If your business hires employees in California, you are no doubt aware that the Golden State rang in the New Year by becoming yet another state to enact law on pay transparency in the work place, including mandating salary-disclosure ranges in job postings. What you might find surprising, however, is that the effects of pay-transparency laws, according to a recent article in the Economist, are "widely misunderstood." And contrary to popular rhetoric on pay transparency in general, employers too can benefit from pay transparency in the workplace.

The Challenges:

The Economist article discusses how labor advocates champion pay-transparency laws for their purported, employee benefits. One benefit commonly discussed is narrowing pay disparities. But according to the article, such disparities (if they exist) are mainly achieved not by elevating wages of lower-paid employees, but by stifling wages of higher-paid employees. Although the article does not discuss why this is the case, it cites forthcoming research papers that may provide insight. One reason may be that more assertive, higher-paid employees are more comfortable negotiating higher salaries, which may eventually far outpace their peers if the business wishes to retain them. In that circumstance, it may be more practical and cost efficient for a business to reduce the salaries of a small number of higher-paid workers, as opposed to raising the overall level and pay structure of its entire workforce. So while data shows that pay transparency laws may stimulate pay parity, at the same time evidence suggests that pay transparency laws in fact lower overall salaries on average.

Another purported benefit of pay transparency is strengthening the bargaining power of workers. Yet, according to research, pay-transparency laws (including granting employees the right to ask about their colleagues' salaries) passed between 2004 and 2016 brought with them a 2% drop in wages, a drop the article attributes to weakened employee bargaining power.

The Opportunities:

Pay transparency theoretically promotes matching employers with better candidates. Recruiting the right candidates is often difficult. What makes the process even more onerous is going through the recruiting process and making an employment offer that the right candidate turns down because the employer and the candidate's salary expectations were not aligned. Through pay transparency, employers have the opportunity to remove (for the most part) salary from the equation during the hiring process, which allows them (and the employee) to focus primarily on the best candidate for the position—one that knows the salary range for the position ahead of time.

Stay tuned for more pay transparency news as the new California law goes into full swing.

Yet despite the popularity of such pay-transparency laws—they now cover roughly a fifth of the American labour force—their effects are still widely misunderstood.

https://www.economist.com/united-states/2023/01/05/pay-transparency-laws-do-not-work-as-advertised