Pay transparency has been a growing trend in recent years, with companies like Starbucks and Whole Foods both engaging in the practice.  While advocates suggest that the practice helps to improve pay equality, research from Harvard Business School suggests that it might not actually be the case.

Pay disclosure has been enshrined in the law of 10 European Union countries in the hope that doing so will give employees more bargaining power.  The study suggests, however, that far from improving wages, it has actually resulted in a loss of up to 3% of pay as companies make lower offers and are more likely to hold firm on those offers during negotiations.

Pay transparency

The researchers collected data from the American Community Survey, which has information on the wages and employment status of over 4 million people who live in states with transparency laws.  The data reveals that in the year after the laws were passed, wages fell by 2.2%, and after three years had fallen by 2.6%.

While it’s hard to say quite why this is so, the researchers speculate that because pay is transparent, if one worker is given a raise it will likely mean requests for raises across the board.  This allows managers to keep wages lower in the initial offers they make to employees.

A notable exception to this was among union workers, whose wages were typically higher than non-union employees (albeit still with a fall).  This is perhaps because of the collective bargaining that is common in unionized workplaces.

Useful information

So where does this leave employees?  The authors suggest that it is still useful to try and elicit as much information as possible, and to be proactive in doing so rather than relying on employers to inform them of raises elsewhere in the business.

“If all else is equal, you are better off finding out as much information as possible and asking for a raise,” they explain.

In terms of making workplaces fairer and increasing the bargaining power of workers, however, the evidence is mixed, although the researchers do note that pay equity is improving, even if overall salaries are falling.

“Equity is something that happens when everything is out in the open,” the researchers conclude. “The firm is more equal, but the overall wage bill is lower.”