Wage Transparency, Negotiation, and Reference-dependent Utility

45 Pages Posted: 24 Mar 2021 Last revised: 30 Apr 2021

See all articles by Hengchen Dai

Hengchen Dai

University of California, Los Angeles (UCLA) - Anderson School of Management

Xiaoyang Long

University of Wisconsin - Madison - School of Business

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: March 16, 2021

Abstract

Wage transparency has become increasingly prevalent across industries as a result of government mandates, companies' voluntary disclosure, and digitization. A commonly cited benefit of wage transparency is that it can prompt underpaid workers to negotiate and thus reduce wage inequality. To empirically address how peer wage information influences wage negotiation and the subsequent implications for wage inequality, we conducted two field experiments on online labor markets where we manipulated information about historical peer wages and assessed workers' responses to job offers. Contrary to predictions of the prior literature, workers become more likely to negotiate not only when they learn that they are paid lower than others (by 34%-132%), but also when they learn that they are paid the same wage as others (by 38%-88%). We conjecture that the latter finding occurs because at least some workers believe they should be paid more than the average due to (warranted or inflated) positive assessments about themselves. This conjecture is supported by a laboratory experiment. Based on our empirical findings, we build a reference-dependent model to describe worker behavior and use it to derive the long-term implications of wage transparency for wage inequality. Our model and the subsequent numerical study reveal that wage transparency may amplify wage inequality by prompting workers who are already highly paid to ask for more. Our work highlights that wage transparency is not necessarily a panacea for wage inequality, and discusses additional measures that governments and organizations may consider along with wage transparency to combat wage inequality.

Keywords: Field Experiment, Reference Effects, Service Operations, Social Responsibility, Empirical Operations

Suggested Citation

Dai, Hengchen and Long, Xiaoyang and Zhang, Dennis, Wage Transparency, Negotiation, and Reference-dependent Utility (March 16, 2021). Available at SSRN: https://ssrn.com/abstract=3805864 or http://dx.doi.org/10.2139/ssrn.3805864

Hengchen Dai

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Xiaoyang Long

University of Wisconsin - Madison - School of Business ( email )

Madison, WI
United States

Dennis Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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