Do Firms Respond to Gender Pay Gap Transparency?

Margarita Tsoutsoura is the John and Dyan Smith Professor of Management and Family Business at the Cornell University SC Johnson College of Business. This post is based on a recent paper by Professor Tsoutsoura; Morten Bennedsen, the André and Rosalie Hoffmann Chaired Professor of Family Enterprise at INSEAD; Elena Simintzi, Assistant Professor of Finance at the University of North Carolina Kenan-Flagler Business School; and Daniel Wolfenzon, the Stefan H. Robock Professor of Finance and Economics at Columbia Business School. This post is based on their recent paper.

Gender pay disparities characterize labor markets in most developed countries. When a man earns 100 dollars, a woman earns 77 in the United States, 78.5 dollars in Germany, 79 dollars in the United Kingdom, and 83.8 on average across European Union countries according to Eurostat.

Recent proposals across many countries focus on pay transparency to promote equal pay. Government-mandated reporting of gender pay discrepancies has been a subject of much debate: Governments often propose transparency as a tool to encourage firms to reduce the wage gap between men and women. Unions and employee groups representing women also seem to believe that secrecy on pay contributes significantly to unequal pay for women. Opponents of pay transparency argue that disclosing gender pay comes as a challenge to firms as it lacks practical utility, increases administrative burden, and violates employee privacy. Until recently there has been no systematic evidence to support either side.

Our study Do Firms Respond to Gender Pay Gap Transparency? conducted the first empirical analysis on the impact of mandatory wage transparency. Our research examined wage statistics of Danish companies before and after the introduction of the country’s 2006 Act on Gender Specific Pay Statistics. That legislation requires companies with more than 35 employees to report on gender pay gaps. We focused on companies with 35-50 employees who had to report their wage gaps (treated firms) and compared their pay data with identical information from a group of similar-sized firms with 25-34 employees that weren’t required to release gender-segregated data (our control group).

Our results showed that from 2003 to 2008, the gender pay gap at treated firms shrank 7%, from 18.9% to 17.5%, while the gap at control firms stayed steady at 18.9%. The wage gap can close because the law causes female wages increase faster, male wages grow slower, or a combination of the two. Interestingly, we find that the entire effect comes from a reduction in the growth rate of male wages in treated firms. The law did not have an appreciable effect on female wages.

We also found that the reform did have a number of additional effects. It increased the number of women being hired. It also increased the number of female employees being promoted from the bottom of the hierarchy to more senior positions.

Wage transparency is not without cost, however. Treated firms in our study experienced a significant 2.5% decline in productivity relative to the control group. However, by the end of our study period, the treated firms’ overall wage bills were 2.8% lower than those of the control firms. Thus, the decline in productivity is fully offset by the saved wage cost and we do not find that the increased transparency impacts firms’ net income.

We also noticed some specific mechanisms at play that enhanced pay gap improvements even further. First, we noticed that the improvement in the pay gap was most prevalent in firms in which male managers had more daughters than sons. This result supports the argument that men with diverse home lives are more progressive about bringing diversity and equality into the workplace. Second, industries which had higher disparities in pay between men and women before the laws were introduced saw a greater shrinking of the gender wage gap.

Overall, we find that wage transparency regulation achieves a reduction in the wage gap. However, this convergence comes at the expense of male employees’ wages. At the same time, this policy tool has additional effects on organizations which policy makers should weigh in when considering the desirability of mandating wage transparency regulation.

The complete paper is available here.

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One Comment

  1. Fred Whittlesey
    Posted Friday, March 15, 2019 at 11:54 am | Permalink

    It disappoints me to seeing academics perpetuate the gender gap myth. This 77 cents idea is nonsense. Yes, nurses are paid less than doctors.Most nurses are women. And women who are MDs tend to choose lower-paying specialties (pediatrics, dermatology) that men (surgery, ER). This holds true across industries and professions. We are not doing to pay nurses as much as MDs. Or A/P clerks as much as CPAs. Move on.

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