps, these could be connected to informal barriers or what is sometimes called ‘cumulative bias’. This is a term for the demonstrably higher obstacles, such as fewer development opportunities or reduced access to mentoring, faced by minority ethnic employees throughout the different stages of their careers.

The exact balance between explained and unexplained factors can produce different pay gaps. The Bank of England, in a recent paper ‘Understanding pay gaps’, estimates that the ‘raw’ ethnicity pay gap – the difference between the median earnings of non-white people compared to white people, with no attempt to account for individual or job characteristics – is 5%, which is smaller than the gender pay gap. But when compositional factors such as educational attainment or location are considered, pay for minority ethnic staff tends to be higher on average than for the majority ‘white British’ population. This produces a negative pay gap, that is, one in favour of minority ethnic staff. This is because minority ethnic people are more likely to live and work in areas where pay is higher than average, such as London, and they tend to have higher educational qualifications than white workers. However, the Bank points out that, once these factors are accounted for, there is a further ‘unexplained’ ethnicity pay gap (that may be due to cumulative bias) which is as large as the gender pay gap. This is one reason the Bank is calling for compulsory ethnicity pay reporting.

In the meantime, the ‘unexplained’ aspect of ethnicity pay gaps is what should most concern employers. It is why, as well as collecting data, they also need to identify strategies and actions that can reduce or remove cumulative bias. This will not only narrow pay gaps but will also lead to improvements in diversity, equality and inclusion at all career stages. If you employ minority ethnic staff, why wait for legislation?

A version of this article appeared in IDS Employment Law Brief, November 2020