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  • May 2023
  • Article
  • Econometrica

Equilibrium Effects of Pay Transparency

By: Zoë B. Cullen and Bobak Pakzad-Hurson
  • Format:Print
  • | Pages:37
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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 and hiring practices of the firm respond in equilibrium has received less attention. To study these outcomes, we build a model of bargaining under incomplete information and test our predictions in the context of the U.S. private sector. Our model predicts that transparency reduces the individual bargaining power of workers, leading to lower average wages. A key insight is that employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others under transparency. In situations where workers do not have individual bargaining power, such as under a collective bargaining agreement or in markets with posted wages, greater transparency has a muted impact on average wages. We test these predictions by evaluating the roll-out of U.S. state legislation protecting the right of workers to inquire about the salaries of their coworkers. Consistent with our prediction, the laws lead wages to decline by approximately 2% overall, but declines are progressively smaller in occupations with higher unionization rates. Our model provides a unified framework to analyze a wide range of transparency policies, and reconciles effects of transparency mandates documented in a variety of countries and contexts.

Keywords

Pay Transparency; Online Labor Market; Privacy; Wage Gap; Corporate Disclosure; Wages; Negotiation

Citation

Cullen, Zoë B., and Bobak Pakzad-Hurson. "Equilibrium Effects of Pay Transparency." Econometrica 91, no. 3 (May 2023): 765–802. (Lead Article.)
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About The Author

Zoe B. Cullen

Entrepreneurial Management
→More Publications

More from the Authors

    • February 2023
    • Quarterly Journal of Economics

    Increasing the Demand for Workers with a Criminal Record

    By: Zoë Cullen, Will Dobbie and Mitchell Hoffman
    • 2023
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    Is Pay Transparency Good?

    By: Zoë Cullen
    • 2022
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    What's My Employee Worth? The Effects of Salary Benchmarking

    By: Zoë B. Cullen, Shengwu Li and Ricardo Perez-Truglia
More from the Authors
  • Increasing the Demand for Workers with a Criminal Record By: Zoë Cullen, Will Dobbie and Mitchell Hoffman
  • Is Pay Transparency Good? By: Zoë Cullen
  • What's My Employee Worth? The Effects of Salary Benchmarking By: Zoë B. Cullen, Shengwu Li and Ricardo Perez-Truglia
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