Up Next

Market-Based Solutions to Vital Economic Issues


Kenan Institute 2023 Grand Challenge: Workforce Disrupted
Market-Based Solutions to Vital Economic Issues
Kenan Insight
Jul 13, 2022

A Clear-Eyed Look at Salary Transparency Laws

Part of our series on Workforce Disrupted

To combat historical pay gaps experienced by people of color and women, 17 states have enacted pay transparency laws of varying degrees. In January, New York City joined the fight when the city council enacted the New York City Salary Range Transparency Act, an amendment to the New York City Human Rights Law set to go into effect in November. Under this act, it is an “unlawful discriminatory practice” for an employer to advertise a position without providing a minimum and maximum salary in the position advertisement. The law applies to all employers with at least four employees in the city, including independent contractors.

This trend of pay transparency also appears to be increasingly popular among millennial and Generation Z workers. During a time of fierce labor competition, companies that disclose salary ranges might have a leg up on recruiting younger workers. Many companies, however, remain hesitant to provide such transparency without the policy requirements.

In this Q&A, we ask two experts about whether salary transparency laws move the needle in changing pay gaps. Jesse Davis is an assistant professor of finance at UNC Kenan-Flagler Business School. Ursula Mead is the founder and CEO of Durham, North Carolina-based InHerSight, a data-driven anonymous platform to measure how well companies support female employees.

What is the market imperfection that drives pay gaps?

Jesse Davis: There are two common measures of the gender pay gap. The first, and the most broadly cited measure in the popular press, is the aggregate pay gap, which estimates the average difference in pay between a male and female worker. Recent estimates suggest that, using this measure, female workers make approximately 80% of what male workers make. The aggregate pay gap, however, reflects average differences between men and women across education, experience, occupation and other factors. The second approach to measuring the pay gap controls for these factors, which – depending upon the population studied and the controls utilized – shrinks the gap by two-thirds or more. Some of the earliest research on the impact of discrimination suggested that, even if some firms in the economy chose to discriminate, competition from non-discriminating firms could be sufficient to eliminate any wage differential in this second measure.1 The presence of a persistent gap, however, hints at other factors and market imperfections.

Negotiation and firm bargaining power in the labor market can lead to differences in male and female wages.

One prominent explanation is the presence of asymmetric information. When an employer is unsure about a worker’s productivity, it may engage in what is called statistical discrimination: it applies the characteristics of the group when making an inference about an individual.2 In such cases, discrimination can be self-fulfilling: employers’ beliefs influence their employee’s actions, confirming their original (biased) belief. There’s empirical evidence that it can be more difficult for a potential employer to assess a female candidate’s productivity (e.g., if women are less likely to be promoted, then a female candidate’s inability to progress up the career ladder may be due to lack of effort or discrimination). This lack of progression may also be strategic, as theories in the academic literature suggest that current employers can “hide” their most productive female employees from outside employers by either paying them less or failing to promote them. Finally, and perhaps of most relevance in the context of new pay transparency laws, there is evidence that negotiation and firm bargaining power in the labor market can lead to differences in male and female wages.

Ursula Mead: Many factors contribute to pay gaps, such as outright pay discrimination, sexism and other kinds of bigotry, occupational sorting and opportunity gaps. But in terms of gender, the market imperfection that’s become notorious, especially during the pandemic, is women’s unpaid labor — the work that ensures children and elderly or sick family members are cared for and that households run smoothly. Despite decades of progress toward gender equality, this labor falls disproportionately on women’s shoulders, meaning they have less time in the day for paid work as compared to their male peers. Women are more likely to limit their hours or pursue less demanding careers because of their responsibilities at home. They’re also more likely to quit their jobs to take care of their kids — a phenomenon we saw occur en masse during the first year of the pandemic.

What do we know about transparency laws and their effectiveness in addressing pay inequities?

Jesse Davis: There are many types of pay transparency laws. In some cases, firms must provide summary statistics. For example, Denmark recently passed a law which mandates that sufficiently large firms must provide wage data for different employee groups, separated by gender. Research by my colleague Elena Simintzi and her co-authors suggests that this shrank the pay gap by approximately 2%.3 Blundell (2021) finds a quantitatively similar effect in the United Kingdom.

In other settings, individual salaries are made public — for instance, Canada recently mandated that public sector workers with earnings over a given threshold must be disclosed. A recent paper suggests that this law led to a reduction of 1.2%-2% in the gender pay differential. In the United States, some states have chosen to mandate such disclosures for public employees. Obloj and Zenger (2021) find that such laws reduced the pay gap by almost 4%.

Ursula Mead: On InHerSight, women anonymously rate their current or former employer on 18 metrics. Salary satisfaction is one of them. Based on our analysis of salary satisfaction by industry, increased pay transparency correlates with higher satisfaction among women employees.

When companies disclose how much they pay employees, the wage gap decreases — and studies on pay transparency have demonstrated its positive effects on productivity, motivation and general employee performance.

For example, when we look at salary satisfaction within government, where pay grades provide salary transparency, we find that women in government are significantly more satisfied with their pay than women in other industries. And that’s despite the fact that government jobs are known for not paying as well as those in other, more competitive industries, such as tech. Women are happier simply because they have all of the information — where they stand, where they can go salary-wise and what others make. Whether we’re talking about salary, maternity leave or paid time off, we often see that clear expectations go a long way toward satisfaction and the perception of equality.

In addition to our observations, research suggests that when companies disclose how much they pay employees, the wage gap decreases – and studies on pay transparency have demonstrated its positive effects on productivity, motivation and general employee performance.

Are there costs and/or unintended consequences of transparency laws like the one passed recently by the New York City Council? If so, what are they?

Jesse Davis: A recent paper by Zoe Cullen and Bobak Pakzad-Hurson may shed the most insight into transparency laws that require firms to provide salary ranges in job postings.4 They study a model that examines how transparency about peer salaries, including information about salary ranges, affects bargaining over wages. Intuitively, when such information is revealed, it helps employees who are paid less than their peers. Moreover, when women face worse outside options (e.g., because of the presence of discrimination), the gender pay gap should shrink. This effect is often offered as the motivation for such pay transparency laws.

On the other hand, firms internalize this effect when considering what to offer potential employees: realizing that such information may be revealed in the future, the firm is able to (credibly) make lower wage offers. In equilibrium, the authors show how such policies lead to a reduction in everyone’s salary. The authors find evidence in support of their proposed mechanism through “right of worker to talk” laws, with wages falling by more than 2% in states that pass such regulations. Alexandre Mas found a similar effect after California mandated public posting of municipal wages: Top managers had their pay cut by 7% and turnover increased.5 (Editor’s note: The positive InHerSight results among government workers referenced above were based on salary satisfaction surveys rather than effects on wages.)

Even in settings in which the pay gap narrows, the reason may not be because transparency leads employers to pay women more. For instance, in the aforementioned papers examining pay transparency in both Denmark and the U.K., the primary driver of the reduction in the gender pay gap was a reduction in male wages.

In short, the primary beneficiary of such laws may not be women (or other groups that face discrimination) but the firms that employ them, which, after such laws are passed, face a lower total wage bill.

New York state has a Salary History Ban law, which bars New York employers from asking applicants about their current or previous salaries. Both laws are meant to address pay gaps, but one law bans information and one law mandates information. Do these laws play well together?

Jesse Davis: My research (with UNC Kenan-Flagler colleague Paige Ouimet and Xinxin Wang, now at the UCLA Anderson School of Management) suggests that salary history bans also have a negative unintended consequence: when firms have less information about the productivity of a potential employee, they make less aggressive offers to potential new hires. In fact, in states with salary history bans, new hires in our sample are offered 3% less than in states without such bans.6 On the other hand, in areas where women have historically experienced the worst pay discrimination, women’s wages fall by less, i.e., the gender pay gap closes.

Ursula Mead: Yes, absolutely. Both laws are working to address the information asymmetry between applicants and companies. To undo complex systems of bias and discrimination, it takes many strategies and approaches. We know that when employers ask about salary history, it can disproportionately affect women and underrepresented minority candidates; prior discrimination and/or a history of working in lower-paying jobs combined with anchoring that employers then do to those salaries can perpetuate pay inequality and the wealth gap. When salary history is the basis for compensation with each new job, the disparity follows a woman throughout her career and builds over time.

We also know that pay secrecy leaves underrepresented candidates guessing. They don’t know what they don’t know in terms of what to ask for — especially if they’re career changers, which many are. And they might not feel comfortable asking or pressing on those pain points in spaces dominated by white men because there’s a very clear power dynamic.

Instead of thinking of the two laws as contradictory, pretend like you’re playing the video game Mario Party. At the start of the game, salary history bans zero out everyone’s score. All of the players are vying for the same job and the same earning potential, and no one carries over a point advantage from a previous game. Then pay transparency ensures everyone can see the board — the twists, the turns, the rules, the landscape. It’s not as if Princess Peach is blindfolded while Luigi races ahead. The laws work to ensure underrepresented applicants have the best shot possible at a fair game.

Firms can voluntarily disclose this information and yet few do. Moreover, some firms stopped advertising for remote work in Colorado after the passage of Colorado’s similar pay transparency law. Why did this happen? Why are some firms opposed to this law?

Jesse Davis: Firms have shared several concerns regarding the law. One reason offered is fear that such information will be used by competitors to potentially poach employees. Others have suggested that the potential cost of failing to adequately comply with the law is not worth the benefit of recruiting in Colorado — this argument, however, will be harder to justify as more municipalities implement such laws. Experts suggest that the most common reason, however, is the effect described by Cullen and Pakzad-Hurson7: In the short term, at least, revealing such information is likely to lead to an increase in wages and could be very costly for firms with high wage dispersion.

Ursula Mead: Pay transparency holds management accountable for making more sensible and predictable compensation decisions — that’s good, and hard. I’ve seen firsthand how difficult it is for companies to transition to pay transparency, having worked for a company that tried to make the switch and witnessed the incredible tumult and unrest that it caused. People were upset, felt cheated, considered changing jobs. In fairly short order, the company reverted to its former policies and approach.

In the short term, when you are in an environment where pay is not equitable, making the transition to pay transparency is likely to be a painful process, so it’s understandable that, for example, organizations would find it difficult to manage the fallout from pulling the curtain back a little for jobs advertised in certain states. That’s not a reason to avoid or roll back change, however; as with any disruptor, the initial sting of ripping off the Band-Aid is painful but temporary. In the long run, transparency has the potential to solve more problems than it creates, and we could reach that reality faster and with more permanence if more states sign on.

1 Becker, G. S. (1957). The economics of discrimination. Chicago: University of Chicago Press.

2 Phelps, E. (1972). The statistical theory of racism and sexism. The American Economic Review, 62(4), 659-661.; Arrow, K. J. (1973) ‘The Theory of Discrimination’, in O. Aschenfelter and A. Rees (eds) Discrimination in Labor Markets (Princeton: Princeton University Press). ; Loury, G., & Coate, S. (1993). Will affirmative action policies eliminate negative stereotypes? The American Economic Review, 83(5), 1220-1240.

3 Bennedsen, M., Simintzi, E., Tsoutsoura, M., & Wolfenzon, D. (2022). Do firms respond to gender pay gap transparency? The Journal of Finance (New York), 77(4), 2051-2091. https://doi.org/10.1111/jofi.13136

4 Cullen, Z.B. & Pakzad-Hurson, B. (2021). Equilibrium Effects of Pay Transparency (NBER Working Paper No. 28903). National Bureau of Economic Research. https://www.nber.org/papers/w28903

5 Mas, A. (2017). Does transparency lead to pay compression? The Journal of Political Economy, 125(5), 1683-1721. https://doi.org/10.1086/693137

6 Davis, J., Ouimet, P. & Wang, X. (In Press).Hidden Performance: Salary History Bans and the Gender Pay Gap. The Review of Corporate Finance Studies.

7 Cullen & Pakzad-Hurson (2021)

You may also be interested in: