A review of the effects of pay transparency

Summary

"A review of the effects of pay transparency" by Duchini, Simion, and Turrell (2024) systematically analyzes the growing body of literature on pay transparency policies and their impact on gender inequality in the labor market. The primary aim of these policies is to mandate firms to disclose information regarding employees' pay, often broken down by gender, or to provide indicators of gender pay and career gaps. The underlying premise is that a lack of information on internal disparities contributes to the persistence of gender inequality. By increasing the visibility of gender gaps, these policies aim to empower lower-paid employees to demand higher wages, thus altering the bargaining power dynamics between employees and firms. Additionally, public disclosure of a firm's gender-equality performance can generate external pressure for corrective actions. The methodology of this paper is a comprehensive review, synthesizing empirical evidence from various studies to draw conclusions about the effectiveness and implications of pay transparency mandates. The review highlights several significant findings. A consistent outcome across the literature is that pay transparency policies effectively reduce the gender pay gap. However, this reduction is largely achieved not by accelerating women's pay growth, but rather by decelerating men's pay increases, leading to a phenomenon known as "pay compression" from the upper end of the wage distribution. While some studies suggest a potential reduction in labor productivity following the introduction of transparency mandates, this is often offset by a decrease in labor costs, meaning these policies can be implemented with limited financial detriment to firms and without negatively impacting profits. Despite their effectiveness in narrowing the gender pay gap, the research indicates that these policies may not be well-suited to improve the outcomes for lower-paid employees more broadly. The review also points to suggestive evidence that pay transparency can increase the likelihood of women being hired into higher-wage occupations and lead to a modest decrease in male real hourly pay in affected firms.