The gender wage gap in Estonia is the largest in the EU, and linked employer-employee analysis shows that firm-level factors explain about 35% of it, with an unusually large share coming from women receiving lower wage premiums than comparable men within the same firm (the bargaining channel) rather than from sorting between firms. The child-related (motherhood) wage penalty is large but is not explained by firm-specific pay premiums, and the hypothesized institutional driver of the within-firm component — weak minimum wages and union coverage — remains an untested interpretation. The open problem is to identify the mechanisms behind the child-related wage loss (worker-side channels such as actual working hours, occupational segregation, and educational choices, as opposed to firm channels) and to examine how labour-market institutions such as minimum wages, union coverage, and pay-transparency mandates shape the within-firm gender wage gap in a weak-institution labour market.

Background

The gender wage gap is the average difference between men's and women's wages; labour economists distinguish the raw gap from the part left unexplained after controlling for education, experience, and occupation, which is often interpreted as reflecting discrimination, bargaining, or unmeasured productivity differences. Estonia has had the highest gender wage gap in the EU (around 20-30% on standard measures during the 2000s and 2010s), with roughly two-thirds unexplained by conventional individual characteristics, and its labour market combines a wide wage distribution with a low minimum wage and very low union density and collective-bargaining coverage. A key methodological development for studying such gaps is linked employer-employee data — administrative registers connecting every worker to their employer — analyzed with the two-way fixed-effects framework of Abowd, Kramarz, and Margolis (1999), in which each worker's log wage is decomposed into a person effect, a firm effect (the firm wage premium, i.e., the persistent pay premium a firm pays to all its workers), and a residual. Card, Cardoso, and Kline (2016) used this framework to split the role of firms in the gender gap into a sorting channel (women working in lower-premium firms than comparable men) and a bargaining channel (women receiving a smaller share of their firm's premium than comparable men within the same firm). They found firms explain roughly a fifth of the Portuguese gap, with bargaining about one third of that; Bruns (2019) found firm premiums explain a growing share of the widening German gap, mainly through sorting. Masso, Meriküll, and Vahter (2022) applied this decomposition to the whole population of Estonian firms and workers for 2006-2017: firm-level factors explain up to 35% of the gap (40% in the published version's abstract), the largest share in this literature, with the within-firm bargaining component about half of the firm effect — much larger than in Portugal, Germany, or France — which the authors attribute, tentatively, to lenient labour-market institutions and weaker bargaining by women. On the parenthood side, event studies (comparing women's wage trajectories before and after a first childbirth, Kleven, Landais, Posch, Steinhauer, and Zweimüller 2019) document a child penalty of roughly 7-10 log points that emerges sharply after birth and persists; Masso, Meriküll, and Vahter find an Estonian motherhood penalty of about 4-9 log points which, unlike in comparable studies, is not related to firm-specific productivity premiums — mothers neither sort into lower-wage firms nor earn lower within-firm premiums after childbirth, so the penalty must arise through other worker-side channels such as the amount of working hours, occupational trajectories, or educational choices, but the paper's data contain no actual hours to separate these.

Problem Statement

The problem, as posed by the Estonian evidence of Masso, Meriküll, and Vahter (2022), is to explain what drives the part of the gender wage gap that worker sorting cannot account for in a weak-institution labour market, along two separate open threads identified in the source. First, determine which worker-side mechanisms generate the child-related (motherhood) wage loss in Estonia, given that firm-specific wage premiums and within-firm premium differences are already ruled out as its source; the source speculates about the amount of working hours and differences in educational and occupational tracks, and its discussion also invokes labour-market participation and occupation-specific non-linear returns to hours/temporal flexibility, so the set of candidate mechanisms is illustrative rather than closed. Second, examine whether, and in which direction, labour-market institutions — such as weak minimum wages, union coverage and collective bargaining, and the firm-level measures the source discusses (pay-transparency reporting and board gender quotas, on which the international evidence is mixed) — shape the within-firm (bargaining) component of the gender wage gap in a low-union, low-minimum-wage setting of the Estonian type. The source offers this institutional link only as an untested interpretation ('can be related to the lenient labour market institutions in our sample country and to women being less effective wage negotiators'). The two threads concern different objects: the mechanism question addresses the child penalty, which the source finds operates outside firm-level premiums, while the institutional question addresses the within-firm bargaining component of the aggregate gap. The two threads are posed jointly: the mechanism thread asks which worker-side channels generate the child-related wage loss, and the institutional thread asks whether — and in which direction — an institution shapes the within-firm component.

References

  1. Masso, Jaan; Meriküll, Jaanika; Vahter, Priit (2022). The role of firms in the gender wage gap. Journal of Comparative Economics 50(2), 454-473. DOI: 10.1016/j.jce.2021.10.001. https://doi.org/10.1016/j.jce.2021.10.001
  2. Card, David; Cardoso, Ana Rute; Kline, Patrick (2016). Bargaining, Sorting, and the Gender Wage Gap: Quantifying the Impact of Firms on the Relative Pay of Women. The Quarterly Journal of Economics 131(2), 633-686. DOI: 10.1093/qje/qjv038. https://doi.org/10.1093/qje/qjv038
  3. Abowd, John M.; Kramarz, Francis; Margolis, David N. (1999). High Wage Workers and High Wage Firms. Econometrica 67(2), 251-333. DOI: 10.1111/1468-0262.00020. https://doi.org/10.1111/1468-0262.00020
  4. Bruns, Benjamin (2019). Changes in Workplace Heterogeneity and How They Widen the Gender Wage Gap. American Economic Journal: Applied Economics 11(2), 74-113. DOI: 10.1257/app.20160664. https://doi.org/10.1257/app.20160664
  5. Kleven, Henrik; Landais, Camille; Posch, Johanna; Steinhauer, Andreas; Zweimüller, Josef (2019). Child Penalties across Countries: Evidence and Explanations. AEA Papers and Proceedings 109, 122-126. DOI: 10.1257/pandp.20191078. https://doi.org/10.1257/pandp.20191078
  6. Kleven, Henrik; Landais, Camille; Leite-Mariante, Gabriel (2025). The Child Penalty Atlas. Review of Economic Studies 92(5), 3174-3207. DOI: 10.1093/restud/rdae104. https://doi.org/10.1093/restud/rdae104
  7. Li, Jiang; Dostie, Benoit; Simard-Duplain, Gaëlle (2023). Firm Pay Policies and the Gender Earnings Gap: The Mediating Role of Marital and Family Status. ILR Review 76(1), 160-188. DOI: 10.1177/00197939221093562. https://doi.org/10.1177/00197939221093562
  8. Hennig, Jan-Luca; Stadler, Balazs (2023). Firm-specific pay premiums and the gender wage gap in Europe. Economica 90(359), 911-936. DOI: 10.1111/ecca.12471. https://doi.org/10.1111/ecca.12471
  9. Caliendo, Marco; Wittbrodt, Linda (2022). Did the minimum wage reduce the gender wage gap in Germany? Labour Economics 78, 102228. DOI: 10.1016/j.labeco.2022.102228. https://doi.org/10.1016/j.labeco.2022.102228
  10. Meriküll, Jaanika; Tverdostup, Maryna (2023). The gap that survived the transition: The gender wage gap in Estonia over three decades. Economic Systems 47(3), 101127. DOI: 10.1016/j.ecosys.2023.101127. https://doi.org/10.1016/j.ecosys.2023.101127
  11. Masso, Jaan; Vahter, Priit (2024). Innovation as a firm-level factor of the gender wage gap. International Journal of Manpower 45(3), 449-465. DOI: 10.1108/IJM-02-2023-0083. https://doi.org/10.1108/IJM-02-2023-0083
  12. Bennedsen, Morten; Simintzi, Elena; Tsoutsoura, Margarita; Wolfenzon, Daniel (2022). Do Firms Respond to Gender Pay Gap Transparency? The Journal of Finance 77(4), 2051-2091. DOI: 10.1111/jofi.13136. https://doi.org/10.1111/jofi.13136
  13. Bennedsen, Morten; Larsen, Birthe; Wei, Jiayi (2023). Gender wage transparency and the gender pay gap: A survey. Journal of Economic Surveys 37(5), 1743-1777. DOI: 10.1111/joes.12545. https://doi.org/10.1111/joes.12545
  14. Bertrand, Marianne; Black, Sandra E.; Jensen, Sissel; Lleras-Muney, Adriana (2019). Breaking the Glass Ceiling? The Effect of Board Quotas on Female Labour Market Outcomes in Norway. The Review of Economic Studies 86(1), 191-239. DOI: 10.1093/restud/rdy032. https://doi.org/10.1093/restud/rdy032
  15. Costa Dias, Monica; Joyce, Robert; Parodi, Francesca (2018). Wage progression and the gender wage gap: the causal impact of hours of work. IFS Briefing Note BN223. DOI: 10.1920/bn.ifs.2018.bn0223. https://doi.org/10.1920/bn.ifs.2018.bn0223
  16. Nguyen, Hang Anh; O'Brien, Martin; Paloyo, Alfredo (2025). Minimum Wage Policy and the Gender Wage Gap. SSRN working paper. DOI: 10.2139/ssrn.5182670. https://doi.org/10.2139/ssrn.5182670