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

The public discourse around pay transparency has focused on the direct effect: how workers seek to rectify newly disclosed pay inequities through renegotiations. The question of how wage-setting, bargaining, and hiring practices change with higher transparency has received less attention. To study these outcomes, we combine a dynamic wage-bargaining model with data from online labor markets for low-skill, temporary jobs. We exploit naturally occurring variation in pay transparency as well as experimentally-induced variation. Wages are more equal, but lower under transparency. An increase in transparency raises the hiring rate when workers have sufficient bargaining power. Employer profits rise with transparency, increasing 27% in a field experiment. A key insight is that increasing transparency decreases the bargaining power of workers, as employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others. 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.)

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Non-Technical Summary of Theory

Non-Technical Summary of Theory

To explore the impact of COVID on small businesses, we conducted a survey of more than 5,800 small businesses between March 28 and April 4, 2020. Several themes emerged. First, mass layoffs and closures had already occurred – just a few weeks into the crisis. Second, the risk of closure was negatively associated with the expected length of the crisis. Moreover, businesses had widely varying beliefs about the likely duration of COVID-related disruptions. Third, many small businesses are financially fragile: the median business with more than $10,000 in monthly expenses had only about two weeks of cash on hand at the time of the survey. Fourth, the majority of businesses planned to seek funding through the CARES act. However, many anticipated problems with accessing the program, such as bureaucratic hassles and difficulties establishing eligibility. Using experimental variation, we also assess take-up rates and business resilience effects for loans relative to grants-based programs.

Working Paper | 2019

The Old Boys' Club: Schmoozing and the Gender Gap

Zoë B. Cullen and Ricardo Perez-Truglia

Offices are social places. Employees and managers take coffee breaks together, go to lunch, hang out over drinks, and talk about family and hobbies. In this study, we provide evidence that employees’ social interactions with their managers can be advantageous for their careers and that this phenomenon can contribute to the gender pay gap. We use administrative and survey data from a large financial institution. We conduct an event-study analysis of manager rotation to estimate the causal effect of managers’ gender on their employees’ career progressions. We find that male employees assigned to male managers were promoted faster in the following years than male employees assigned to female managers; female employees, on the contrary, had the same career progression regardless of their managers’ gender. These differences were not accompanied by any differences in effort or performance, and they explain a third of the gender gap in promotions at this firm. Then, we provide evidence suggesting that these effects were mediated by the social interactions between male employees and their managers. First, we show that the effects were present only among employees who worked in close proximity to their managers. Second, we show that the effects coincided with an uptick in the share of breaks taken with the managers. Third, we provide suggestive evidence that social interactions are important even among male employees: when male employees who smoke transitioned to male managers who smoke, they took breaks with their managers more often and were subsequently promoted at higher rates than male smokers who transitioned to non-smoking managers.

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

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 limited diffusion of salary information has implications for labor markets, such as wage discrimination policies and collective bargaining. Access to salary information is believed to be limited and unequal, but there is little direct evidence on the sources of these information frictions. Social scientists have long conjectured that privacy norms around salary (i.e., the “salary taboo”) play an important role. We provide unique evidence of this phenomenon based on a field experiment with 755 employees at a multibillion-dollar corporation. We provide revealed-preference evidence that many employees are unwilling to reveal their salaries to coworkers and reluctant to ask coworkers about their salaries. These frictions are still present, but smaller in magnitude, when sharing information that is less sensitive (seniority information). We discuss implications for pay transparency policies and the gender wage gap.

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Equilibrium Effects of Pay Transparency in a Simple Labor Market

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