Last week, President Obama proposed a new rule that would require companies with more than 100 employees to report salary data by race, gender and ethnicity. The proposal, Mr. Obama said, is intended to close pay gaps, fixing unequal pay practices at companies.
Requiring employers to submit individual salary information to the Equal Employment Opportunity Commission, as Mr. Obama proposes, would certainly shine new light on gender and other hard-to-explain pay gaps that persist throughout organizations. The proposed salary reporting requirement is expected to be approved by September with the first reports due in late 2017. This dramatic sharing of pay information would cover more than 63 million employees, the Obama administration estimates.
How might this move affect the labor market? There is a large set of literature in economics on how salary transparency affects the way workers search for jobs, bargain for wages, and perform in the workplace. And overwhelmingly, the findings point to benefits being felt -- both to workers and employers -- from greater salary and workplace transparency.
Last year, we reviewed dozens of academic studies on the impact of workplace transparency, and summarized the findings in a simple, easy-to-read report titled Is Salary Transparency More Than a Trend?. The big takeaway from the research is that opening up salary information can have positive and lasting effects on both job seekers and employers, including:
- Increased productivity. Most studies find that employees are more productive and engaged when pay structures are transparent and predictable. Studies also find that when pay is secret, employees commonly overestimate co-workers' pay, which hurts job satisfaction.
- More successful pay negotiations. Salary transparency helps expose pay gaps between otherwise similar workers, encouraging underpaid employees to renegotiate or move to better-fitting jobs, improving overall efficiency in labor markets. Men are more likely to negotiate salary than women. But studies show this "negotiation gap" disappears when information about other job applicants' negotiation experience is public information.
- More effective hiring. Studies find that better access to job information can encourage smarter job searching, help improve the quality of job matches, and may lead to shorter unemployment spells for workers. By providing more information to job seekers about job application processes, companies improve the diversity of applicant pools by boosting the number of female job applicants. Some economists argue that improved information can prevent workforce dropouts and "discouraged workers" in the same way that far more costly worker retraining programs can.
The lessons from economic research are clear. Openly sharing salary information--so long as it is done in an anonymous way that addresses important concerns about employee privacy--can be a winning strategy for both companies and their workers. Employers with transparent workplaces often enjoy higher productivity and better job matching for open jobs, and employees enjoy an enhanced sense of fairness in pay determination.
An important downside to keep in mind is that federal information mandates like these always create administrative burdens--the cost of gathering pay information, assuring its accuracy, merging it with gender and demographic information, and transferring to an administrative agency. As we've learned from tax and financial disclosure rules, compliance costs are a serious concern for employers. Although the benefits of salary transparency are clear, disclosure mandates are not without cost, and lawmakers should aim to address the practical issue of compliance costs as they develop new rules.
In an age of anonymous online sharing, the traditional workplace norm of pay secrecy is rapidly being eroded, and the genie of salary transparency is out of the bottle. An official recognition of the benefits of more transparent pay structures is a policy move the research suggests both workers and employers should welcome.