Equilibrium Effects of Pay Transparency / Zoe B. Cullen, Bobak Pakzad-Hurson.

Format:

Book

Author/Creator:

Cullen, Zoe B.

Contributor:

National Bureau of Economic Research.

Pakzad-Hurson, Bobak.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28903.

NBER working paper series no. w28903

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

The public discourse around pay transparency has focused on the direct effect: how workers seek to rectify pay inequities through renegotiation. The question of how wage-setting and employment practices of the firm respond has received less attention. To study these equilibrium outcomes, we test our model of bargaining under incomplete information with an analysis of pay transparency mandates 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 adoption 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 effects are muted when workers have low individual bargaining power. 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.

Notes:

Print version record

June 2021.