Equilibrium Effects of Pay Transparency in a Simple Labor Market

Zoë B. Cullen; Bobak  Pakzad-Hurson

Working Paper | 2018

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 unique data of temporary work arrangements that differ in their level of transparency. Full transparency lowers wages by up to 25% and increases hiring by similar magnitudes. Earnings inequality falls, and employer profits rise significantly. 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: 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 2018. (Formerly two papers, "Equal Work for Unequal Pay" and "Is Pay Transparency Good?")

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Appendix

The diffusion of salary information has important implications for labor markets, such as for 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 752 employees at a multibillion-dollar corporation to address these questions. We provide evidence of significant frictions in how employees search for and share salary information and suggestive evidence that these frictions are due to privacy norms. We do not find any significant differences in information frictions between female and male employees.

We study how employees learn about the salaries of their peers and managers and how their beliefs about those salaries affect their own behavior. We conducted a field experiment with a sample of 2,060 employees from a multi-billion dollar corporation. We combine rich data from surveys and administrative records with data from the experiment, which provided some employees with accurate information about the salaries of others. First, we document large misperceptions about salaries and identify some of their sources. Second, we find that perceived peer and manager salaries have a significant causal effect on employee behavior. These effects are different for horizontal and vertical comparisons. While higher perceived peer salary decreases effort, output, and retention, higher perceived manager salary has a positive effect on those same outcomes. We provide suggestive evidence for the underlying mechanisms. We conclude by discussing implications for pay inequality and pay transparency.

Working Paper | 2018

Outsourcing Tasks Online: Matching Supply and Demand on Peer-to-Peer Internet Platforms

Zoë Cullen and Chiara Farronato

This paper studies the growth of online peer-to-peer markets. Using data from TaskRabbit, a rapidly expanding marketplace for domestic tasks, we show that growth is highly heterogeneous across cities, which is a common feature of peer-to-peer markets for local services. To disentangle the potential drivers of growth, we present a general model of a frictional market for services, and estimate it using variation in the number of buyers and sellers present on the marketplace over time and across cities. First, we find that supply is highly elastic: in periods when demand doubles, sellers work almost twice as hard, prices hardly increase and the probability of requested tasks being matched only slightly falls. The first result implies that in markets where supply can accommodate wide fluctuations in demand, growth relies on attracting buyers at a faster rate than sellers. Second, we show that cities where the market fundamentals promote efficient matching of buyers and sellers are also the cities that grow fast in the number of buyers. This heterogeneity in matching efficiency is not attributable to scale economies, but is instead related to two measures of market thickness: geographic density (buyers and sellers living close together), and level of task standardization (buyers requesting homogeneous tasks). The second result implies that when network effects are limited by the local and time-sensitive nature of the services exchanged, growth of peer-to-peer markets largely depends on strategic geographic expansion.

Keywords: two-sided market; two-sided platforms; platform strategy; sharing economy; Online Technology; Market Platforms; Market Design;

Citation:

Cullen, Zoë, and Chiara Farronato. "Outsourcing Tasks Online: Matching Supply and Demand on Peer-to-Peer Internet Platforms." Working Paper, February 2018. View Details

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Equilibrium Effects of Pay Transparency in a Simple Labor Market

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