Whose Information Do We Protect? Lessons From Two Labor Market Policies
The latest US labour data shows that there were 10.6 million job openings in November 2021 while the number of workers willing to walk away from jobs increased to 4.5 million, the highest on record in two decades. While labor shortages have presumably led to greater bargaining power among workers, this will very likely erode over time. An important driver of the power imbalance between employers and workers is how much more employers know about their employees than the other way around. In most labor markets, this allows employers to bargain for outcomes more favourable to them. How and should policymakers then protect workers’ information if they want to improve workers’ well-being? Would it help if employees were allowed access to information that is privately held by their employers? Policies from either side of the Atlantic might hold some clue.
Research shows that without competing offers, job applicants are less likely to achieve their desired salary targets if recruiters get to know about their current pay. Access to this information leads to strong correlations between a workers’ previous pay and new salary offers. This might depress salary increases over time, especially for those who might have faced accidental earnings losses in their careers. These concerns are particularly relevant for women who often cut back on work because of childbirth and these early-stage earnings losses then accumulate over their lifetime, leading to significant pay gaps between men and women. Therefore, it seems that it is in job applicants’ best interests to hold on to that information when they negotiate an offer. But would you really refuse to share your salary if the recruiter asks you? Would you still volunteer information if a policy explicitly prohibited employers from asking job applicants their pay history? My research on a recent set of policies in the US might shed some light.
Several states and local jurisdictions have implemented salary history bans (SHBs), which restrict prospective employers from asking job applicants about their previous pay, before they have made an offer including compensation. Using new data from PayScale, I find that only 1 out of 10 candidates volunteer pay history after SHB – a 75% decrease in disclosure rates from before the ban. In fact, women were more likely to share salary information than men before SHB – because they were more likely to be asked and they were also more likely than men to comply with information requests. Turns out, these changes in disclosure behavior after SHB do translate into outcomes favorable to workers. Using data from the Current Population Survey, I find that SHBs were not only successful in weakening the link between an individual’s past and future earnings, but also in reducing the gender pay gap by 14%. Therefore, a simple policy tweak that takes employers’ ability to nudge workers for more information, has the potential to increase workers’ lifetime earnings while reducing pay inequality between men and women.
Till now, we’ve talked only about information that is private to workers. But employers hold key information as well – for example, employers know how much all their workers make and if employees had access to this, they might be able to negotiate better. Motivated by this very rationale, several European countries have implemented pay transparency policies which mandate that firms provide data on average salaries by gender and job title. Research evidence on the effectiveness of these policies has been rather mixed. In a recent co-authored paper I show that the Austrian pay transparency policy had little effects either on pay gaps or pay inequality within firms. In contrast, concurrent studies [1, 2] on the UK pay transparency policy find that pay gaps between men and women decreased by 15%. What do we make of these cross-country differences in policy outcomes? It appears that transparency policies like that in the UK, which mandate releasing pay audits in the public domain are more effective than the one in Austria which allows access to information only for current employees. Public release of pay reports generates considerable media attention which then incentivizes employers to review and update their pay policies.
It is tempting to conclude that if policymakers want to prioritize workers, they could simply restrict employers from accessing any information that might harm employees and at the same time provide workers with access to their employers’ private information. But that would be incorrect, if not detrimental. Therefore, crafting a sensible policy to address pay gaps should try to correct the informational asymmetry between workers and employers, while accounting for behavioral responses to these policies from both sides. Ultimately, government regulations can only go so far, and more changes need to come from employers themselves. Commitments to equal and fair pay is cheap talk without more transparency in how firms set pay, in the first place.
Sourav Sinha, ISPS Graduate Policy Fellow ‘21, is a PhD student in Economics at Yale. He studies labor market policies aimed at addressing disparities between men and women, and among other groups of labor force participants.