The Unexpected Benefit of Telling People What Their Coworkers Make
Each year, Equal Pay Day comes and goes on April 8 amid rising income inequality, low social mobility, and pay disparities for workers of color and women in our nation.
Pay disclosure has often been suggested as a way to combat pay inequity between men and women. If women knew how much their co-workers made, they would be in a better position to assess whether they receive equal pay for equal work, and, thus, to negotiate with management, so the thinking goes. But improving the negotiating position of female workers wouldn’t be the only effect of pay disclosure.
My recent research suggests that pay transparency in some workplaces has the potential to boost economic output by improving the productivity of workers. In a field experiment, I divided people into two groups. One group was given information about the earnings of others performing similar work at the same piece rate as them, and the other group was kept in the dark about their peers’ earnings. By comparing the differences between the groups, I could see the effect of pay transparency on these workers.
What I found was that people in the group shown their relative earnings position were more productive than those that weren’t given that information. In fact, the work output of those in the informed group increased by about 10 percent after they learned their relative positions.
Why did pay disclosure increase productivity? We’re not sure, but the answer may be that people care about their position relative to their coworkers. We may work harder even if we don’t see a raise if we know that we’re doing well compared to our peers. Workers may care about the level of their earnings not only because it lets them buy goods and services, but because it also lets them know where they stand in their peer groups, giving them an internalized sense of status.
Normally a productivity jump of the size I found would be significant for any business, not to mention, hard to come by. But these gains were made simply by giving workers information, yielding greater firm output without increases in wages, and, thus, potentially greater tax revenue without increases in tax rates. This is one potential advantage to pay transparency, quite different than the rationale that pay transparency is a plus because it can reduce the pay gap between male and female workers.
Earlier attempts to make the American labor market more equitable and inclusive have also boosted growth. A study by economists at the University of Chicago and Stanford University suggests that opening up professions to women and Americans of color accounted for between 15 to 20 percent of economic growth (in terms of aggregate output per worker) between 1960 and 2008.
Of course, my research is far from the final word on this issue. Very good work by other economists has found results both consistent with and contrary to the finding of a positive productivity effect due to disclosure of relative standing information. Moreover, in my setting, workers learned about the earnings of peers who were paid the same piece rate for each unit of product produced, making the relative earnings information presented also information about relative performance. When making earnings comparisons to other peer groups, including those who receive different wages for the same work, other factors may come into play. Further research is needed to understand all the different ways increased pay disclosure affects workers, firms, and our overall economy.
The existing literature does suggest that one way or another people are responsive to information about relative standing. It should also make us consider that policies intended to reduce inequities may also increase efficiency. A large portion of the public is concerned about the rise in inequality in recent decades and continuing pay disparities. In responding to these trends, policy makers would be well advised to think about how policies can promote both equity and growth.