Introduction
This chapter will explore the relationship between gender and financial capability levels. A large body of literature has explored the gender gap that persists in financial capability.
Largely, the gender differences are concentrated in financial knowledge discrepancies, with males having a greater understanding of financial concepts and phenomenon. Literature is still inconsistent as to whether this knowledge discrepancy has consequent impact on financial decision making differences between males and females (Chambers et al., 2019; Lusardi et al., 2009). However, this finding is based on traditional financial capability indices, encompassing measures of financial knowledge, behaviour and attitudes. As such, little research exists exploring the gender difference in financial capability based on measures which consider psychological factors. As outlined in chapter 3, psychological factors play a significant role in the decision-making process, including tendencies towards impulsivity, long-term time orientation and reliance on behavioural biases.
The contribution of this essay is to build on current research exploring the gender gap in financial capability, utilising the new financial capability index developed in chapter 3. This chapter will firstly explore the factors contributing to the gender gap in financial capability levels, and secondly, propose the intended method for using the financial capability index developed in chapter 3 to measure the gender differential in financial capability of New Zealanders.
Review of existing literature Gender and financial literacy
Financial knowledge is paramount to an individual’s ability to make informed financial decisions. Within the growing complexity of modern financial markets, individual’s lacking this financial knowledge are likely to make ill-informed decisions leading to poor financial security and negative impacts on the wider economy.
Numerous studies confirm that women consistently score lower than men across measures of financial literacy, a finding which holds in a number of countries across the globe (Hasler &
Lusardi, 2017; Mottola, 2013; Potrich, Vieira, & Kirch, 2018; Theodos, Kalish, McKernan, &
Ratcliffe, 2014). Worldwide, 35% of males are considered financially literate as compared with only 30% of females. Although financial literacy levels vary greatly across developed and emerging nations, this 5% gender gap is consistent across a majority of countries (Hasler &
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Lusardi, 2017). Based on individual financial literacy questions from the Financial Industry Regulatory Authority (FINRA), 32% of females answered four or five correctly (out of five questions) as compared with 53% of men. Women achieved an average score of 2.68 with male participants scoring 3.31 on average (A. Lusardi & O. Mitchell, 2011; Mottola, 2013). After performing cluster analysis on a financial literacy indicator, Potrich et al. (2018) find that 33.7% of women surveyed were classified as having a high level of financial literacy as compared with 46.5% of men. A similar study based also on the FINRA National Financial Capability Survey explored gender differences in financial knowledge, behaviour and well- being. Controlling for employment and income differences, the study identified that women consistently scored 6.5% less than men on the financial literacy questions (de Bassa Scheresberg, Lusardi, & Yakoboski, 2014).
Gender and financial behaviour
Gender differences are also prevalent in measures of financial behaviour. Based on the US National Financial Capability Survey results, women are much more likely to struggle to come up with enough money to cover a (hypothetical) unexpected financial shock. In relation to the maintenance of emergency funds for the G20 countries included in the study, Italy, Turkey and Canada, had the highest gender discrepancies with respective differentials of 17%, 15%, and 10% in favour of males (Hasler & Lusardi, 2017).
Women often have lower levels of knowledge surrounding the concept of ‘debt’ and therefore can fall in to using more costly methods of borrowing. These expensive debt traps include payday lenders, pawn shops and mobile traders (Mottola, 2013). Interest in the financial capability levels of females has been increasing amongst researchers particularly in relation to the link between financial literacy and financial decision-making. Women with poor financial literacy levels are likely to be disadvantaged in their ability to accumulate wealth, stunting financial progression and wellbeing (Potrich et al., 2018). The evidence of poor financial knowledge among females can translate to uninformed financial decision making and engagement in detrimental financial behaviours including high use of credit card facilities and lack of participation in the stock market (Theodos et al., 2014).
Studies also show that gender differences exist in retirement planning with 44% of working females having attempted to determine how much they need to save for retirement as compared to 50% of working males. Based on the Standard & Poor’s Ratings Services Global Financial Literacy Survey, women are less likely to save for their retirement when compared to males.
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In G20 countries, the gender gap in retirement savings is significant with the United Kingdom and Italy maintaining differentials of 15% and 11% respectively (Hasler & Lusardi, 2017). A US study found that a large number of women were approaching the age of retirement holding a variety of short-term and long-term debt. Within females approaching retirement, 40% of females were overly indebted and likely to carry debt into retirement. Likewise, only 37% of females in the late stage of their careers have sought any form of formal financial advice regarding retirement savings and current/future investments (de Bassa Scheresberg et al., 2014).
Gender, socialisation and cultural norms
Gender inequalities in the general sense are embedded in society due to social relations throughout history (Potrich et al., 2018). Traditionally, women have held informal housekeeping roles that often means they become part of the unpaid workforce. At a more general level, several studies attribute the lower financial literacy levels of females to social struggles, as well as lack of autonomy and recognition (Potrich et al., 2018). It has been found that, according to the agency-communion theory, men are primarily focused on individualistic goals, whereas the goals of females often tend to be focused on the co-existence of themselves with those around them (He, Inman, & Mittal, 2008).
Traditional gender roles can also have an impact on the development of financial capabilities through socialization during childhood. Often males are believed to be the ‘breadwinner’ of the household, who ‘take care’ of females financially, which can deter women from becoming financially independent as they transition to adulthood (Agnew & Cameron-Agnew, 2015).
Despite progress being recognised in this area, the modern concern is that increasing female autonomy means that in many cases uneducated females are now expected to head households and make daily financial decisions (Potrich et al., 2018).
Gender and life stages
Another contributing factor to the financial capability gender gap is the influence of lifecycle and stages. The gender gap in financial capability levels is becoming increasingly exacerbated as women’s participation in the labour market increases. Traditionally, women were the ones to stay at home looking after the household and raising the children. This means that in many cases, women have had substantially less exposure to budgeting and income management. With the increase in female labour market participation, the discrepancy in financial capability skills, particularly income management and debt literacy, has been highlighted (Potrich et al., 2018).
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As per the U.S Bureau of Labour Statistics, 47% of the employed population in the United States are women and this participation level is increasing at a greater rate than that of males (de Bassa Scheresberg et al., 2014). Women are often disproportionately represented in the service sector. Despite more traditional sectors (e.g. agriculture) historically contributing a significant portion to growth in GDP within advanced economies, the contribution to GDP of the services industry is increasing dramatically (de Bassa Scheresberg et al., 2014). Despite female contribution to the labour market growing drastically over recent years, women remain more likely than men to be employed on a part-time basis and are on average, paid less than men. This finding regarding the gender pay gap is pervasive and holds across all age groups (Hasler & Lusardi, 2017; Theodos et al., 2014). The Bureau of Labour Statistics 2012 figures showed that on average in the US, the median weekly earnings of females were equivalent to 81% of men’s earnings (de Bassa Scheresberg et al., 2014). Despite a large proportion of working women in the US having a bank account, females employed on a full-time basis are 25% more likely to have a retirement account as compared with females in part-time employment (de Bassa Scheresberg et al., 2014).
Women are now often recognised as the head of the household, responsible for the day to day money management. For example, in Brazilian households, the number of females classified as being responsible for the household increase from 22.2% in 2000 to over 40% in 2015 (Potrich et al., 2018).
As seen in several studies, marital status is an important influencer on female financial literacy levels. A US study undertaken by Potrich et al. (2018) explored gender differences in financial literacy levels observed against various socioeconomic and demographic variables. It was identified that single women performed poorer than married women with only 42% of single women categorised as having a high level of financial literacy as compared with 52.2% of married women. In measuring financial fragility, the US National Financial Capability Survey identified that marital status had a substantial impact on a female’s ability to weather unexpected financial shocks. Females who were single, separated, divorced or widowed were more approximately 25% less likely than married females to be able to come up with $2000 for unexpected expenses (de Bassa Scheresberg et al., 2014). When compared to males, 37%
of single working men were certain they could come up with $2000 to weather an unexpected financial shock as compared with 25% of single working females. The same study identified that women who were married or living with their spouse were 19% more likely to hold an employment-based retirement account than single females (de Bassa Scheresberg et al., 2014).
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Women face a plethora of challenges throughout their lifetime which varies greatly in comparison to men and affects their financial wellbeing during their working life and retirement. Women face life expectancies which are on average longer than males, meaning females face high retirement saving requirements and are expected to live at least some of their retirement in widowhood. Females also face lower average incomes, and career interruptions due to child rearing, which significantly decreases their attachment to the labour market.
Consequently, less access to financial resources across the lifetime combined with poor financial capability levels increase the risk of females facing financial distress during retirement (de Bassa Scheresberg et al., 2014; Hasler & Lusardi, 2017).
Gender and psychological implications
Finally, the generic psychological differences between men and women also contribute significantly to the gender gap in financial capability. Women have been found to report ‘do not know’ responses far more frequently than males in financial literacy surveys, reflecting a lower average level of subjective financial knowledge related to lower confidence levels (de Bassa Scheresberg et al., 2014; Hasler & Lusardi, 2017; Theodos et al., 2014). Participants in the study were asked to rank their subjective financial knowledge on a scale of one to seven.
Women on average rated themselves 4.8 as compared to the male self-assessment average of 5.1 (Mottola, 2013). Potrich et al. (2018) also find that women often provide more conservative self-assessments of their financial knowledge and capability levels. Several studies have identified that gender differences in financial literacy can at least in part be attributed to differences in attitudes towards money. Men tend to view money as an indicator of power that could increase their standing in society while females tend to adopt a more conservative approach. Consequently, women often have more negative and anxious feelings towards money, and are less willing to take financial risks (Calamato, 2010; Potrich et al., 2018;
Theodos et al., 2014). Based on the US National Financial Capability Survey results, women were significantly more likely to answer questions with ‘do not know’ than men, with 65% of women answered ‘do not know’ to at least one of the five financial literacy questions (de Bassa Scheresberg et al., 2014). This trend of females answering ‘do not know’ has been found in countries across the world including the Netherlands, the United States, Germany, New Zealand, and Japan (A. Lusardi & O. S. Mitchell, 2011).
Eventually coined as the Dunning-Kruger effect, a study by Kruger and Dunning (1999) showed that individuals are unaware of what they do not know. In a financial context, the Dunning-Kruger effect explains that individuals who lack financial knowledge, don’t hold the
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necessary metacognitive skills required to accurately assess subjective financial knowledge levels. The US National Financial Capability Survey incorporated both subjective and objective measures of financial capability level. The study found that 79% of working women believe they can successfully manage day-to-day financial decisions. This is a similar figure to the results of male participants. Likewise, 73% of females identified themselves as having high financial knowledge levels, with females who are married, have a college level education, and have high incomes more likely to subjectively assess their knowledge at this level. However, the concern for female participants is the discrepancy between subjective and objective financial capability levels. Despite the subjective measures above, only 31% of working women were able to correctly answer the three basic financial literacy questions as compared with 52% of working men. This not only highlights the gender discrepancy in financial knowledge levels but also that females overestimate their financial knowledge levels to a greater extent than men.
Research objective and hypotheses
Given the prevalence of poor financial literacy levels among females, which are further exacerbated when compared to the level of males, it is clear significant financial education intervention is required. The above analysis also identifies that a female’s life trajectory varies greatly to that of a male and they face unique challenges including career breaks (which can often be long by nature), lower average incomes, longer life expectancy and a tendency towards part-time employment. This suggests that financial advice services and education programs tailored to females are required and would be overtly more effective (de Bassa Scheresberg et al., 2014).
Females face distinct financial challenges throughout all life stages including changes in employment and marital status. For example, females are often concentrated in lower paying roles including healthcare, teaching and office work, a finding which lends itself to the gender pay gap which persists in many countries. Late-career females face different challenges including coming back from career breaks, mortgage indebtedness, and preparation for retirement. Financial education and advice programs will be most effective when they are tailored to overcome those specific challenges (de Bassa Scheresberg et al., 2014). These challenges are the largest contributor to the gender gap in financial capability which persists across the globe.
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Using the new financial capability indicator, this essay will explore and seek to better understand gender differences in financial capability
The above research question prompts the development of the below hypotheses. Although gender differences in financial capability levels are well documented, substantially less research has been undertaken to understand which factors explain this gender discrepancy. The new financial capability indicator will be used to test the following hypotheses:
H1: Females have lower financial capability levels H2: Gender differences exist in financial knowledge H3: Gender differences exist in financial behaviours H4: Gender differences exist in financial attitudes H5: Gender differences exist in psychological factors
Methodology: Gender and financial capability
Multivariate analysis is a useful technique to provide an understanding of gender differences in financial capability levels, enabling the identification of the specific factors that could contribute to this gender differential. Studies have identified several variables which are likely to negatively influence the financial capability levels of females across age groups. For example, on average, women are paid less than men and experience a weaker attachment to the labour market due to career breaks and a tendency towards part-time employment. The multivariate analysis will be undertaken on the four indicators which form the financial capability index, namely:
1. Financial knowledge 2. Financial behaviour 3. Financial attitudes 4. Psychological factors
The model will control for specific demographic variables including age, income, and ethnicity.
Details regarding analysis for this essay are yet to be finalised however there will be some exploratory analysis utilising t-statistics.
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