When buying a new car, most auto experts would advise research what consumers pay for the car models you are interested in before entering a showroom so you know if you are getting a good deal or not.
Similarly, career professionals generally recommend employees interested in negotiating a higher salary arm yourself with information how much workers in similar roles earn, either within their own company or across industries.
But knowing too much about how much money each of your coworkers makes can ultimately backfire paper entitled “Equilibrium Effects of Wage Transparency,” which was circulated Monday by the National Bureau of Economic Research.
“The problem that arises is that when there is too much information and the employer knows it, it is basically impossible to use that information because you no longer have a unique advantage.”
This is because “salary transparency reduces workers’ bargaining power in environments where workers begin with some level of individual bargaining power,” wrote the paper’s co-authors, Brown University Professor Bobak Pakzad-Hurson and Professor Zoe Cullen from Harvard Business School.
The report relies on salary data collected by the US Census Bureau from 2000 to 2016 from more than 4 million people in 18 states who “have issued guidelines specifically designed to facilitate communication about pay between employees.”
The researchers found that three years after such laws were passed, wages fell by a total of 2%. There was, however, one important exception: wages “fell half as much in occupations with above-median union quotas as in occupations with below-median union quotas”.
Should employees push for more transparency?
In short, yes.
“At the individual employee level, it makes perfect sense to gather as much information as possible” before starting a conversation with your employer to negotiate a higher salary, Pakzad-Hurson told MarketWatch.
“The problem that arises is when there is too much information and the employer knows it, it is basically impossible to use that information because you no longer have a unique advantage.”
In such a situation, employers will likely tell their employees that they can’t give a particular person a raise because everyone else inevitably knows about it and demands a raise as well, he said.
This suggests that in most cases it is in the employer’s best interest to be transparent about pay in order to avoid costly and time-consuming salary negotiations.
But a higher level of pay transparency will not necessarily allow employers to reject requests from workers who are union members. In this case, it is up to union leaders to bargain collectively on behalf of union members to ensure they are paid fairly in relation to market wages.
Previous research has shown that wage transparency can help in the short term to close the pay gap between men and women, but it can can lead to lower wages for everyone over time.
Long-term sharing of information on salaries may have led employers to lower overall salaries instead of raising women’s salaries to the level of their male counterparts, the study suggested, which would have influenced the impact of public sector pay disclosure laws in Canada examined.