Pay transparency can close the gender gap — if done correctly

As we approach Equal Pay Day we can expect reaffirmation by the Biden administration of their strong commitment to reducing gender pay gaps. But how to do it is not so clear.  

One idea is that pay transparency will help. There are two very different policy models for pay transparency. In the first, the argument is that if women knew what their male coworkers were earning, they would bargain for themselves more effectively. In the second, the government mandates pay transparency, which encourages firms to confront internal pay disparities and as a result, reevaluate their pay practices.  

The first argument has led to legislative initiatives in multiple U.S. states and in other countries as well. In the United States, for example, the Massachusetts Equal Pay Act (MEPA) forbids employers from banning employees from discussing what they are paid. In Germany, employees now have the right to ask the average wages of individuals of a different gender in their workplace. The goal of both laws is to make sure that women are not disadvantaged in negotiations because of ignorance of coworkers’ earnings. The Paycheck Fairness Act is a federal law that has passed every year in the House since 2010, but never in the Senate. If passed it would make it unlawful for employers to prohibit employees from disclosing their pay to others.  

Of course, it is already illegal to prohibit pay discussions under the National Labor Relations Act, but that does not seem to stop many employers. Current estimates suggest that in about half of workplaces employers either prohibit or discourage employees from discussing their earnings. Unfortunately, states that have legislated increased pay transparency since 2010 do not look much different in this regard than those that have not. My research also shows that women who negotiate tend to gain little if anything as a result. Ending prohibitions in discussing pay to increase the bargaining power of women and reduce the gender pay gap is unlikely to produce much change.  

In contrast, complete pay transparency, where salaries are publicly available, does appear to reduce gender pay gaps. In Denmark, a 2006 law mandated firms with more than 35 employees to publicize gender by occupation pay comparisons. The law appears to have reduced the gender pay gap by 13 percent, primarily through reduced male wage growth. A study on Canadian faculty salaries after public earnings disclosure found a dramatic 30 percent drop in the gender pay gap, partially through higher wages for women. A recent study has found similarly large effects of public pay transparency in the U.S. 

The Paycheck Fairness Act also authorizes the U.S. Equal Employment Opportunity Commission (EEOC) to collect pay data from employers. This provision would not create pay transparency, but it would encourage employers to look over their shoulders and perhaps reevaluate their pay practices. It would not create pay transparency because the EEOC is barred from releasing data on any specific firm. This does not prevent firms from releasing their own pay data, something that Intel has been doing since 2019. Since 1966, the EEOC has been collecting employment diversity data from U.S. firms and has treated these reports as confidential. Over the last half dozen years many large firms, however, have voluntarily released their data publicly.  

With similar firm confidentiality rules as the U.S., since 2013, Australian firms have been required to report workforce composition, gender pay gaps and policies for gender equity to the government. In return, firms receive a benchmark analysis of how they are doing compared to others in their industry. By 2018, the average gender pay gap in Australian firms dropped 4 percent, flexible work practices increased and employer-targeted gender equity practices grew. 

The recipe for reducing the gender pay gap is not simply stopping employers from forbidding workers from discussing pay. To reduce the gender pay gap, firms must analyze and report their gender pay disparities — preferably publicly. The Australian example suggests that even confidential reporting to the EEOC might have an impact if they also monitored gender equity practices and shared data with an individual firm’s progress benchmarked relative to its competition.  

To make the Paycheck Fairness Act more effective, confidentiality restrictions on the EEOC should be removed and the EEOC should be instructed by Congress to provide benchmarked reports to employers.  

Donald Tomaskovic-Devey directs the Center for Employment Equity at the University of Massachusetts and is a member of the National Academy of Science’s study panel on EEOC pay data collection.

Tags economy Equal Employment Opportunity Commission Equal Pay Day Equal pay for equal work Gender pay gap Labor rights Paycheck Fairness Act Public economics

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