Is Transparency Enough? The Effect of Pay Transparency on Negotiations and Inequality

Abstract

A commonly cited cure for pay inequality is pay transparency, because access to peer pay is believed to prompt underpaid individuals to negotiate. We study how historical peer pay information influences pay negotiations and investigate the implications for pay inequality. Across three experiments on different online labor platforms, we find that workers become more likely to negotiate not only when they learn that they are offered a lower pay than others, but also when they learn that they are offered the same pay as others. We conjecture that the latter finding-which contradicts the predictions of the prior literature-occurs because at least some workers believe they should be paid more than the average due to positive self-assessments. Additional analyses of our experiments and three complementary surveys show evidence consistent with this conjecture. Based on our empirical findings, we build a reference-dependent model to describe worker behavior and use it to derive the long-term implications of pay transparency for pay inequality. Our model and the subsequent numerical study suggest that pay transparency may surprisingly amplify pay inequality by prompting workers who are already highly paid to ask for more. Our work highlights that pay transparency may not be a panacea for pay inequality, and discusses additional measures that governments and organizations may consider along with pay transparency to combat pay inequality.

Keywords: Pay Transparency, Negotiation, Pay Inequality, Reference Points, Online Labor Platform