Equilibrium Effects of Pay Transparency in a Simple Labor Market

Zoë B. Cullen; Bobak  Pakzad-Hurson

Working Paper | 2019

Equilibrium Effects of Pay Transparency in a Simple Labor Market

by Zoë B. Cullen and Bobak Pakzad-Hurson

Abstract

Public discourse on pay transparency has not focused on equilibrium effects: how greater transparency impacts hiring and bargaining. To study these effects, we combine a dynamic wage-bargaining model with data from online markets for low-skill, temporary jobs that differ in their level of transparency. Wages are more equal, but lower under transparency. Transparency increases hiring and employer profits, rising 28% in an online field experiment. A key intuition is high transparency commits employers to negotiating aggressively, because a highly paid worker's salary affects negotiations with other workers. We discuss implications for the gender wage gap and employers' endogenous transparency choices.

Keywords: Pay Transparency; online labor market; privacy; wage gap; Negotiation; Corporate Disclosure; Compensation and Benefits; Gender;

Language: English

Format: Print

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Citation:

Cullen, Zoë B., and Bobak Pakzad-Hurson. "Equilibrium Effects of Pay Transparency in a Simple Labor Market." Working Paper, April 2019. (Formerly two papers, "Equal Work for Unequal Pay" and "Is Pay Transparency Good?". Selected as Exemplary Applied Modeling Paper at EC '19.)

Working Paper | 2019

The Old Boys' Club: Schmoozing and the Gender Gap

Zoë B. Cullen and Ricardo Perez-Truglia

The old boys’ club refers to the alleged advantage that male employees have over their female counterparts in interacting with powerful men. For example, male employees may schmooze with their managers in ways that female employees cannot. We study this phenomenon using data from a large financial institution. We use an event study analysis of manager rotation to estimate the causal effect of managers’ gender on their employees’ career progression. We find that when male employees are assigned to male managers, they are promoted faster in the following years than they would have been if they were assigned to female managers. Female employees, on the contrary, have the same career progression regardless of the manager’s gender. These differences in career progression cannot be explained by differences in effort or output. This male-to-male advantage can explain a third of the gender gap in promotions. Moreover, we provide suggestive evidence that these manager effects are due to socialization between male employees and male managers. We show that these manager effects are present only if the employee works in close proximity to the manager. We use survey data to show that, after transitioning to a male manager, male employees spend more time with their managers. Finally, we study a shock to socialization within males, based on the anecdotal evidence that employees who smoke tend to spend more time together. We find that when male employees who smoke switch to male managers who smoke, they spend more of their breaks with their managers and are promoted faster in the following years. Moreover, the effects of these smoking manager switches are similar in timing and magnitude to the effects of the gender manager switches.

Keywords: career; promotions; Socialization; Networking; Gender; Personal Development and Career; Wages;

Citation:

Cullen, Zoë B., and Ricardo Perez-Truglia. "The Old Boys' Club: Schmoozing and the Gender Gap." NBER Working Paper Series, No. 26530, December 2019. View Details

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The diffusion of salary information has important implications for labor markets, such as wage discrimination policies and collective bargaining. Despite the widespread view that transmission of salary information is imperfect and unequal, there is little direct evidence on the magnitude and sources of these frictions. We conduct a field experiment with 755 employees at a multibillion-dollar corporation to study how people search for and share salary information. We show that most employees have inaccurate beliefs about the average salary of their peers. We provide evidence that such misperceptions arise, in part, due to search costs, and we provide suggestive evidence that these costs are associated with privacy norms. Last, we show that, contrary to widespread belief, there are no significant gender differences in misperceptions, search costs, and privacy norms.

The vast majority of the pay inequality in an organization comes from differences in pay between employees and their bosses. But are employees aware of these pay disparities? Are employees demotivated by this inequality? To address these questions, we conducted a field experiment with a sample of 2,060 employees from a multibillion-dollar corporation. We make use of the firm’s administrative records alongside survey data and information-provision experiments. First, we document large misperceptions among the employees about the salaries of their managers and smaller but still significant misperceptions of the salaries of their peers. Second, we show that these perceptions have a significant causal effect on the employees’ own behavior. When they find out that their managers earn more than they thought, employees work harder on average. We provide evidence that these effects are consistent with career-concerns models. In contrast, employees work less hard when they find out that their peers earn more. We conclude by discussing implications for pay inequality and pay transparency.

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Equilibrium Effects of Pay Transparency in a Simple Labor Market

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