Pay Transparency at Work: The Great Equalizer?

“Pay secrecy fosters discrimination and we should not tolerate it.”

So declared President Obama in the Spring of 2014 upon signing an executive order ratcheting up punishments for federal contractors that maintain pay secrecy policies.  Two years on and legislators in dozens of states are following the President’s lead by introducing policies that would crack down on employer retaliation against workers who discuss their pay.

But is President Obama right?  Does pay secrecy “foster discrimination”?  Last week Alexa Kissinger provided a fantastic overview on this blog of the many possible connections between pay secrecy policies and gender inequality.  And indeed the stories from Hollywood and elsewhere certainly buttress the claims of those who believe transparency is a potent tool to reduce gender inequality.  Lilly Ledbetter provides another piece of evidence.  Ledbetter was a longtime manager at Goodyear Tire & Rubber.  Company records revealed that Ledbetter’s pay was substantially lower than men occupying similar positions at the firm.  It took her years to discover the discrepancy, due to a complete lack of transparency regarding wages and salary rates at the company.

Pay secrecy policies refer to workplace rules, informal or formal, that ban or strongly discourage workers from discussing wages or salaries.  The flurry of legislative activity surrounding them obscure the fact that the implementation and maintenance of a pay secrecy policy is already illegal.  Courts have consistently ruled that discussion about wages is considered concerted activity, and protected under the National Labor Relations Act (NLRA).  But, falling as it does under the NLRA, the penalties for violating this law and maintaining pay secrecy policies amount to little more than back pay and reinstatement. Hence all the recent attention.

And, as Kissinger highlights, it is not as if only a small slice of the American workforce is subject to these policies.  As the Institute for Women’s Policy Research has documented, approximately half of American workers report being subject to a pay secrecy policy of some sort.  Pay secrecy policies are illegal, incredibly commonplace, and may help explain gender inequality at work.

Mandating Pay Transparency vs. Eliminating Pay Secrecy

What does the available research show?  Not a whole lot, frankly, as companies unwilling to share salary information with their employees are also unwilling to share it with nosy academics.  But what we do know should give some pause to those advocating greater pay transparency in the belief that it would narrow pay disparities between men and women.  These studies suggest that transparency is potentially equalizing – but, depending on the form of implementation, could actually widen pay gaps between men and women.  It turns out sunlight may not be the best disinfectant, depending on how it’s reflected.

It is important to distinguish between calls to mandate salary transparency versus proposals that seek to eliminate pay secrecy policies.  Thanks to recent research by the economist David Card and his colleagues, we have some sense of what happens in situations in which employees who don’t know their colleagues’ pay rates find them out.  This particular study capitalized on the online disclosure of salaries for employees of the California university system, and the authors tracked the reactions of the workers who went online to see what their colleagues made.

Reactions were generally not positive.  Workers who found that they were underpaid relative to their work-unit reported a decrease in morale, and an increase in job searches.  Workers who discovered that they are overpaid relative to their colleagues reported no change in their behavior or attitude toward their job.  Why?  Part of this explanation stems early research done by our current Chairperson of the Federal Reserve, Janet Yellen, along with George Akerlof.  Citing psychological studies, they suggest that most of us think we’re pretty good at what we do.  In fact, most of us think we’re better than most our colleagues at what we do – we’re all above average.  Think of it as the real world Lake Wobegon effect.  So when we find out we’re being paid more than our colleagues, we think “well yeah that makes sense” and we get back to business, none the wiser.

Yellen and Akerlof suggest that an implication of this finding about how workers interpret wage differentials is that wage dispersion among similarly-situated workers can lead to morale problems.

A potential solution for employers in transparent workplaces then is to narrow wage differences between workers performing the same jobs.  With everyone able to see the salary structure, it is much more difficult to justify large differentials for workers performing the same jobs – including differentials between men and women.  Take the firm publicizes its salary structure to its employees.  It also pays all employees at the same job level the same, and doesn’t allow salary negotiations.  As a result, all men and women working as, for example, associate directors make the exact same amount.

None of the proposed state-level legislation or the laws recently enacted, such as Calfornia’s Fair Pay Act, mandate salary transparency.  What unites them is that they all stiffen penalties for employers that maintain pay secrecy policies.  These provisions could have helped women like Lilly Ledbetter, freeing her to ask about her male co-workers’ salaries.  But they also could help male workers, who can use the information provided by their colleagues to negotiate for raises.  And research has found men are much more likely to negotiate than women, and that negotiating pays.  Thus the elimination of pay secrecy policies could lead to growing demands among the type of worker who feels emboldened to ask their bosses for a raises.  And that type is disproportionately male.

This is not to suggest that pay secrecy policies should be maintained.  We know that these bans on workplace speech can be used to cover up discrimination.  And we know they are already illegal.  What we don’t know is whether their elimination will significantly reduce gender pay disparities, especially in non-union private sector workplaces.  Pay secrecy polices – and most workers – are concentrated in unorganized workplaces in the private sector.  As Kissinger highlights, wage gaps between men and women are smaller in organized establishments, and in many public sector environments.  But in those contexts, relative transparency is combined with highly-structured salary bands along with less room for individual workers to negotiate.  Banning pay secrecy policies in isolation is likely no panacea, unless paired with more uniform, transparent salary structures, in which salary negotiations are also forbidden.  Absent such changes, if the ending of pay secrecy is to reduce stubborn gender disparities, women will need to negotiate at rates similar to their male colleagues.  And, as many women have discovered, that’s much easier said than done.