Equilibrium Effects of Pay Transparency

Abstract

The discourse around pay transparency has focused on partial equilibrium effects: how workers rectify pay inequities through informed renegotiation. We investigate how employers respond in equilibrium. We study a model of bargaining under two‐sided incomplete information. 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. When workers have low individual bargaining power, pay transparency has a muted effect. We test our model with an event‐study analysis of U.S. state‐level laws protecting the right of private sector workers to communicate salary information with their coworkers. Consistent with our theoretical predictions, transparency laws empirically lead wages to decline by approximately 2%, and wage declines are smallest in magnitude when workers have low individual bargaining power.

Pay transparency intervention and the gender pay gap: Evidence from research‐intensive universities in the UK

“…We leverage on the longitudinal nature, which allows us to track individuals over time, to document that the increases in female wages come about as a result of women moving up within their institution, particularly for female full professors. Overall, our results are consistent with a bargaining mechanism as found in the literature (Cullen & Pakzad-Hurson, 2023): whereas, pay transparency limits the bargaining power of employees under collective bargaining (i.e. as in the case of non-full Professors in the UK), it may not necessarily harm -and, in fact, might benefit -those who are more likely to be subject to individual bargaining (i.e.…”

“…Under a simple Beckerian or statistical model of discrimination, incomplete information -that is not knowing what others earn -may result in discriminatory practices going undetected in the long run (Kerwin & Guryan, 2007). For example, any lack of information about peers' wages can explain some of the evidence showing how women are less likely to ask for a pay rise or to negotiate their salary when offered a job (Babcock et al, 2003;Bowles et al, 2007;Cullen & Pakzad-Hurson, 2023;Leibbrandt & List, 2015). 4 There is indeed causal evidence that wage transparency in the presence of gender gaps leads women to ask for higher pay, eliminating any discrepancy (Roussille, 2022).…”

“…Similarly, Baker et al (2023) look at the effects of the 1996 Disclosure Act in Canada and find a drop in male salaries relative to the control group post-reform. Lastly, Duchini et al (2022a) (𝑎) Cullen and Pakzad-Hurson (2023) test their theoretical model with an event-study analysis of US state-level laws protecting the right of private sector workers to communicate salary information with their coworkers. Consistent with theoretical predictions, transparency laws decrease wages by approximately 2%; which are the smaller in magnitude when workers have low individual bargaining power.…”

Navigating the Practical Complexities of Pay Transparency: Implications for Employers and Public Policy

“…Third, it should give employees a greater understanding of the underlying fairness of organizational remuneration practices, as well as of the relative probabilities of increasing their income through advancement within the organization (versus by moving to a different employer). Finally, although recent research suggests that pay transparency may in some cases weaken employee bargaining power (Cullen and Pakzad-Hurson, 2023), there is substantial evidence supporting the ideas that enhanced pay knowledge has the potential to significantly boost employees' leverage when negotiating with employers over pay-related matters (Kleiner and Bouillon, 1988;Rosenfeld and Denice, 2015).…”

“…Additionally, employer disclosure of individuals’ pay raises significant privacy concerns, particularly since, as noted by Montag-Smit and Smit (2020), many employees—especially those at the higher or lower ends of a pay scale—may prefer not to have their personal pay information shared with others. Finally, the disclosure of individual-level rates of pay can have negative implications for pay dispersion (Mas, 2017; Wong et al, 2023), the sensitivity of pay to individual differences in productivity (Obloj and Zenger, 2022), and—at least in the gig employment context—even workers’ bargaining power and wage levels (Cullen & Pakzad-Hurson, 2023).…”