Wednesday, March 29, 2023

Pay transparency, horizontally, vertically, and across firms, by Zoe Cullen

 Information architecture is an important part of market design. Here's a nuanced review of pay transparency by Zoe Cullen, dealing with the non-obvious effects of horizontal transparency (letting workers know what similar workers are paid), vertical transparency (finding out how pay proceeds up the career ladder), and cross-firm transparency (what other firms are paying).

Is Pay Transparency Good?  by Zoe B. Cullen, NBER working paper 31060, DOI 10.3386/w31060 March 2023

Abstract: Countries around the world are enacting pay transparency policies to combat pay discrimination. 71% of OECD countries have done so since 2000. Most are enacting transparency horizontally, revealing pay between co-workers of similar seniority within a firm. While these policies have narrowed co-worker wage gaps, they have also lead to counterproductive peer comparisons and caused employers to bargain more aggressively, lowering average wages. Other pay transparency policies, without directly targeting discrimination, have benefited workers by addressing broader information frictions in the labor market. Vertical pay transparency policies reveal to workers pay differences across different levels of seniority. Empirical evidence suggests these policies can lead to more accurate and more optimistic beliefs about earnings potential, increasing employee motivation and productivity. Cross-firm pay transparency policies reveal wage differences across employers. These policies have encouraged workers to seek jobs at higher paying firms, negotiate higher pay, and sharpened wage competition between employers. We discuss the evidence on pay transparency’s effects, and open questions.

And from the conclusions:

"We conclude that “horizontal” pay transparency policies that reveal pay gaps between co-workers at the same firm create unintended spillovers between worker negotiations that lower worker bargaining power and wages. This characterizes the strong majority of pay transparency policies that have been put in place over the past two decades. However, policies that focus on ameliorating information frictions in the labor market more broadly have achieved the objectives of raising wages and equity. “Cross-firm” and “vertical” pay transparency policies have proven potential to increase motivation, allocation of talent, and sharpen competition. These policies are not designed to draw attention to employers who pay similar workers different wages, but instead these policies educate workers about the full range of opportunities to earn higher wages when they make decisions about training, where to apply, and how hard to work. Our evidence on misperceptions suggests low earners have the most to gain from improved access to this information. Pay transparency policies can also have pro-competitive effects by educating employers about market wages, eroding information rents when employers have private knowledge about the value workers bring to the job.

"Cross-firm pay transparency policies have recently gained traction among policy makers. In January of 2023, California and Washington became the second and third states in the U.S. to mandate that employers include a salary range in the job postings external job candidates see, following on the heels of Colorado and New York City. This is a big step toward making pay information available at the time workers are choosing where to direct their applications, and employers expect that this will lead applicants to direct their applications toward higher paying firms, increasing wage competition."


And here's a quick story about that paper in yesterday's WSJ.

Knowing Everyone’s Salaries Can Light a Fire Under Workers. Seeing a career path to advancement—and believing the process is fair—motivates employees, studies show. By Courtney Vinopal, March 28, 2023

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