Working Papers
Is Pay Transparency Good?

Invited for the Journal of Economic Perspectives

Abstract: Countries around the world are designing pay transparency policies with the intention of combating pay discrimination. The consequences of these policies have been wide-ranging, proving at times to impact productivity, employment, wages and well-being in unanticipated ways. In this paper, we examine the evidence to-date and ask, on the whole, is pay transparency a good thing? We conclude that our evidence allows us to design transparency policies to the benefit of most. However, the most popular policies - publicizing the salary gender gaps of private firms, fully disclosing internal salaries, protecting co-workers who share pay information - force trade-offs between lower wages and more equal wages, and create both winners and losers.

What's My Employee Worth? The Effects of Salary Benchmarking

with Shengwu Li and Ricardo Perez-Truglia

Abstract: While U.S. legislation prohibits employers from sharing information about their employees' compensation with each other, companies are still allowed to acquire and utilize more aggregated data provided by third parties. Most medium and large firms report using this type of data to set salaries, a practice that is known as salary benchmarking. Despite their widespread use across occupations, there is no evidence on the effects of salary benchmarking. We provide a model that explains why firms are interested in salary benchmarking and makes predictions regarding the effects of the tool. Next, we measure the actual effects of these tools using administrative data from one of the leading providers of payroll services and salary benchmarks. The evidence suggests that salary benchmarking has a significant effect on pay setting and in a manner that is consistent with the predictions of the model. Our findings have implications for the study of labor markets and for ongoing policy debates.

Equlibrium Effects of Pay Transparency

with Bobak Pakzad-Hurson (Revise and Resubmit at Econometrica)

Selected coverage: The New York Times Magazine, PBS

Best Paper Prize: Applied Modeling EC '19

Abstract: The public discourse around pay transparency has focused on the direct effect: how workers seek to rectify newly-disclosed pay inequities through renegotiations. The question of how wagesetting and hiring practices of the firm respond in equilibrium has received less attention. To study these outcomes, we build a model of bargaining under incomplete information and test our predictions in the context of the U.S. private sector. Our model predicts that transparency reduces the individual bargaining power of workers, leading to lower average wages. A key insight is that employers credibly refuse to pay high wages to any one worker to avoid costly renegotiations with others under transparency. In situations where workers do not have individual bargaining power, such as under a collective bargaining agreement or in markets with posted wages, greater transparency has a muted impact on average wages. We test these predictions by evaluating the roll-out of U.S. state legislation protecting the right of workers to inquire about the salaries of their coworkers. Consistent with our prediction, the laws lead wages to decline by approximately 2% overall, but declines are progressively smaller in occupations with higher unionization rates. Our model provides a unified framework to analyze a wide range of transparency policies, and reconciles effects of transparency mandates documented in a variety of countries and contexts.

The Salary Taboo: Privacy Norms and the Diffusion of Information

with Ricardo Perez-Truglia (Under revision for the Journal of Public Economics)

Abstract: Offices are social places. Employees and managers take breaks together and talk about family and hobbies. In this study, we show that employees’ social interactions with their managers can be advantageous for their careers, and that this phenomenon contributes to the gender pay gap. We use administrative and survey data from a large financial institution and exploit quasi-random variation induced by the rotation of managers. We provide evidence that when employees have more face-to-face interactions with their managers, they are promoted at a higher rate. This mechanism could explain a third of the gender gap in promotions at this firm.

Accepted, Forthcoming and Published Articles
The Old Boys' Club: Schmoozing and the Gender Gap

with Ricardo Perez-Truglia (Conditionally accepted at the American Economic Review)

Abstract: Offices are social places. Employees and managers take coffee breaks together, go to lunch, hang out over drinks, and talk about family and hobbies. In this study, we show that employees' social interactions with their managers are advantageous for their careers and that this phenomenon contributes to the gender pay gap. We use administrative and survey data from a large financial institution. We estimate the impact of social interactions on career progression using quasi-random variation induced by the rotation of managers, along with the smoking status of managers and employees. When male employees who smoke transition to male managers who smoke, they take breaks with their managers more often and are subsequently promoted at higher rates. The smoker-to-smoker advantage is not accompanied by any differences in effort or performance. Moreover, we find that the male-to-male advantage is also only present among employees who work in close proximity to their managers, limiting the mechanism to channels requiring face-to-face interaction. The male-to-male advantage explains a third of the gender gap in promotions at this firm.

Increasing Demand for Workers with a Criminal Background

with Will Dobbie and Mitch Hoffman (Forthcoming, The Quarterly Journal of Economics)

Abstract: State and local policies increasingly restrict employers' access to criminal records, but without addressing the underlying reasons that employers may conduct criminal background checks. Employers may thus still want to ask about a job applicant's criminal record later in the hiring process or make inaccurate judgments based on an applicant's demographic characteristics. In this paper, we use a field experiment conducted in partnership with a nationwide staffing platform to test policies that more directly address the reasons that employers may conduct criminal background checks. The experiment asked hiring managers at nearly a thousand U.S. businesses to make actual hiring decisions under different randomized conditions. We find that 39% of businesses in our sample are willing to work with individuals with a criminal record at baseline, which rises to over 50% when businesses are offered crime and safety insurance, a single performance review, a background check covering just the past year, or objective information on the productivity of these individuals. Wage subsidies can achieve similar increases but at a substantially higher cost. Based on our findings, the staffing platform relaxed the criminal background check requirement and offered crime and safety insurance to interested businesses.

Abstract: The vast majority of the pay inequality in an organization comes from differences in pay between employees and their bosses. But are employees aware of these pay disparities? Are employees demotivated by this inequality? To address these questions, we conducted a natural field experiment with a sample of 2,060 employees from a multibillion-dollar corporation in Southeast Asia. We make use of the firm's administrative records alongside survey data and information-provision experiments. First, we document large misperceptions among employees about the salaries of their managers and smaller but still significant misperceptions of the salaries of their peers. Second, we show that these perceptions have a significant causal effect on the employees' own behavior. When they find out that their managers earn more than they thought, employees work harder, on average. In contrast, employees do not work as hard when they find out that their peers earn more. We provide suggestive evidence of the underlying causal mechanisms, such as career concerns and social preferences. We conclude by discussing the implications of pay inequality and pay transparency.

Determinants of Small Business Reopening Decisions After COVID Restrictions Were Lifted

with Dylan Balla-Elliott, Ed Glaeser, Mike Luca, and Chris Stanton

Abstract: The COVID-19 pandemic led to dramatic economic disruptions, including governmentimposed restrictions that temporarily shuttered millions of American businesses. We present three main facts about business owners' decisions to reopen at the end of the lockdowns, using a nation-wide survey of thousands of small business owners. First, a plurality of firms reopened within days of the end of legal restrictions, suggesting that the lockdowns were generally binding for businesses - although a sizable minority delayed their reopening. Second, decisions to delay reopenings were not driven by concerns about employee or customer health. Instead, businesses in high-proximity sectors planned to reopen more slowly because of expectations of stricter regulation. Third, pessimistic demand projections primarily explain delays among firms that could legally reopen. Owners expected demand to be one-third lower than before the crisis throughout the pandemic. Using experimentally induced shocks to perceived demand, we find that a 10% decline in expected demand results in a 1.5 percentage point (8%) increase in the likelihood that firms expected to remain closed for at least one month after being legally able to open.

The Impact of COVID-19 on Small Business Outcomes and Expectations

with Alex Bartik, Marianne Bertrand, Edward L. Glaeser, Michael Luca, and Christopher Stanton

Abstract: To explore the impact of COVID on small businesses, we conducted a survey of more than 5,800 small businesses between March 28 and April 4, 2020. Several themes emerged. First, mass layoffs and closures had already occurred-- just a few weeks into the crisis. Second, the risk of closure was negatively associated with the expected length of the crisis. Moreover, businesses had widely varying beliefs about the likely duration of COVID-related disruptions. Third, many small businesses are financially fragile: the median business with more than $10,000 in monthly expenses had only about two weeks of cash on hand at the time of the survey. Fourth, the majority of businesses planned to seek funding through the CARES act. However, many anticipated problems with accessing the program, such as bureaucratic hassles and difficulties establishing eligibility. Using experimental variation, we also assess take-up rates and business resilience effects for loans relative to grants-based programs.

Management Science 67, no. 7 (July 2021)

Abstract: We study the growth of online peer-to-peer markets. Using data from TaskRabbit, an expanding marketplace for domestic tasks at the time of our study, we show that growth varies considerably across cities. To disentangle the potential drivers of growth, we look separately at demand and supply imbalances, network effects, and geographic heterogeneity. First, we find that supply is highly elastic: in periods when demand doubles, sellers perform almost twice as many tasks, prices hardly increase, and the probability of requested tasks being matched falls only slightly. The first result implies that in markets where supply can accommodate demand fluctuations, growth relies on attracting buyers at a faster rate than sellers. Second and perhaps most surprisingly, we find no evidence of network effects in matching: doubling the number of buyers and sellers only doubles the number of matches. Third, we show that the cities where market fundamentals promote efficient matching of buyers and sellers are also those that are the fastest-growing. This heterogeneity in matching efficiency is related to two measures of market thickness: geographic density (buyers and sellers living close together) and level of task standardization (buyers requesting homogeneous tasks). Our results have two main implications for peer-to-peer markets in which network effects are limited by the local and time-sensitive nature of the services exchanged. First, marketplace growth largely depends on strategic geographic expansion. Second, a competitive rather than winner-take-all equilibrium may arise in the long run.