Does wage transparency really close the gender pay gap?

While the goal of wage transparency is to close the gender pay gap, it can also have negative unintended impacts, writes UNSW Business School’s Frederik Anseel

At first glance, wage transparency seems appealing because it implies fairness. That is also why countries around the world – including European Union regulators – are enforcing regulations that require companies to be more transparent. The idea is that companies will pay men and women equally if we make the starting wages and pay scales public.

Makes sense, and I don’t need to explain it twice – especially to a woman who has been underpaid her entire life. However, wage transparency may not address the issue of the gender pay gap.

We know from our own research that people tend to think that someone else, even in the same company with the same job, earns slightly more. Mentally, we always compare ourselves with those people who we think deserve more. That makes us unhappy about our own wages. If we consider ourselves to be an above-average employee, is it logical that we compare ourselves with the best? Why don't we earn the same amount?

The doubt about whether our office neighbour will receive a hundred dollars more per month (or not) keeps us awake at night. We are social beings. It is our nature to determine our self-worth by comparing ourselves to others: our house, our children, our car, and how much we earn.

Wages, monkeys, cucumbers and grapes

People are not the only social beings; animals are, too. At lectures, I used to show a hilarious video of research about rewards with monkeys by the recently deceased biologist Frans de Waal. The monkey, who is rewarded with a piece of cucumber but thinks he is entitled to a grape, literally breaks down the cage.

If fairness is so important to us, united apes, why not be transparent about our wages? Then we can worry about something else at night rather than the wages of our office neighbour.

Well, the reality is more complex than regulators might like. Wage transparency does indeed lead to men and women earning the same – but not because women earn more. No, the gap is closing because men's wages are rising less quickly.

Companies use transparency to put the brakes on wage negotiations with men, which can have a demotivating effect on them. In one study, the drop in productivity due to bruised male egos was more than what the company could save by reducing wages.

The issue of wage transparency lowering wages is not just a male-female issue. A wage transparency requirement gives companies a convenient excuse not to negotiate individually. After all, one wage increase means an increase for everyone. New European legislation risks taking away negotiating power from individuals in favour of employers, who see it as an easier way to keep wages low.

An American study that was able to compare wage transparency state-by-state estimates that a law on salary transparency may lead to a 2 per cent drop in salary. For highly educated people, this increases to 4 per cent, because they normally have more negotiating power (at least in the US).

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So, should wage transparency be overhauled? I didn’t say that. The unjust wage gap between men and women has proven so stubborn that we might need to take the good with the bad and finally put an end to it.

My main point is that tinkering with complex psychological systems and thinking that regulators need to impose uniform rules on companies almost always produces unintended side effects. And this time, these side effects are unlikely to favour the employee.

Frederik Anseel is Dean and Professor of Management at UNSW Business School. His research focuses on the motivational micro-foundations of how people contribute to organisational success. For more information, please contact Prof. Anseel directly. A version of this post was first published in De Tijd.