What would you do if you knew how much money your colleagues made?
Imagine being able to look up anyone’s salary the same way you’d search for how much your neighbor paid for their house on Zillow. A tap, a click — that’s all it would take to find out how your salary stacks up with your co-workers, how much you could be making if you’re promoted, and even what your boss’s boss makes.
That isn’t far from the reality for many workers in Scandinavian countries where wage-transparency laws have helped narrow gender pay gaps. But in America, where women earned 82% of what men did last year, some states are trying to take a page out of the famously egalitarian European region’s book.
What happened when Denmark introduced salary transparency
In Denmark, firms with more than 35 employees are required to report the gender pay gap within departments that have at least six men and six women. That law went into effect in 2006; before then, one study found that there was a nearly 19% wage premium between what men made compared with women. By 2008, the gap declined to nearly 17%.
But here’s the rub: Firms that had fewer than 35 employees, and therefore weren’t required to report gender pay gaps, didn’t see any change in the gap, according to the analysis which draws upon Danish tax records.
On top of that, wages for men grew nearly two percentage points slower than wages for women in firms with more than 35 employees after the law went into effect, according to the report. But that didn’t result in men leaving their employers even though they also became less likely than female co-workers to get promoted to a higher-paying position.
“60% of U.S. private sector employees work at a firm that has some kind of pay secrecy policy.”
These effects may appear paltry, but “it was actually quite dramatic that we could measure an effect,” said Morten Bennedsen, an author of the report and a professor at the University of Copenhagen.
The goal was less ambitious than that. Wage reform “wasn’t meant to have an effect but just be symbolic” — a means of courting more female voters, he added. “That of course leads to the next level. You could say, ‘If such a small reform had an impact, why don’t we make some stronger reforms that will have a bigger impact?’”
If the wage-reporting law was applied to companies with more than 100 employees, Bennedsen said that there’s a good chance it would help further narrow the gender wage gap.
Knowing your coworkers’s salaries can be ‘motivating’
So if salary transparency encourages management to address issues like the gender pay gap, what effect does it have on employees? Finding out how much your manager makes can be “quite motivating,” said Harvard Business School professor Zoe Cullen. “It’s a very strong indication that it’s potentially a number you could achieve,” she added.
Workers at a large Southeast Asian bank sent more emails, sold more credit cards and worked longer hours upon finding out their bosses made more money than they thought, according to research Cullen co-authored with Ricardo Perez-Truglia, a professor at the University of California, Berkeley Haas School of Business.
Management can use salary transparency to their advantage by showing employees what’s possible if they stayed with the company, she told MarketWatch.
But the opposite is also true: If workers find out that they’re earning less than their peers, the exact opposite can happen — they send fewer emails, sell fewer credit cards and work shorter hours, separate research found.
A field experiment of more than 260 workers at an Indian manufacturing plant found workers reduced their output by 52% when they learned that their co-workers are paid more than themselves. They also are less likely to show up for work and in doing so forfeit opportunities to get a promotion.
Employers are not obligated to reveal workers’ salaries
At the federal level, workers are allowed to discuss salary information with their co-workers and are protected if their employer retaliates against them, per the National Labor Relations Act.
But in practice, some 60% of U.S. private sector employees work at a firm that has some kind of pay secrecy policy, according to a 2017-2018 analysis of more than 4,200 employees published by the Institute of Women’s Policy Research, a nonprofit think tank, in February.
Compared with men, women are more likely to work for an employer that either formally prohibits employees from discussing pay or discourages it, the analysis found.
Over the years employers have taken advantage of loopholes to the NLRA. For instance, the law doesn’t protect people who occupy supervisory positions, which are defined broadly essentially as workers that have the ability to hire or fire.
On top of this, employers can get around the law and institute pay-secrecy policies if they can prove “legitimate and substantial business justifications,” a 1967 Supreme Court case ruled.
Due in part to these loopholes and the rising push to ensure women are paid equally, some states have been taking matters into their own hands.
“The primary impetus behind lawmakers’ efforts to prohibit pay-secrecy policies is to eliminate a means by which employers can, intentionally or not, discriminate against women in setting pay,” researchers at IWPR wrote.
In 2017, California legislators passed a law that requires employers to provide a salary range to job applicants who request it after an interview. Maryland, Rhode Island, Washington, Nevada and Connecticut followed suit with similar laws.
For instance, in Maryland job applicants have the right to request a salary range at any point during their interview process and aren’t required to disclose their pay history, and employers cannot retaliate against them by denying them an interview or employment.
Colorado has taken pay transparency laws to an entirely new level. The Rocky Mountain state’s Equal Pay for Equal Work Act, which went into effect earlier this year, requires companies, even those with only one employee, to disclose a range of what they’d expect to pay someone for the position they’re looking to fill.
But some employers “are struggling with this law,” said Christopher Patrick, a principal employment attorney at Jackson Lewis P.C. in Denver. “Many consider their salary structures to be trade secrets — confidential trade information not publicly known.”
For them, it’s a tricky balancing act between recruiting the best talent quickly and not giving away their “secret sauce” for how salaries are computed, according to Patrick, who specializes in equal employment opportunity law.
Other employers are embracing the new law by trying to “provide as much transparency as possible” to current employees and applicants.
Most employers Patrick has spoken with aren’t asking him how they can get around the pay-transparency law, but rather want advice for how to comply with it in the best interest of their firm.
Still, there are anecdotal cases in which employers with a national footprint are barring remote workers based in Colorado from applying to a job because of the law, The Wall Street Journal reported.
The major upside of the law: It, to an extent, levels the playing field for applicants who traditionally don’t know how much an employer is willing to pay.
“That is good in terms of closing the [gender] wage gap,” Patrick told MarketWatch.
What happened when Norway introduced salary transparency
There are also downsides to finding out what someone else you know makes even if they work outside your company.
Say you’re making $50,000 a year, slightly below the 2020 median pay in the U.S. across all industries — $56,310 annually, according to the Bureau of Labor Statistics — and you love your job, and leaving it has never even crossed your mind.
But then you find out your best friend from college who took all the same classes as you is making double that at a competing company. Chances are you either think about leaving your current job or you stick it out, but end up enjoying it less than you did before you found out what your friend makes.
At least that’s what many lower-income Norwegians with internet access experienced after 2001, when income tax records were digitized and made available at their fingertips, according to a study Perez-Truglia wrote in 2020.
Rather than using the tax returns to uncover tax evasion or corruption, people primarily used the information to snoop on one another, according to one study published in April 2020 authored by Perez-Truglia.
Salaries became akin to playing Candy Crush: entertaining and addictive. Want to know which Facebook friend of yours makes the most money? There’s an app for that and another that displays people’s salaries on a map.
But games aside, his analysis, which uses survey data collected from 1985 to 2013 that gauged relative happiness and life satisfaction, suggests that the well-being gap between the richest and the poorest households grew by 29% after 2001.
Wealthier folks got a self-esteem boost upon finding out they’re relatively richer than they thought they were, compared with friends and family members. Poorer folks were more likely to find out that they’re even less well off than they thought they were.
That led to some reports that kids from poorer households were bullied by kids from richer households, a Norwegian news outlet reported in 2008.
On top of that, the income information didn’t necessarily empower workers to exclaim they should be getting paid what their co-worker is getting paid.
One reason for that: Tax records revealed the net income an individual earned in a year which included all their salaried income, “including bonuses and commissions, and non-salaried income, such as capital gains, self-employed income, and social benefits.”
Of all OECD countries, Norway had the sixth lowest gender pay gap, 4.8%, in 2020, according to OECD data. But there’s limited research that studies the extent to which the country’s income transparency policy is responsible.
Even accounting for those downsides, Bennedsen said he’s “totally convinced [salary transparency] is the best way to get a more equal gender-wage balance.”
Without it men will continue to “be more aggressive and better at going into smoke-filled rooms and bargaining for their sake.”
Patrick agrees, for the most part.
“As long as there is some discretion at play, I think we will always have some differences between men and women, or employees of various races make.”
“The question is not do those differences exist, it’s are they justifiable or are they discriminatory?” he said.
