01 Mar 2019
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Research Brief: Unveiling the Truth about Transparency

by Jennifer Myers
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Zoë Cullen (photo by Russ Campbell)

Wage transparency is a concept that is most often rallied against by employers, while employees presume it will benefit them by equalizing wages and reducing the employer’s bargaining power. But recent research by Assistant Professor Zoë Cullen finds that the long-term effects of pay transparency reverse the winners and losers, with firms benefiting significantly more than workers.

“This was one of the most counterintuitive findings I have ever discovered,” Cullen says. In the study “Equilibrium Effects of Pay Transparency in a Simple Labor Market,” she and Brown University’s Bobak Pakzad-Hurson drew on data from online platforms used by employers seeking temporary workers; they also conducted an experiment that involved managers and contractors bargaining over wages.

The study showed that higher transparency resulted in an average increase in employer profits of 60 percent and lowered wages by 25 percent. The key finding is that transparency gives employers a reason to negotiate more aggressively, since the wages of higher-paid employees impact negotiations with all employees—at the start of their employment and later on in renegotiations. Transparency also leads workers to accept lower initial offers to get in the door, thinking they can renegotiate later, once they learn the salaries of their coworkers, Cullen says.

Already 13 states have enacted laws to prevent employers from punishing those who discuss their wages with coworkers. In Massachusetts, the Equal Pay Act also prohibits employers from asking about salary history. Intended to protect employees from being low-balled, Cullen says the law may backfire in practice. Although employers can’t ask, prospective employees can volunteer their salary history, so those with high outside offers are more likely to be the first to reveal their history. “The employer starts to make the assumption that if someone doesn’t offer that information voluntarily, they must not have a high salary,” she says.

The takeaway from their research is that “good things happen for a firm under a high-transparency environment,” Cullen says. Employees, on the other hand, may find short-term gains by having open conversations about wages but potentially long-term losses. Transparency benefits some employees and not others. “There is no one-size-fits-all policy answer,” she says.

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