How pay transparency laws have reduced salaries by 2 per cent

Good intentions, unintended consequences? UNSW Business School’s Pauline Grosjean examines why pay transparency can have perverse effects

The question of wages is a central concern, especially as the cost of living and interest rates have increased. Let us first remember that salaries in the private sector are not the prerogative of the government but the result of a negotiation between companies and union representatives for employees who are covered by a collective agreement or between companies and the employees themselves.

However, the state intervenes in this equation through the minimum wage, through taxation, by setting public sector salaries which (if attractive) can attract private sector employees and help the sector retain their staff, and finally, through legislation governing salary negotiations and social dialogue.

Read more: Why the key to bridging Australia's gender pay gap lies in statistics

Pay transparency in theory and practice

One potential tool of this legislation is pay transparency, forcing companies to publish accurate data on individual and average salaries. Pay transparency is seen as a tool to combat discrimination, particularly between women and men.

The publication of all salaries allows employees to become aware of potential discrimination and to demand the application of the principle of equal pay for equal work. Pay transparency was defended by a bill from the left-wing political party La France Insoumise in June 2023, when the European Parliament adopted a directive going in this direction, with member states obligated to transpose it into their national law within three years.

One may wonder what the effects of such a directive will be. But perhaps it would have been more judicious to ask this question before legislating? According to a study by Zoë B. Cullen and Bobak Pakzad-Hurson, Equilibrium Effects of Pay Transparency, published in May in Econometrica 91, no 3, this law could have a significant negative effect on average salaries – in this case, an average drop of 2 per cent in real average wages (adjusted for inflation).

The argument is simple. In the presence of such a legal obligation, companies can refuse to negotiate an increase for an individual employee because if this increase is granted, the company will have to increase all salaries. The fact that this obligation is legal facilitates this response from companies and assures them that their competitors will do the same, which makes it less likely that the employee whose request for a raise is rejected will leave for another.

Deprivation of bargaining power

A generalisation of this individual logic to all employees – in economic language, to the general equilibrium – demonstrates how such a law deprives employees of their bargaining power, transfers it to companies, and allows them to maintain salaries as low as possible. Of course, this logic only applies to employees who are able to negotiate their salaries individually – that is to say, the most educated and specialised employees and those who are not covered by a union agreement.

The study's authors verify these theoretical predictions by comparing the evolution of salaries as different states in the United States legislate on salary transparency. They estimate that pay transparency laws have lowered wages by 2 per cent on average (in real terms), but not uniformly. For employees with a master's level of education or higher (those most able to negotiate individually before the law) and in poorly unionised sectors, the drop is estimated at 4 per cent.

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This is indeed the perverse effect of this law, which, as the authors of the study point out, has made it possible to highlight discrimination and reduce salary inequalities between women and men in certain cases. This study encourages us to think more deeply about the general equilibrium implications of solutions that appear to be able to bring about improvements on a case-by-case basis.

Pauline Grosjean is a Professor of Economics at UNSW Sydney, a Fellow of the Academy of the Social Sciences in Australia, and a Fellow of the Centre for Economic Policy Research (CEPR). Her research studies the historical and dynamic context of economic development. In particular, she focuses on how culture and institutions interact and shape long-term economic development and individual behaviour. This article was originally published in Le Monde, and was translated from French to English for republishing.