Making Wages Public – Good for the Economy, or Too Much Information?

Posted on July 20, 2011

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Communications – specifically, communications to employees around their pay and benefits – is a primary focus of my firm. So it was with great interest that I read an article at The Atlantic Web site entitled The Case for Making Wages Public: Better Pay, Better Workers by Daniel Indiviglio.

The basic question Indiviglio asks is: would individuals – as well as the economy as a whole – be better off if there were less secrecy around what people earn? He cites two examples where pay is more or less public knowledge – Wall Street and corporate CEOs. In both cases, an argument can be made that wages have gone up far faster than overall levels of compensation in part because of the information that is available; once individuals know how much others are making for similar work there is upward pressure on wages.

But what about those people who aren’t corporate titans or Wall Street tycoons – what benefit is to be gained by knowing what someone in the next cubicle brings home? According to recent research, there could be some real positives:

Even if compensation transparency doesn’t cure inequality, however, it could make the labor market more efficient. Economists David Card, Enrico Moretti, and Emmanuel Saez from Berkeley and Alexandre Mas from Princeton, recently published a research paper that examined what effects more information on pay has on worker satisfaction. In California, all state employee salaries are public information. The researchers informed University of California employees of a website containing this information and analyzed their job satisfaction after those workers obtained pay information.

The results were what you might expect for those whose pay was below average within their peer group: they weren’t thrilled. They were more likely to be unsatisfied with their pay/job and search for new work. The worse the individuals’ pay was relative to the median, the worse their satisfaction. Those at or above the median, however, experienced no change in job satisfaction or job search intention.

These economists conclude that pay transparency just makes workers who are on the low-end of the pay scale feel worse about their jobs, so it accomplishes little. Linda Barrington notes, however, that this contention misses a benefit of being unsatisfied: the likelihood of moving on.

In theory, those who are paid less than their peers are likely to be poorer performers. Since managers want strong performers, these people would likely be better off — from both their standpoint and that of management — to look for work elsewhere. Their talents and abilities might be better suited to another job, which would match that improved performance with better pay. The previous employers could also then find new employees for the newly vacant positions who could better fit their mold and meet their expectations.

So, should we start encouraging more sharing about what we all make? The key to that question really has to do with two words in the paragraph above – “In theory.” In theory, we are all rational economic actors and, as such, we would welcome the greatest degree of transparency possible. But, in reality, there are powerful emotions tied in to the value we assign to ourselves and the jobs that we do. Whether or not individuals would be better off knowing more in this case might be an area for further research not just by economists but maybe by psychologists as well.