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The US push for pay transparency

October 2, 2022
Diversity & Inclusion

California has become the latest US state to force employers to publish detailed information on salaries, in an effort to clamp down on gender and other wage gaps, and boost fairness for workers.

The law, which Governor Gavin Newsom signed on 27 September, requires any employer with at least 15 employees to publish a pay scale alongside any job advertisement. It also requires all companies employing more than 100 people to submit an annual pay data report to California’s Civil Rights Department, providing a snapshot of employees by race, ethnicity and sex, as well as the median and mean hourly pay rate for each group.

In passing the law, California joins a clutch of other states and cities that have introduced ­ – or are tipped to pass – legislation designed to shed light on pay practices. In 2021, The Equal Pay for Equal Work Act went into effect in Colorado, while New York City’s Pay Transparency Law will likely pass in November this year. Elsewhere, Maryland already requires pay to be disclosed for job postings upon request; and laws in Connecticut, Nevada and Rhode Island ensure that compensation levels are disclosed during the hiring process.

Proponents of pay-transparency legislation say it creates accountability, and remedying pay gaps in individual organisations starts with understanding how dramatic they are. Overall, the picture is clear: women who work full-time in the US still only earn around 83% of what men do, a figure that has hardly moved in recent years, and black and Hispanic women earn less than white women. Other pay gaps, for example for workers with a disability, and LGBTQ+ workers, persist too.

There are many factors driving these gaps; for example, women’s careers are more likely to be disrupted by childcare responsibilities. Women are also more likely to work in lower-paid sectors. But another element is that companies can offer certain groups of employees, including women – and especially women of colour – lower salaries than, for example, white men. Research shows women and minority workers tend to ask for less money, something that could be counteracted if pay ranges are published on job advertisements. Providing a snapshot of pay rates across a firm’s workforce, meanwhile, could potentially provide evidence for how different groups of workers progress within companies, and whether there is an imbalance there.

Experts say that while many of the newest laws have been in the works for some time, the mood within the labour force in the last two years, combined with the expectations of today’s younger workers, have exerted pressure on lawmakers to act. But while these laws could level the employment playing field somewhat, and even prompt firms unaffected by such legislation to follow suit, they are just one step towards addressing a wage-gap problem that is as entrenched as it is systemic.

‘A key tool to close wage gaps’

In many countries, including the US, pay opacity is a core cultural tenet of the labour market, which has traditionally benefitted employers. It’s enabled companies to keep compensation stagnant even in the face of inflation, or when market rates for talent have risen, and it’s prevented individuals from accessing reference points when it comes to the fairness of their own pay cheque. Indeed, because a culture of salary secrecy can keep companies’ wage bills low, and because transparency laws can expose organisations to lawsuits and fines, many business leaders have historically advocated for pay remaining private.

But some companies no longer have a choice in the matter. Daniel Zhao, lead economist at Glassdoor, a San Francisco-headquartered company that collects and analyses pay data for companies around the world, explains that the recent rise in pay transparency legislation is part of a long-term wave of pressure to enhance transparency – and therefore fairness – in the job market.

This trend, he says, has been accelerated by technology and especially by salary-sharing websites like Glassdoor, which pool information from workers across industries, geographies and seniority levels. These platforms, says Zhao, have “helped foster an expectation and culture of transparency, especially among younger workers entering the workforce today”.

The dynamics of the current job market – low unemployment and labour shortages across many industries – have likely also contributed to a push for greater transparency. Workers feel more emboldened to speak up, while companies are having to work harder to attract talent. But Pavlina Draganova, who works for Organise, a UK-based online platform that advocates for pay transparency and fair working conditions, says that regardless of the economic climate, the case for pay transparency is clear. “Over the last few decades, there’s been mounting evidence that pay transparency can be a key tool in closing gender and racial pay gaps, making this an increasingly appealing option for legislators,” she says.

In May, for example, academics published a paper analysing the impact of pay transparency legislation in Denmark in 2006 that requires companies with more than 35 employees to report salary data broken down by gender for employee groups large enough for an individual’s anonymity to be protected. They found that the gender pay gap in the companies affected by the new laws narrowed as a result of the legislation, while the firms’ profitability remained unaffected. Studies conducted in Canada and the UK have reached similar conclusions.

Pay transparency can be a key tool in closing gender and racial pay gaps, making this an increasingly appealing option for legislators – Pavlina Draganova
Zhao points out there are other potential advantages of pay transparency beyond reducing wage gaps. In hiring, for example, being open about pay eradicates information asymmetries – situations in which a prospective employee’s expectations for pay differs wildly from an employer’s. “Pay transparency can help make the job search more efficient for job seekers and employers, letting both sides skip interviews when expectations about pay are too far apart,” he says.

In the short-term, he believes, increased pay transparency might lead to higher turnover by showing employees what their skills are actually worth on the open market; it might give some workers who discover they are underpaid more confidence to quit. But in the long run, adds Zhao, a less opaque market will likely lead to less turnover and more stability because of higher retention rates, which will benefit all.

No silver bullet

For all the potential upside of pay transparency regulation, however, experts also warn that it should not be considered a panacea for making the labour market overall fairer.

For one thing, publishing pay ranges might still lead to some groups of candidates – like minorities – being offered a salary at the bottom of a stated range and other candidates – like white men – negotiating top-of-the-range pay. In the UK, where since 2017 all companies with 250 employees or more have been obliged to publish an annual gender pay gap report, some institutions have exploited loopholes to understate their wage disparities.

There’s also no conclusive evidence of a causal relationship: that all companies who accurately report their pay gaps are necessarily all more effective at making their workplaces fairer and more equitable. “For organisations, this could be a catalyst for positive change,” says Mabel Abraham, associate professor of business at Columbia Business School in New York City. But the reality, she adds, is that it will not uniformly lead to a closing of all pay gaps and an eradication of inequality. Also, the closing of a pay gap should never be considered a perfect proxy for creating a more equitable labour force.

Abraham’s ongoing research shows that one of the key predictors of whether a company will close a pay gap or not is whether leaders have actually taken the time to understand why a gap exists in the first place. “Those that do are considerably more likely to improve – or reduce – the gap,” she says.

Organise’s Draganova agrees. “[Salary transparency is] a step in the right direction, and may well go some way towards resolving long-standing issues of pay equality and equity among workers,” she says, “[but it’s] just one piece of the puzzle – on its own, it can’t guarantee a good workplace for employees or a thriving business for employers.”

‘Genie out of the bottle’

For now, even if pay transparency is an imperfect solution to workplace wage inequalities, experts are optimistic that California’s move could encourage others to follow suit, simply because of the number of huge companies – like Facebook parent Meta, Google parent Alphabet and The Walt Disney Company – domiciled in the state.

Sarah Russell, a UK-based employment lawyer, says changes that occur in California and New York are particularly influential because of the sectors that dominate those places. “Anything that becomes normalised working practice within the California tech sector or New York banking becomes normalised working practice across those sectors internationally, she says.” Russell also believes that even companies that fall below the size threshold for having to provide pay ranges and salary data will inevitably feel the pressure to do so if they want to attract talent.

In a labour market where job openings remain near a record high, competition for talent is still fierce. If the New York law passes later this year, almost a quarter of the US population will live in a state with some kind of salary disclosure requirement. If companies aren’t providing the information workers and potential employees are coming to expect of them, they will wonder what those companies are trying to hide, says Zhao.

“The next generation of workers already increasingly expects transparency in the workplace, including on pay,” he says. “The pay transparency genie is out of the bottle.”

By Josie Cox


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