SWEDES discuss their incomes with a frankness that would horrify Britons or Americans. They have little reason to be coy; in Sweden you can learn a stranger’s salary simply by ringing the tax authorities and asking. Pay transparency can be a potent weapon against persistent inequities. When hackers published e-mails from executives at Sony Pictures, a film studio, the world learned that some of Hollywood’s most bankable female stars earned less than their male co-stars. The revelation has since helped women in the industry drive harder bargains. Yet outside Nordic countries transparency faces fierce resistance. Donald Trump recently cancelled a rule set by Barack Obama requiring large firms to provide more pay data to anti-discrimination regulators. Even those less temperamentally averse to sunlight than Mr Trump balk at what can seem an intrusion into a private matter. That is a shame. Despite the discomfort that transparency can cause, it would be better to publish more information.
There is a straightforward economic argument for making pay public. A salary is a price—that of an individual worker’s labour—and markets work best when prices are known. Public pay data should help people make better decisions about which skills to acquire and where to work. Yet experiments with transparency are motivated only rarely by a love of market efficiency, and more often by worry about inequality. In the early 1990s, it was outrage at soaring executive salaries which led American regulators to demand more disclosure of CEOs’ pay. Such transparency does not always work as intended. Compensation exploded in the 1990s, as firms worried that markets would interpret skimpy pay-packets as an indicator of the quality of executive hires.
Despite this, bosses tend to oppose transparency, for understandable reasons. Firms have an easier time in pay negotiations when they know more about salaries than workers do. What is more, shining a light on pay gaps can poison morale, as some workers learn that they earn substantially less than their peers. A study of employees at the University of California, for instance, found that when workers were given access to a database listing the salary of every public employee, job satisfaction among those on relatively low wages fell. In industries in which competition for talented workers is intense, the pernicious effects on morale of unequal pay create an incentive to split the high-wage parts of the business from the rest. Research published in 2016 concluded that diverging pay between firms (as opposed to within them) could account for most of the increase in American inequality in recent decades. That divergence in turn resulted from increased segregation of workers into high- and low-wage firms.
Yet transparency increases dissatisfaction not because it introduces information where there was none before, but because it corrects misperceptions. Surveys routinely find that workers overestimate their performance and pay relative to their peers’. This is true across economies as well as within firms. In 2001, tax records in Norway were put online, allowing anyone to see easily what other Norwegians had earned and paid in tax. Reported happiness among the rich rose significantly, while the well-being of poorer people fell as they learned their true position on the economic ladder. Better information changes behaviour. Low-paid workers at the University of California became more likely to seek new jobs after salary data became public. In Norway the poor became more likely to support redistribution.
Transparency might threaten the function of capitalist economies if people were implacably opposed to pay gaps, but they are not. A study published in 2015 of factory workers in India, for instance, found that unequal pay worsened morale and led to reduced effort when workers could not see others’ contributions, but not when productivity differences were easily observable.
Yet in the modern economy, individual contributions are often devilishly hard to assess. Simple theory suggests that workers are paid according to their productivity. Were they to earn more, their employers would lose money; were they to earn less, other firms could profit by hiring away underpaid employees. But although it is easy enough to see how many shirts a textile worker stitches in an hour, it is much harder to evaluate the contribution of one member of a team that has spent years developing new software. When it is difficult to observe important parts of a job, economists believe that trying to link pay closely to narrow measures of performance can be misguided. Workers inevitably neglect murky but critical tasks in favour of those the boss can easily quantify. In the knowledge economy, therefore, the relationship between pay and productivity is often loose.
Pay gaps are often nonetheless justified. Workers with scarce and valuable skills can easily threaten to leave, and can therefore bargain for higher pay. Those fat pay-packets serve the economy by encouraging young workers to develop skills that are in short supply—provided, of course, that they know how much they can expect to earn. But the difficulty in observing productivity allows factors to influence pay, such as office politics, discrimination or a simple tendency to silence the squeakiest wheels with grease.
Not every country will opt for radical transparency. Even Nordic governments continue to tweak their policies: in 2014 Norway banned anonymous searching of its tax database, so citizens could see who had nosed around their finances. But increased openness about pay could improve both the fairness and the functioning of the economy. When pay is public, it is not the justifiable inequities that create the most discomfort, but those firms cannot defend.
- “Inequality at work: the effect of peer salaries on job satisfaction,” David Card, Alexandre Mas, Enrico Moretti, Emmanuel Saez, American Economic Review, October 2012.
- “Firming up inequality,” Jae Song, David Price, Fatih Guvenen, Nicholas Bloom, Till von Wachter, Working Paper, October 2016.
- “The effects of income transparency on well-being: evidence from a natural experiment,” Ricardo Perez-Truglia, Working Paper, February 2016.
- “Biased perceptions of income distribution and preferences for redistribution: evidence from a survey experiment,” Guillermo Cruces, Ricardo Perez-Truglia, Martin Tetaz, Journal of Public Economics, February 2013.
- “The morale effects of pay inequality,” Emily Breza, Supreet Kaur, Yogita Shamdasani, NBER Working Paper 22491, August 2016.