Equilibrium Effects of Pay Transparency

48 Pages Posted: 14 Jun 2021 Last revised: 20 Jul 2021

See all articles by Zoe Cullen

Zoe Cullen

Harvard University - Business School (HBS)

Bobak Pakzad-Hurson

Brown University - Department of Economics

Date Written: June 2021

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.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Cullen, Zoe and Pakzad-Hurson, Bobak, Equilibrium Effects of Pay Transparency (June 2021). NBER Working Paper No. w28903, Available at SSRN: https://ssrn.com/abstract=3866335

Zoe Cullen (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

HOME PAGE: http://www.hbs.edu/faculty/Pages/profile.aspx?facId=879471

Bobak Pakzad-Hurson

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
67
PlumX Metrics