Who will benefit from salary transparency? Not everyone, suggests a new study

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When buying a new car, most auto experts recommend researching what consumers are paying for the car models they are interested in before entering a showroom so that you know if you are getting a good deal or not.

Similarly, career professionals generally recommend employees interested in negotiating a higher salary to equip themselves with information on how much workers in similar roles are making, either within their own company or across the industry.

But knowing too much about how much money each of your employees makes can ultimately backfire, suggests a paper titled “Equilibrium Effects of Pay Transparency,” circulated Monday by the National Bureau of Economic Research.


“The problem that arises is when there is too much information and the employer knows it, it is basically impossible to use that information because you no longer have a unique advantage.”

– Professor at Brown University Bobak Pakzad-Hurson University

This is because “salary transparency reduces workers’ bargaining power in environments where workers begin with a certain level of individual bargaining power,” wrote the paper’s co-authors, Brown University Professor Bobak Pakzad-Hurson and Professor Zoe Cullen from Harvard Business School.

The report relies on salary data collected by the US Census Bureau from 2000 to 2016 on more than 4 million people in 18 states who “have issued guidelines specifically designed to facilitate communication about pay between employees.”

The researchers found that three years after such laws were passed, wages fell by a total of 2%. But there was one important exception: wages “fell half as much in occupations with above-median union rates as in occupations with below-average union formation rates”.

Should employees push for more transparency?

In short, yes.

“At the individual employee level, it makes perfect sense to gather as much information as possible” before starting a conversation with your employer to negotiate a higher salary, Pakzad-Hurson told MarketWatch.

“The problem that arises is when there is too much information and the employer knows it, it is basically impossible to use that information because you no longer have a unique advantage.”

In such a situation, employers are likely to tell their employees that they cannot give a particular person a raise because everyone else inevitably learns about it and demands a raise too, he said.

This suggests that in most cases it is in the employer’s best interest to be transparent about pay in order to avoid costly and time-consuming salary negotiations.

But a higher level of pay transparency will not necessarily allow employers to reject requests from workers who are union members. In this case, it is up to union leaders to bargain collectively on behalf of union members to ensure they are paid fairly in relation to market wages.

Previous research has shown that while wage transparency can help narrow the pay gap between men and women in the short term, it can, over time, lead to lower wages for all.

Long-term sharing of information on salaries may have led employers to lower overall salaries instead of raising women’s salaries to the levels of their male counterparts, suggested the study, which looked at the impact of pay disclosure laws in the public sector in Canada.

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