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Equilibrium Effects of Pay Transparency

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  • Zoë B. Cullen
  • Bobak Pakzad‐Hurson

Abstract

The discourse around pay transparency has focused on partial equilibrium effects: how workers rectify pay inequities through informed renegotiation. We investigate how employers respond in equilibrium. We study a model of bargaining under two‐sided incomplete information. 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. When workers have low individual bargaining power, pay transparency has a muted effect. We test our model with an event‐study analysis of U.S. state‐level laws protecting the right of private sector workers to communicate salary information with their coworkers. Consistent with our theoretical predictions, transparency laws empirically lead wages to decline by approximately 2%, and wage declines are smallest in magnitude when workers have low individual bargaining power.

Suggested Citation

  • Zoë B. Cullen & Bobak Pakzad‐Hurson, 2023. "Equilibrium Effects of Pay Transparency," Econometrica, Econometric Society, vol. 91(3), pages 765-802, May.
    • Handle: RePEc:wly:emetrp:v:91:y:2023:i:3:p:765-802
    DOI: 10.3982/ECTA19788
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    2. Jakob Alfitian & Marvin Deversi & Dirk Sliwka, 2023. "Closing the Gender Gap in Salary Increases: Evidence from a Field Experiment on Promoting Pay Equity," ECONtribute Discussion Papers Series 244, University of Bonn and University of Cologne, Germany.
    3. Philippe, Arnaud & Skandalis, Daphné, 2023. "Motherhood and the Cost of Job Search," IZA Discussion Papers 16669, Institute of Labor Economics (IZA).

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