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Equilibrium Effects of Pay Transparency

Author

Listed:
  • Zoe B. Cullen
  • Bobak Pakzad-Hurson

Abstract

The public discourse around pay transparency has focused on the direct effect: how workers seek to rectify pay inequities through renegotiation. The question of how wage-setting and employment practices of the firm respond has received less attention. To study these equilibrium outcomes, we test our model of bargaining under incomplete information with an analysis of pay transparency mandates 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 adoption 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 effects are muted when workers have low individual bargaining power. 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.

Suggested Citation

  • Zoe B. Cullen & Bobak Pakzad-Hurson, 2021. "Equilibrium Effects of Pay Transparency," NBER Working Papers 28903, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28903
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    Citations

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    Cited by:

    1. Oliver Gürtler & Lennart Struth, 2021. "Do Workers Benefit from Wage Transparency Rules?," ECONtribute Discussion Papers Series 105, University of Bonn and University of Cologne, Germany.
    2. Alexander Berry & Molly Maloney & David Neumark, 2024. "The Missing Link? Using LinkedIn Data to Measure Race, Ethnic, and Gender Differences in Employment Outcomes at Individual Companies," NBER Chapters, in: Race, Ethnicity, and Economic Statistics for the 21st Century, National Bureau of Economic Research, Inc.
    3. Matthias Fahn & Giorgio Zanarone, 2022. "Transparency in relational contracts," Strategic Management Journal, Wiley Blackwell, vol. 43(5), pages 1046-1071, May.
    4. Jones, Melanie K. & Kaya, Ezgi, 2022. "Organisational Gender Pay Gaps in the UK: What Happened Post-transparency?," IZA Discussion Papers 15342, Institute of Labor Economics (IZA).
    5. Werner, Peter, 2023. "Wage negotiations and strategic responses to transparency," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 161-175.
    6. Lara Ezquerra & Joaquin Gomez-Minambres & Natalia Jiminez & Praveen Kujal, 2021. "Making it public: The effect of (private and public) wage proposals on efficiency and income distribution," Working Papers 21-12, Chapman University, Economic Science Institute.
    7. Yannis Galanakis & Amanda Gosling, 2024. "Mind the (Gender Pay) Gap - The role of Board Gender Composition," Working Papers 045, The Productivity Institute.
    8. Chen, Yunsi & Hu, Dezhuang, 2023. "Why are exporters more gender-friendly? Evidence from China," Economic Modelling, Elsevier, vol. 118(C).
    9. Patrick Bennett & Ian Burn & Luke Walsh, 2023. "The Effect of Pay Transparency Laws on Wages and Discrimination Complaints," Working Papers 202312, University of Liverpool, Department of Economics.
    10. Amir Habibi, 2023. "Pay Transparency in Organizations," Rationality and Competition Discussion Paper Series 395, CRC TRR 190 Rationality and Competition.
    11. Riccaboni, Massimo & Swoboda, Torben & Van Dyck, Walter, 2022. "Pharmaceutical net price transparency across european markets: Insights from a multi-agent simulation model," Health Policy, Elsevier, vol. 126(6), pages 534-540.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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