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10 January 2023

What would happen if everyone knew your salary? 

Pay transparency could help to increase productivity and fight inflation.

By Will Dunn

In a society which is comfortable debating sex, religion and politics, pay remains one of the final taboos: two thirds of British workers would not tell their colleagues what they earn, according to a survey last year, while more than a third wouldn’t even reveal their pay to their partner or spouse.

This may be about to change, however, as new laws impose greater standards of pay transparency on employers. In November New York became the fifth and largest state in the US to require employers to disclose the pay range for any job they advertise. In December the EU reached a political agreement that, once approved, will give European workers the right to ask how their pay compares to their colleagues’, as well as the pay range for any advertised job, for any role in a company of any size. Last year the UK began a (limited and optional) trial of similar rules on job ads.  

Could we end up with a situation like Norway, where – thanks to the open publication of tax records, which began in 2001 – everyone can easily find out everyone else’s salary? And would that be a bad thing?

One possible concern is that by giving workers better information and strengthening their bargaining positions, pay transparency could lead to higher inflation. The government and Andrew Bailey, the governor of the Bank of England, have asked the public (and particularly public sector workers on strike) to moderate their requests for higher pay to prevent higher wages from pushing prices up further. They’re wrong, though: the consumer price index (CPI) measure of inflation shows that prices are outpacing wages by some distance, which means inflation is not being accelerated by what people are paid but by what companies feel they can get away with charging.

[See also: Is Substack the future of media?]

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In fact, the one major piece of pay transparency legislation the UK has enacted appears to have had a disinflationary effect. Xiaowei Xu, senior research economist at the Institute for Fiscal Studies, says that since the UK required all large businesses to report the difference in pay between male and female employees, some companies have reduced their gender pay gaps – but not by paying people more. “The way this happened was not by women getting higher pay, but rather high-paid men getting lower pay,” Xu explains. “So, taking that at face value, pay transparency is actually reducing average wages.” 

Not only that, but the labour market being better informed could also combat inflation by giving an advantage to more productive companies, says Xu. “Ultimately, the firms that can afford to advertise higher wages are going to be those that are more productive. From the workers’ point of view, having more information will allow them to make better choices… and they would move to higher-productivity firms.” If workers are paid more and produce more, this could actually push prices down: “You could have a rise in average wages, but then that rise would not be inflationary.”

Emma Duchini, an assistant professor of economics at the University of Essex, says pay transparency also lets consumers choose whether to buy the goods or services of a company that had very unequal pay. Duchini’s research has found a correlation between the reputational rankings of UK companies and their gender pay gaps.

However, Duchini also points to research by the American economist Ricardo Perez-Truglia that suggests transparency can go too far. Perez-Truglia found that when Norwegians became able to effectively search for each other’s salaries, doing so became an unhealthy national obsession. “Norwegians were more likely to search for the tax records than to search for the weather.” The information caused new inequalities in happiness and life satisfaction to emerge between the rich and poor, as people on lower incomes realised how little the labour market valued their work.

Duchini says more information can also impact individuals’ productivity and likelihood of quitting, and the “gender ask gap” that reflects men’s general willingness to ask for more money. “There is some evidence from the US that when managers were allowed to ask their colleagues how much they were paid, this actually led to an increase in the gender pay gap, because male managers were the ones that profited most from the possibility of talking with their colleagues.” 

While the information needs to be handled well, Duchini agrees that more general reporting of pay bands and access to pay information (albeit at a less personal level than in Norway) could help to address some of the problems in the British economy, which has some of the highest income inequality in the developed world and ranks poorly among its peers for productivity and investment.

Fundamentally, Britain is hobbled by systems that keep money from moving around too much. Capital is locked up in slow and steady assets – pension funds, property – rather than being spent on growing businesses, and the tax system favours wealth over enterprise. A labour market in which most workers are flying blind might look as if it hands an advantage to employers, but what it really means is that companies spend too much on their employees’ negotiating skills and too little on their actual work.

[See also: “This country doesn’t invest in its own future”: Torsten Bell on why the UK is being hit hardest]

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