Equilibrium Effects of Pay Transparency in a Simple Labor Market

By: Zoë B. Cullen and Bobak Pakzad-Hurson

Format:Print
| Language:English

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

Citation

Cullen, Zoë B., and Bobak Pakzad-Hurson. "Equilibrium Effects of Pay Transparency in a Simple Labor Market." Working Paper, April 2020. (Formerly two papers, "Equal Work for Unequal Pay" and "Is Pay Transparency Good?" Selected as Exemplary Applied Modeling Paper at EC '19. Reject and Resubmit at Econometrica.)