If you’re shopping for a new car, most auto-experts would advise researching what consumers are paying for the car models you’re interested in before entering a showroom so you know whether or not you’re getting a good deal.
Similarly, career experts generally recommend that employees who are interested in negotiating a higher salary arm themselves with information on how much workers in similar roles make, either within their own firm or industry-wide.
But knowing too much about how much money each of your coworkers makes can ultimately backfire, one paper titled “Equilibrium Effects of Pay Transparency” circulated on Monday by the National Bureau of Economic Research suggests.
‘The problem that arises is if there’s too much information and the employer knows this, it basically becomes impossible to exploit that information because you no longer have a unique advantage.’
— Brown University professor Bobak Pakzad-Hurson
That’s because “pay transparency reduces the bargaining power of employees in settings where workers start out with a degree of individual bargaining power,” wrote the paper’s co-authors, Brown University professor Bobak Pakzad-Hurson and Harvard Business School professor Zoe Cullen.
The report draws upon salary data collected by the U.S. Census Bureau from 2000 to 2016 from more than 4 million individuals in 18 states that had “enacted policies specifically aimed at facilitating communication about pay between coworkers.”
The researchers found that wages declined by 2% overall three years after such laws were enacted. But there was an important exception: wages “declined half as much in occupations with above-median rates of unionization compared to occupations with below-median rates of unionization.”
Should employees still push for more transparency?
In short, yes.
“From an individual worker level, it absolutely makes sense to gather as much information as you can,” before you initiate a conversation with your employer to negotiate a higher salary, Pakzad-Hurson told MarketWatch.
“The problem that arises is if there’s too much information and the employer knows this, it basically becomes impossible to exploit that information because you no longer have a unique advantage.”
In such a situation, employers are likely to tell employees that they cannot give a particular individual a raise because everyone else will inevitably end up finding out about it and demand a raise as well, he said.
This suggests that in most cases it’s in the employer’s best interest to be transparent about pay to avoid costly and time-consuming salary negotiations.
But higher levels of pay transparency won’t necessarily enable employers to deny employees’ requests for raises if they’re part of a union. In which case, it’s up to union leaders to collectively bargain on behalf of union members to ensure they’re getting paid fairly relative to the market wage rate.
Previous research has shown that while pay transparency can help close the pay gap between men and women in the short term , it can result in lower wages for everyone over time.
Sharing information on salaries over the long term may have led employers to lower overall salaries rather than lifting women’s salaries to the level of their male co-workers, the study, which looked at the impact of public-sector pay disclosure laws in Canada, suggested.