Discover more from Monday Morning Economist
Salary Transparency Laws & Asymmetric Information
Salary transparency laws correct for information asymmetry in the workplace, but only when companies provide meaningful information.
Salary transparency laws have been gaining traction across the United States as a way to provide more information to job applicants about their expected future starting pay. Colorado kicked things off in 2021 by requiring businesses to list salary ranges on job ads and New York City rolled out its pay range law in November 2022. California and Washington both have laws that went into effect at the start of 2023 and New York’s law will go into effect state-wide in September. A few other states have salary transparency laws that vary depending on the situation or industry:
Salary transparency laws are intended to provide job applicants with easier access to pay information that wasn’t readily available before at most companies. Negotiating a salary can be difficult and challenging—if you ask for too little, you risk losing out on potential income, and if you ask for too much, you may not get the job offer. Asymmetric information occurs when one party has more information than the other. In our workplace context, this can happen when employers have more information about salary expectations compared to job applicants. This can lead to a power imbalance, where the employer has leverage in terms of pay negotiations and future raises.
If the new laws are implemented correctly, they can not only address the information asymmetry problem but also improve the matching process between employers and job applicants. With more information about future salaries, some job seekers may not even apply for positions that pay below their expectations. This can save applicants and the company time and money. Additionally, these laws can help reduce pay gaps associated with implicit discrimination and provides workers in similar positions at other companies with information on their relative earnings. While these transparency laws are aimed at job postings for new employees, it’s part of a bigger push for pay transparency even after workers are hired.
While job applicants can be better informed about open positions, and current employees may be able to negotiate for higher pay, not all employers are ready to give up some of their negotiating power. Some companies have been manipulating the new laws by posting wide salary ranges that make it difficult for job applicants to determine the actual starting pay. Netflix recently post a job for a new L4 Software Engineer with salaries ranging from $90,000 to $900,000:
These moves push the power imbalance back in favor of the employer since workers no longer have certainty about where their expected salary falls within the range. It can lead to confusion and uncertainty, which may have long-term impacts when promotions or raises are based on previous salaries.
The push for greater transparency, both before and after hiring, appears to be a generational one. Nearly all workers (98%) believe companies should put salary ranges in job postings, but only 70% of U.S.-based full-time employees were at least somewhat comfortable sharing their actual salaries with co-workers. This jumps to 89% for Gen Z workers but drops to 53% for Baby Boomers. The generational split is likely why social media accounts like Hannah Williams from Salary Transparent Street have become so popular over the past few years.
The impact of salary transparency, both for job postings and current employees is fairly mixed. A 2013 study found that workers are more productive when salary information is available. A study of Canadian salary-disclosure laws found a narrower gender pay gap among university professors by 20-30%, while a study of 100,000 U.S. academics between 1997 and 2017 found that the gender pay gap improved by 50% whenever salaries became publicly available online.
Transparency can be good for pay equity, but there is some evidence that the result may be due to lower salaries for high-earning employees. Some researchers found that the 2006 Danish pay transparency law decreased the gender pay gap because it reduced the wages of male workers. A recent study analyzed the impact of 13 state laws aimed at protecting workers' rights to ask about their coworkers' salaries. The study found that these laws resulted in a 2% decrease in wages, which the authors attribute to weakened bargaining power.
Salary transparency laws are an important step in addressing information asymmetry in the workplace, but businesses must be transparent in their implementation of the law, and not manipulate the law in their favor. Additionally, it is important to consider the potential unintended consequences of these laws and address them as necessary. Overall, salary transparency laws can be a valuable tool for promoting fair pay and reducing discrimination, but it's crucial that they are implemented in a way that is fair to both employees and employers.
Rhode Island employers are required to provide a wage range for any position, including open jobs, upon request [Society for Human Resource Managers]
New York City companies that fail to follow the disclosure law can face fines of up to $250,000 per violation [Bloomberg]
New York City, as of this past November, was the home of more than 4 million private-sector jobs [New York State Department of Labor]
More than half of workers (53%) would decide not to apply for a job that doesn’t post salary ranges in the job post [Monster]
A survey of full-time, U.S.-based employees found that 41% of respondents across all generations have had a negative experience discussing pay with an employer [PR Newswire]