William Watson: When not knowing pays

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Laws that forbid companies from penalizing employees from comparing wages actually end up depressing wages

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All through my career as a university teacher, until I became chair of my department, I didn’t know what my colleagues were paid. Not knowing didn’t prevent people from speculating and gossiping, of course. When I did become chair and had to administer merit pay I wasn’t surprised to learn that — as on an NHL team — everyone was paid differently. They had been hired at different times under different financial conditions with different starting salaries that in part reflected how much we had wanted to get them. And then they had done differently over the years under our system of merit pay, which rewarded research, teaching and contributions to the university and profession. And occasionally someone received an offer from some other university that had to be matched.

I don’t think any of my colleagues, who were all economists, would have been surprised or offended by our individualistic pay scale. Some did argue, however, that salaries should be public knowledge. And in a number of other departments that decided merit pay more collectively, salaries were widely known despite not being published.

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In the public at large, there’s a strong view that at least some people’s salaries should be known. We taxpayers want to know what the politicians and bureaucrats working for us make. And shareholders want to know how much of the firm’s revenues executives are using to pay themselves.

Such concerns have given rise to transparency laws for both corporate execs and civil servants (e.g., Ontario’s “sunshine list,” which shows the salaries of all public employees making more than $100,000 a year). More generally, many U.S. states and a couple of provinces have “right of worker to talk” (ROWTT) laws that forbid companies from penalizing employees from comparing wages. (According to the Philadelphia Inquirer, “Google Spreadsheet was the most powerful labour tool in 2019,” referring to the practice of employees entering their pay information on spreadsheets the web makes public to all.)

Everything has consequences (a rule apparently unknown to the federal politicians who say Quebec’s unilateral amending of the Constitution is fine) so it’s not surprising that salary transparency laws would, too. Thus the corporate disclosure laws enacted by Congress in the early 1990s are thought to have contributed to the rapid escalation in executive salaries since then: lots of executives apparently liked what they were earning until they read in the footnotes to their and other companies’ annual reports that their peers were earning more. In fact, the explicit rationale for ROWTT laws is to help people who are paid less to get their negotiating act together and demand higher pay.

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As so often, however, laws passed with the best of intentions have unintended consequences. A new paper from the National Bureau of Economic Research in Cambridge, Mass., by Zoe B. Cullen of the Harvard Business School and Bobak Pakzad-Hurson of Brown University argues that ROWTT laws actually depress wages.

Yes, they enable workers to go to their employers and say, “I’m being underpaid and demand a raise.” But they also allow firms to respond, “If I give you a raise, everybody will know about it and will ask for a raise too and that’s going to be too expensive for me so, very sorry, no can do.”

Granted, the firm may be bluffing. But it’s not an implausible story. Everybody else is watching and when people see a peer stepping up the salary ladder they reach for their climbing shoes, too. For any econ nerds out there, it’s the classic problem of the “monopsonist,” i.e., the monopoly buyer, in this case a monopoly buyer of labour. If you’re the only employer around and you raise your wage offer in order to expand your workforce, your existing workers all want their wages raised, too. So the new worker costs you much more than whatever you pay him or her and you’re therefore less likely to hire them.

Suppositions aside, Cullen and Pakzad-Hurson take advantage of the laboratory-like nature of U.S. federalism to look at what happened to wages in states that enacted ROWTT laws. The answer is that three years after the new ROWTT law was enacted they were an average of 2.6 per cent lower than in the states that don’t have such laws.

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An interesting wrinkle, however, is that the wage reduction following the introduction of ROWTT laws was smaller in occupations with higher rates of unionization. The researchers stress that unionization may be a proxy for other characteristics of these occupations that they haven’t managed to capture in their econometric equations. But if it’s not a proxy and in fact unionization does make a difference, what’s going on? Enforced transparency reduces the bargaining power of the individual worker in his or her negotiations with the employer. But with unions in place, there are no individual negotiations and the employer already understands that a wage increase for one worker is a wage increase for all workers. So ROWTT has a smaller effect.

Conclusion? In the labour market, at least, ignorance can be bliss, silence can be golden, talk may not be cheap and knowledge may not pay.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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