My first instinct was that revealing wages upfront could improve efficiency, since firms would spend less time assessing workers who would ultimately reject the job because the wage is too low. Greater transparency could also reduce misallocation in the labour market, as workers are better informed and can sort more easily into firms where their labour is valued most highly.
On the other hand, wage transparency might reduce welfare if it makes collusion easier. When firms can observe competitors’ wages more easily, they may coordinate implicitly and compete less aggressively for workers.
So the overall welfare effect seems ambiguous: transparency may improve matching and reduce information frictions, but it could also weaken competition in the labour market. Which one is it?
Should we force companies to reveal wages?
byu/Lumpenokonom inAskEconomics
Posted by Lumpenokonom
2 Comments
[This review](https://www.aeaweb.org/articles?id=10.1257/jep.38.1.153) is a good place to start on how economists have answered this question. Both of the mechanisms you mention definitely exist.
There’s a good paper recently about this by [Cullen](https://www.aeaweb.org/articles?id=10.1257%2Fjep.38.1.153&ref=aussienomics.com).
She argues that there are 3 types of pay transparency: horizontal (compare your wages to a similar worker within your place of employment), vertical (what are wages for more senior occupations in your place of employment) and cross-firm (what are wages for similar workers at your occupations’ competitors).
She argues that the empirical evidence suggests horizontal transparency is much less effective; that businesses responded by reducing wages for everyone. Essentially, if you negotiate with one worker, you negotiate with them all. And if there isn’t equality of pay, then worker effort falls. There’s another paper by Bennedsen et al. (2023; Gender wage transparency and the gender pay gap: a survey) who finds that increased transparency for comparable jobs is overall good, but it didn’t lead to increased wages for females.
She argues that vertical and cross-firm pay transparency don’t do a good enough job at fighting discrimination and holding firms accountable, they raise wages (moving between firms increases wages, usually), morale (knowing what you can earn as a senior), and productivity.