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