Is Pay Transparency Good?

Countries around the world are designing pay transparency policies with the intention of combating pay discrimination. Are these policies working as intended? Most focus on revealing pay gaps between co-workers within a firm, with the goal of arming workers with information to negotiate equal pay for equal work. While this has led to a narrowing of co-worker wage gaps, these policies have also led to demoralizing peer comparisons, and created spillovers between negotiations that in turn force employers to bargain aggressively, lowering average wages.

The future for pay transparency policies, however, is bright. When designed to go beyond co-worker wage gaps, pay transparency policies address a wide-array of information frictions in the labor market. Experimental and quasi-experimental evidence showed vertical pay transparency shifted peoples’ beliefs upward about what they could earn if they gained a promotion, leaving employees more motivated and productive. Pay transparency in job-postings revealed which employers can offer the highest wages, redirecting applications toward higher paying firms. Pay transparency between employers shed light on the wages of competing firms, reducing the information rents of firms in wage-setting games and increasing wages for lower-skill work. The key design feature for all these pay transparency policies is that they shine the light outward, away from similar workers negotiating with the same employer.

The degree of learning and behavioral change stemming from pay transparency underscores the extent of information frictions in the labor market. I describe an open field for pay transparency studies to improve the functioning of labor markets and shed light on how the labor market operates. I also apply insights from existing evidence to predict how recent legislation, including mandated pay ranges in job advertisements, will affect the labor market.