Most workers don’t probably know how much their colleagues make, and likely don’t know how much their counterparts at other companies are paid, either. This lack of transparency may be keeping millions of Americans from earning higher paychecks.
There is limited evidence on the impacts of wage transparency on middle-class wages, largely because there are few examples of transparent wages in the U.S. labor market. American experiments with wage transparency have primarily come through two avenues: disclosure of salaries for public-sector workers and for highly compensated executives.
These select instances aside, many workers have no idea about their relative pay. Part of the problem is that when it comes to knowing what their counterparts earn, private-sector workers have few reliable resources. Public data often lack sufficient detail to make for a useful comparison, and wages are rarely published by companies. And social stigma and workplace polices often prohibit workers from even talking about wages in the first place—a recent survey revealed that 41% of workers are discouraged from talking about pay and a shocking 25% of workers fear retribution over pay discussions.
Employers, on the other hand, often have ready access to fulsome data on compensation. Salary surveys, also referred to as compensation surveys, are widespread among employers—with one source estimating that over half of North American companies utilize the service. The data provided by these surveys offer managers a complete picture of compensation in the marketplace. Want to hire an engineer and pay them better than most of their peers? A compensation survey can tell employers exactly what to offer.
These surveys are rightly justified on the grounds that hiring firms want to offer competitive salaries. But the problem lies in the asymmetry between the information available to managers compared to workers. In a wide array of circumstances, economic studies have found that the entity with more and better information comes out ahead. The labor market is likely no different.
Lawmakers have been moving on wage transparency. Several states passed anti-retaliation laws that prohibit employers from punishing workers for discussing pay. The Obama administration advanced steps to collect better wage data as a strategy for combating gender and race discrimination. Congressional lawmakers have adopted both these strategies in the Paycheck Fairness Act—a proposed bill aimed at closing the gender wage gap.
Technology is improving access to wage data as well. Websites like Glassdoor have begun to unravel the social stigma around discussing pay. Public data, like those collected by the Bureau of Labor Statistics, are more accessible through increased access to the internet. And some progressive companies, like Buffer, are making their whole payroll transparent by publishing each worker’s salary online.
Can this sort of transparency help? The nascent literature tells a complex story: wage disclosure can raise wages for underpaid employees, and in cases where there is public backlash against high salaries—such as with city executives—it can cause pay compression.
In a study of a 2010 California mandate that public manager salaries be made public, Alexandre Mas shows that such disclosure lowered public salaries, especially those above $200,000, and steeply raised resignations — findings he attributes to populist backlash against high public salaries. Mas also studied a Depression-era mandate regarding disclosure of executive salaries, finding that executive salaries generally ratcheted up as a result of such disclosure: lower-paid CEOs within an industry saw their wages increase once they could see how well other CEOs were paid. Pay disclosure can also impact more than just wage levels: an experimental study by David Card and co-authors found that workers with relatively low pay reported diminished satisfaction and higher rates of job seeking after learning about their pay relative to others.
My view, based on both theory and the evidence we have to date, is that more transparency would help the average worker, and that policymakers can do more to encourage such transparency. In a recent Hamilton Project paper, I offer a few additional strategies for doing so. One, states across the U.S. should protect workers who discuss pay at work; no worker should face retaliation for reasonably talking about pay.
Two, the Trump Administration should back the Equal Employment Opportunity Commission’s effort to collect and publish data on pay by demographic group. Large employers already report this data for employment; extending it to pay would yield important new insights without substantially burdening companies.
Three, regulators should change the antitrust laws regarding the use of compensation surveys to encourage and incentivize managers to share this information with employees. Use of compensation surveys is justified on competitive grounds; keeping the information from workers is not.
Four, the federal government should prohibit firms from asking about prior pay during the hiring process unless they are willing to provide information on their own pay structure. This represents a compromise for hiring firms looking to offer competitive and attractive salaries—the price for this information should be revealing to prospective workers how they would fare relative to their new colleagues.
Five, Congress should appropriate a small amount of funding for the Department of Labor to study the issue of wage transparency. If better information can help boost wages, policymakers would have a new tool in their arsenal to make workers better off.
Together, these five reforms would help put workers and employers on the same playing field when it comes to information about pay. The ultimate goal is for everyone to negotiate wages with the same information.
There are potential drawbacks to this approach. For example, Todd Zenger worried in a 2016 Harvard Business Review article that wage transparency would cause strife within a workplace and could even hurt productivity. Fair enough, but this workplace disruption is exactly the point—underpaid workers should react negatively when they realize how much less they’re making.
Consumers are well-familiar with the power of comparison shopping. Homebuyers demand “comps” from recent sales. Online shoppers often go to more than one website to compare prices. And any driver looking to fill-up on gas might drive by more than one station before hitting the pump. Searching for the best price for labor is the exact same principle, only the stakes are much higher.