Equilibrium Effects of Pay Transparency
nber.org
nber.org
That said - I don't disagree with the conclusions of the paper (showing correlation between pay transparency and reduced pay), but I don't think it's an important conclusion. Pay is a frequency distribution. Talking about the mean/median of that distribution is less important than making there there are good reasons for the people at either ends of it (e.g. "I'm at the lower end because I'm female). To put it another way - I'm more worried about inequality than overall pay level because the people in the middle are fine, it's people at the bottom who need help.
For that matter, there are also the office intangibles that don’t show up nicely on an evaluation but do cause problems when nobody does them.
You definitely can't do a proper employee evaluation by a completely objective set of numerical KPIs (even in places it seems possible like sales numbers, it results in gaming the system and knock on negative effects). On the other hand, you can definitely have a consistent system for looking at the different areas of people's performance and judging how much they've added. It takes some effort to get right, and there will always be an element of subjectivity but it is possible to do a decent job at it.
It's not up only to one company to reward optimally, it's the entire network which provides employment alternatives to underpaid employees that will eventually lead to an optimum.
For instance, I joined my first local company as an immigrant from a vastly different culture and was the only foreigner. It caused issue as I knew little about the way people interacted and they had trouble accepting my particularities. I was blocked out of suspicion, under constant worried monitoring, for fear of rocking a status quo that had lasted for a decade, and was paid well below market rate for what I could have done.
Well, gladly a few months in that environment let me learn the ropes of my new culture, I was able to quickly change job while selecting a more balanced company, and eventually tripled that initial salary in 4 years, by switching position or job.
I dont want just performance assessment by humans, it's also good to have an open employment network you can adapt to and that can adapt to you. This is something that doesnt exist in my original socialist country and create intense misery, with a 10% unemployment rate.
In comparison, my new ultra capitalist country has 3% unemployment and provides new job opportunity every week, at the cost of a small effort on my side to rectify a position of weakness. Employee performance is tied to a social environment that is sometimes nonsensical to an individual judged as a failure, it is important to balance this reward mechanism with outside competition too.
Superstars typically avoid these types of projects.
If you are an employer in a jurisdiction with pay transparency, and you need to get a superstar employee, you just create a titled position for them. Then you can justify paying them 350% the average wage.
The paper claims that there will be a wage equilibrium. Yes, for average employees there will be a wage equilibrium, and average employees will see their wages increase because of this.
The paper tries to claim that this wage equilibrium will negatively affect superstar employees. This is complete nonsense. It bases this on the assumption that employers cannot justify discriminating between normal employees and superstar employees. But this is an unwarranted assumption. Literally just give the guy a title. Secondly it assumes that even for these superstar employees their wage would reach an equilibrium. This is another misguided assumption, because these superstar employees are not a fungible resource like the rest of the employees in the same occupation. They very likely possess unique experience and skillsets. So the pay of other superstar employees should not have any bearing on how much they themselves get paid.
Basically the model seems to think that somehow all the employees are equal and entirely fungible, but at the same time some employees somehow manage to negotiate much higher salaries.
Now of course I am not an economist so it is ridiculous to believe that I have found the fatal flaw in a published paper, but because of the political nature of such articles I find it hard to trust the "hard numbers". I remain skeptical.
I admittedly haven't read the paper properly, but did study economics at undergrad and read many similar papers. This is how a lot of economics works, you end up with published papers claiming completely different results because of small differences model assumptions. Multiple models can be consistent with observed data while providing vastly different policy implications. If you want to look at a well publicized example (though I think it might have to do more with different econometric assumptions) look at the research published on the Mariel boatlift and its impact on labor markets. See here - https://www.bruegel.org/2017/06/the-mariel-boatlift-controve...
Which shows the original result standing and the "controversy" was caused by the later subsample having a different (racial) composition.
The only issue is people outside your organization, but they have no idea what a given title means. Scrum Lord’s make 500k, wonder what they do?
The dev who can whip out tons of stable code is easily measured. The dev who fights to stop an unneeded re-architecure or veto feature requests that would have maintenance overhead unjustified by their value is harder to judge. And yet that veto may be the equivalent of 2-3 FTEs savings.
They did not seem impressed. I did get hired though...
More seriously, I've met several people who really struggled to get recognized officially for their work. One was someone who was just amazing at cross team collaboration. Specifically, we were a small group, doing an important strategic project, but we needed some work from other teams that were serving the companies larger, single product. It was hard to get them to free up a couple of dev-days, even when we had the explicit support up and down the management chain. She was amazing at getting the ICs on the team to get on board. But really struggled during review cycles because a fair amount of her work wasn't traditional lines-of-code/jiras.
Another example was a developer who was a king at driving customer solutions through the dev team. He was a developer, and even though he's probably responsible for millions in not-lost-sales, he struggled to get the recognition he deserved.
Anyway, just agreeing with some examples from my professional life.
The Indian cricket league IPL has a public auction every year. Salaries range from 2 million at the top to 20/30K at the bottom. And most players are towards the bottom.
If companies could actually reduce wages through pay transparency, they would be giving that information away.
Legislated pay equity will always result in lower wages simply because the employer is legally unable to raise their bid for talent. No surprises there.
But, are those of us advocating for pay transparency trying to increase the average wage, though, or trying to reduce pay disparity?
Reducing disparity within a company is surely achievable and almost inevitable.
I don’t personally believe it’s desirable in endeavors where value contributions can be heavily unevenly distributed, because it likely leads to the company being unable to employ the very top value contributors as another company can [and likely will choose to] pay them more, which is consistent with the main claims in the article.
In California for example, the equal pay act requires 'equal pay for employees who perform “substantially similar work,” when viewed as a composite of skill, effort, and responsibility.'
https://www.dir.ca.gov/dlse/California_Equal_Pay_Act.htm
Someone who contributes more inherently must have greater skills and/or put in greater effort, and likely greater responsibility, given they are accomplishing more tasks.
You can pay differently based on a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or another bonafide factor such as education, training or experience.
Here's a copy of that law, it's pretty short.
https://leginfo.legislature.ca.gov/faces/codes_displaySectio....
No place is (yet) mandating perfect sameness of the latter and I don’t expect that to be policy in my lifetime or while we have the concept of money as a society.
Because directly stating "the authors of this paper misunderstood the purpose of pay transparency: it doesn't matter what the average pay becomes, as the goal was to reduce pay disparity" is a more forceful statement that makes more assumptions and simply isn't as friendly as asking it in the form of a question (which might be taken as a socratic dialog, but that also feels more friendly to me than a lecture).
When you make statements about what you want, that's good for discourse.
Individual bargaining may decrease within the company, but will make it easier for other companies to poach underpaid employees.
Looking at a list of countries sorted by GDP per capita reveals that the ones nearest the top (with the highest average) are, with few exceptions, the best places to live even if one is earning less than that average:
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PP...
A theoretical model is likely trash - you can pretty much reverse the outcome by tweaking a couple of assumptions.
The only way I can think of that might work would be to measure the effect on pay for similar jobs across a state border - where one side implemented pay transparency and the other didn't (similar to how the Dube, Lester, Reich study was constructed).
The pay transparency leading to wage equilibrium is just enforcement of the societal expectation. There is also very low class mobility there compared to, say, the US.
I'd also be careful about placing much emphasis on things like culture, not because countries are homogeneous culturally, but because often when people talk about how culture in Europe is so drastically different than culture in the U.S., they are referring to stereotypes that are mostly at the margins and don't often have much of an impact on socioeconomic factors. As humans, we have a tendency to focus on superficial differences and exaggerate those differences to explain away phenomenon.
I highly doubt you'd find a credible study indicating that Scandinavians will forgo attaining a higher income and a better quality of life just so they can fit into a mold and satisfy some kind of cultural tendency, but if you do have any such studies for review I'd be very happy to see them.
[1] http://www3.weforum.org/docs/Global_Social_Mobility_Report.p...
What I'm talking about wrt low mobility is how often people in those countries go from poor or average to wealthy or from wealthy to average or to poor. Generally wealthy people stay wealthy there and average income people stay average income. That study's data supports this -- it's very easy to obtain a mean income if you had less; after that movement is very low. This should be obvious but if you have very low income inequality then there's very little potential to be either rich or poor.
This isn't even a criticism! It's great that people can generally earn a living there. I'm just stating what everyone seems to know there -- that it's very hard to become wealthy and generally looked down upon as a goal. Scandinavians don't like to boast. Startup costs for new businesses are high and you can't just go buying up tons of real estate to rent out to people because land ownership is heavily regulated. I can't even buy an apartment as a non-resident foreigner (in Denmark) without a very difficult to obtain government approval. Danish monetary policy is having its banks charge customers penalty rates for having a meager cash savings.
In the US we have much greater swings in fortune, good and bad. Heck, I've been both a millionaire and homeless within my lifetime. That kind of outcome is absurdly unlikely in Scandinavian countries.
So, it's in employers' interest to make the salaries transparent, isn't it? I bet the model is incomplete.
Not necessarily - without transparency, an employer might decide to hire Dr Super Engineer, and might be happy to pay her 2× the mean wage of their existing engineering team.
With transparency, they might choose not to hire her, because they are only happy to pay her 2× if the existing engineering team are not aware, and she might refuse to take the job if they won't give her 2×.
What's stopping them from creating a new role/position/title that pays 2x?
You can totally pay people different wages under these laws for the same position, if they are better at their job, you just have to show that that's why.
I imagine we both know neither of those is the case.
Since those are not the case, you can ask yourself, are bills requiring equal pay for equivalent work and pay transparency each likely to improve salary as a metric for job performance, and labor market efficiency?
I suspect they do both, but if you believe otherwise, feel free to explain.
There exists no perfect metric for job performance, so what is your point? No alternative system you propose can do it perfectly.
> and that nobody is paid less than they could get elsewhere (IE that the labor market operates with perfect efficiency)
Pay is not the only measure of a good job. I could easily find a job that pays me 50% more than I currently make.
> Since those are not the case, you can ask yourself, are bills requiring equal pay for equivalent work and pay transparency each likely to improve salary as a metric for job performance, and labor market efficiency?
No, they absolutely aren't. Who decides what is equivalent work? Having the same job title doesn't mean you add the same value to an organization, and trying to use law to force that will exacerbate the problem, not make it better.
Some people work more, practice their craft outside work, or are available after hours as needed. Those people are more valuable and should be compensated as such, not lumped in with the lowest common denominator.
All of the people I have talked to who supported these "equal pay" measures were people who were bad (or at best mediocre) at their job.
Businesses in the US are driven almost entirely by money. The people making less at their jobs are really, truly providing value, they can use that as leverage to negotiate a higher salary. Or just take matters into their own hands and give themselves a raise by getting a new job.
I don't get how the end of the political spectrum that complains about pay gaps is the same one that constantly complains about how corporations are driven by greed and money.
No employer wants to pay any person any more than they have to. I, a white man, have had to do a lot of work to justify my own raises. And when I got screwed by my employer, you bet your ass I left and found something better.
If people think they really can get more for what they do, they should go out there and do it. At the end of the day, money talks. If you truly provide value, you have leverage.
Or something is missing, or the employers are going to realize their mistake and implement transparency.
I’m not in favor of publishing the individual salary information of people who joined my company without that publication being part of the bargain. (I view it as a serious privacy violation whether I publish “here’s what XYZ makes” or whether I publish enough data that lets a data scientist figure out which point in the dataset is XYZ with greater than 80% certainty.)
In countries with salary transparency, (the ones I've worked in anyway), there is usually a published grid of roles, and salary ranges. Similar to how the government does things[0]. Companies then make use of "benefits" to reward better performing employees, since those benefits are not part of salary.
[0]: https://www.federaljobs.net/salarybase.htm#SALARY_TABLE_2015...
Pay transparency might result in lower wages at the transparent company, as underpaid employees jump ship to another company - leaving only the lower-value companies being perhaps more fairly paid.
That doesn't mean lower wages overall for all workers involved, though. The ones that jumped ship may be getting much more somewhere else, raising the average in a way that wasn't looked at in this model.