Do Pay Transparency Requirements Reduce Inequalities?
February 17, 2023
By Anthony Kaylin, courtesy SBAM Approved Partner, ASE
Pay transparency is a rock rolling downhill that is picking up steam. A number of jurisdictions have pay transparency laws with Illinois the latest state to require it. The findings of a recent survey by Talent.com of 2,000 employees shows that 98% of job seekers in New York City want to know a position’s salary before they apply. A Monster research project had similar findings, and 53% said they wouldn’t apply for a job without pay transparency upfront.
Many employers who are required to have pay transparency are trying to go around laws by showing a grade range as opposed to a salary range. Either way, these pay ranges distort the expectations of employees and applicants. Although those supporting pay transparency think it is a good thing to reduce the opportunity of pay disparity by keeping employers honest. It will; however, it has other effects that are unintended and inhibiting productivity.
True pay transparency is typically seen in union and government contracts. With a union workforce, generally a scale is established for workers in the Collective Bargaining Agreement (CBA) based on a variety of factors including seniority and/or job. The employees see it and know when their next jump in pay will be and how much. Bonuses would be paid only if negotiated, like in the auto industry. The federal government has scales that employees and applicants can see, but there is a step progression. Anyone going into government will start at Step 1 no matter what level. If they were in government in the past, their rehiring would be at a level comparable to what they left at. Further, the steps have time in government requirements for them to move from one to the next. As for levels, promotions can be generally made up to GS-12 and could be based on performance or based on time or both.
Pay transparency harkens back to the Obama Administration, which generally wanted everyone on a union scale similar to the federal government.
Pay transparency does tend to reduce pay disparity. The Economist points to papers which show unintended consequences. A paper by economists at the University of Toronto, Princeton University, and Statistics Canada that is coming out estimates that Canadian salary-disclosure laws implemented between 1996 and 2016 narrowed the gender pay gap of university professors by 20-30%. Another paper by professors at Insead, University of North Carolina, Chapel Hill, Cornell, and Columbia University found that a Danish pay-transparency law adopted in 2006 shrank the gender pay gap by 13%.
What was the downside of the pay transparency? Both papers showed that pay transparency either lowered salaries or curbed salaries to create greater equity. The impact could end up with disenfranchised workers who are not very productive, especially in a U.S. working environment.
In another study by Zoe Cullen of Harvard Business School and Bobby Pakzad-Hurson of Brown University discussed by The Economist, they analyzed the effects of 13 state laws passed between 2004 and 2016 that were designed to protect the right of workers to ask about the salaries of their coworkers. They found that the laws were associated with a 2% drop in wages, an outcome attributed to reduced bargaining power. “Although the idea of pay transparency is to give workers the ability to renegotiate away pay discrepancies, it actually shifts the bargaining power from the workers to the employer,” says Mr Pakzad-Hurson. “So wages are more equal,” explains Ms Cullen, “but they’re also lower.”
Employers should do pay disparity analyses before they implement any pay transparency programs to see where weaknesses could be and to prepare a plan of action.
It should be noted that it is an unfair labor practice (ULP) to discipline or attempt to keep confidential employee wages when employees talk among themselves. The protection was extended in federal contractors to applicants, supervisors, and managers.
Although pay transparency, if done correctly, may provide a better match between applicants and jobs available, it does reduce wages and wage growth. It might encourage greater job hopping. It could also encourage common salaries within an industry, which the Federal Trade Commission may have issues with, but may not be able to enforce. Then more howling could be heard from the gallery if CEO wages increase even more in ratios and employers gain greater profitability by using pay transparency to its benefit.
Source: The Economist 1/5/23, Human Resource Executive 10/24/22, Law360 1/17/23