Pay Transparency Laws: The Good, the Bad, and the Ugly?
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The Growing Trend of Pay Transparency
Pay transparency laws are taking the United States by storm, with nine states trailblazing this new legislative trend forward at a record pace. Within the past five years, California, Colorado, Connecticut, Hawaii, Maryland, Nevada, New York, Rhode Island, and Washington have enacted pay transparency laws. Furthermore, Illinois, Massachusetts, Minnesota, and Vermont will join this list of states as their own pay transparency laws come into effect in 2025. In addition to these states, several other jurisdictions have enacted local pay transparency laws, including Washington, D.C., Cincinnati, Toledo, Jersey City, Albany County, New York City, Ithaca, and Westchester County. Why are pay transparency laws growing with such prevalence around the U.S.?
Pay Transparency Laws in a Nutshell
Pay transparency laws require employers to disclose wage information to employees and job applicants in particular situations. These laws come in different shapes and sizes, varying in terms of what wage information employers must disclose and when it must be shared. On the more expansive end, some pay transparency laws require employers to list wage information in their job postings; this may include salary ranges and other forms of compensation and benefits. In contrast, many pay transparency laws require employers to disclose wage information to job applicants at some point during the recruitment process, such as “[a]fter an initial interview; [w]hen current employees switch positions; [w]hen current employees are promoted; [a]t the time of an offer; or [a]t the time of hire.” Finally, on the more lenient end, some pay transparency laws require employers to provide wage information when an applicant or employee requests it an applicant or employee at an appropriate time, removing the burden on the employer to automatically disclose such information. In sum, all pay transparency laws provide applicants and employees with access to salary information in one way or another.
For example, in California, employers must provide a job position’s pay scale in job postings and to applicants and employees upon request. In New York, employers must disclose the compensation or compensation range and job description when advertising a job, promotion, or transfer opportunity that will be performed or supervised in the state. The coverage of each jurisdiction’s pay transparency laws differ as well, with California’s applying to employers with fifteen or more employees and New York’s applying to employers with four or more employees. For context, around 6.3% of employees in New York work for employers with less than four employees. The enforcement of these laws varies as well. For example, Washington, D.C.’s pay transparency law does not give individuals a private right of action for employer violations, but D.C.’s attorney general may sue an employer on behalf of an aggrieved individual. Although other jurisdictions align with D.C.’s approach to enforcement, states like California and Connecticut differ by providing individuals with a private cause of action.
The Purpose of Pay Transparency
Pay transparency laws aim to reduce pay disparities existing among genders, races, and other group classifications in the U.S. While gender and racial pay disparities are well-documented and understood at the macro-level, the same is not true at the micro-level. For example, if a woman suspects that her male colleagues are being paid more than her for the same work, finding substantial evidence to prove this disparity can be challenging. Since discussing wages has historically been considered “ill-mannered,” her co-workers will unlikely disclose their wage information if asked. Thus, significant barriers stand in the way of an individual who suspects her employer of not giving equal pay for equal work but has no tangible way of proving it.
Here’s where pay transparency laws come into play: by equipping applicants and employees with wage information once hidden from them, these laws intend to empower individuals to negotiate fairer compensation with their employers. Pay transparency laws seek to ultimately eradicate discriminatory pay gaps by giving workers the knowledge needed to investigate, catch, and hopefully remediate pay inequity. Given that, on average, women working full-time, year-round are paid less than men (at around 84% of what men are paid), and, on average, Black, Latine, and Indigenous workers are paid less than White workers, pay transparency’s purpose of promoting pay equity is necessary and admirable. However, an important question remains: do pay transparency laws succeed in accomplishing this purpose?
Pay Transparency’s Effects on the Workplace
The Good
Pay transparency laws are associated with several positive outcomes, including effectively reducing pay inequities. Researchers at the National Bureau of Economic Research examined the impact of pay transparency laws on university faculty salaries in Canada and found that, on average, these laws significantly reduced the gender pay gap. In fact, the pay transparency laws examined reduced the gender pay gap by 20 to 40 percent. Economists at the Centre for Economic Performance, University of Essex, University of Bristol, and Bank of England examined the impact of pay transparency policies in the United Kingdom and found a 19 percent reduction in the gender pay gap. Further, researchers from the University of California San Diego, University of Southern California, and Emsi Burning Glass (now Lightcast) examined the impact of Colorado’s pay transparency law, which requires wage information on job postings. They found that Colorado’s policy led to a 3.6 percent increase, on average, in posted salaries after going into effect.
The Bad
Pay transparency laws are also associated with several negative outcomes, including reduced worker bargaining power and wages overall. Professors at INSEAD, the University of North Carolina at Chapel Hill, Cornell University, and Columbia University examined the impact of Denmark’s pay transparency law and found that the law reduced the gender pay gap by 13 percent but at the expense of restraining male workers’ wages. Another study conducted by researchers at the Harvard Business School and Brown University examined the equilibrium effects of pay transparency on wage negotiations and found that increasing transparency led to a decrease in worker bargaining power, resulting in lower average wages. According to this study, as transparency rises, an employer’s “maximum willingness to pay for labor falls” because information about one worker’s pay increase is disclosed to others, “who use that information to renegotiate (demand effect).” Additionally, these workers make “lower initial wage offers to increase their chances of getting hired (supply effect).” Since workers can expect to learn their colleagues’ wages and renegotiate with increased transparency, they risk neglecting opportunities to land higher initial wages. Moreover, studies suggest that the form of transparency required by New York City’s law also lowers overall wages for the broader population but increases pay for those inequitably underpaid. Pay transparency can also result in decreased worker productivity when employees see that their company engaged in pay discrimination (however, pay transparency can also result in positive worker productivity when employees see that their company equitably pays workers).
Navigating the Pros and Cons
The current research on the impact of pay transparency reveals several positive and negative outcomes. On the one hand, the studies above show that pay transparency does help reduce the gender pay gap and increases the wages for those inequitably underpaid. On the other hand, the studies above show that one of the goals of pay transparency––increasing workers’ bargaining power––may be weakened by pay transparency, resulting in lower wages across the board. In other words, while pay transparency policies have narrowed wage gaps between co-workers, they can “also lead to counterproductive peer comparisons and [cause] employers to bargain more aggressively, lowering average wages.”
Pay transparency laws are not perfect. Although they are well-intentioned and have been shown to accomplish their primary goal of reducing pay disparities, they also have unintended consequences that legislatures must address to function at their best. Some might argue that the negative effects of these laws are an acceptable cost. After all, reducing pay inequity is paramount to achieving a fair workplace. However, maintaining the status quo is unproductive. States that choose to implement these laws must address their consequences. By simply hopping on this trend, legislatures risk overlooking the nuanced adjustments necessary to actualize the purpose of pay transparency.
The Best Version of Pay Transparency
Instead of requiring employers to fully disclose wage information, states could implement structured pay transparency, where standardized pay ranges for certain roles and experience levels are disclosed to employees and applicants. This reform would still give workers transparency on what similarly situated employees can expect to earn without disclosing exact figures that could anchor wages lower across the board. Many pay transparency laws today aim to skew bargaining power in favor of employees. However, as discussed earlier, these laws can inadvertently decrease workers’ bargaining power. When bargaining power is too high on the worker side, “workers act like monopolists, making high wage demands that are often rejected.” Alternatively, employers “act[] like monopsonist[s], committing to low wages that deter high-outside-option workers from considering work at the firm.” Thus, structured pay ranges could better balance bargaining power between workers and employers, thereby increasing employment and avoiding a reduction in wages overall. By preventing full disclosure of wage information, workers will have the flexibility to negotiate for higher wages and possess a reference point with which to bargain.
Additionally, states could offer tax benefits to employers that demonstrate equitable wage practices. By introducing these benefits, states can make employers view pay transparency as a path toward positive change rather than a compliance hurdle. Given that pay transparency can result in employers bargaining more aggressively, giving them an incentive to ensure fairer wages can help minimize this negative outcome. More specifically, states could provide tax benefits to employers who conduct pay equity audits that assess whether employees in similar roles are being compensated equitably. Based on these audits, states could provide certifications for employers that meet high standards in pay equity and allow employers to voluntarily display this certification publicly. This would provide employees with a signal that a certain employer pays their employees equitably, which would increase demand for employment and benefit all sides. Overall, states have the power to change these laws in ways that curb their negative outcomes, and legislatures must take this initiative.
In the meantime, employers should be aware of the rise in pay transparency laws across the U.S. and be ready to comply with their jurisdiction’s requirements. Further, researchers should continue to discern what kinds of pay transparency policies function best in the workplace, both in achieving their intended purpose and in preventing unintended outcomes. Finally, legislatures should constantly innovate their laws in this area to ensure a fair and equitable workplace.
Suggested Citation: Kadin Mesriani, Pay Transparency Laws: The Good, the Bad, and the Ugly?, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Nov. 7, 2024), https://jlpp.org/pay-transparency-laws-the-good-the-bad-and-the-ugly/.
Kadin Mesriani is a second-year law student at Cornell Law School. He graduated from Cornell University with a degree in Industrial and Labor Relations. In addition to his involvement with Cornell’s Journal of Law and Public Policy, Kadin serves as the Vice President of Cornell’s Middle Eastern and North African Law Students Association and as an Honors Fellow in Cornell’s Lawyering program.