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Modeled Behavior

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Should Employers Be Allowed To Prevent Workers From Sharing Their Salary Information?

WASHINGTON, DC - MAY 23:  Sen. Al Franken (D-M...

WASHINGTON, DC - MAY 23: (Image credit: Getty Images via @daylife)

There are a variety of social norms around talking about wages and salaries. It’s often considered rude to ask someone what they are paid, and this is sometimes true within workplaces. In fact some employers go so far as to not permit workers to share wage and salary information with each other. Employers would be banned from doing this by the Paycheck Fairness Act, which has failed to pass in congress twice. Is this a good idea?

The case for this law is pretty common sense: knowing what their coworkers make will give employees bargaining power, and may even prevent discrimination. However, I think there is a not-so-obvious case for why this aspect of the law may be a bad idea: it could allow fairness norms to increase unemployment.

Consider a simple case where an employer has market power. In this case they will set wages like a monopolist, which will put wages and employment below efficiency level. However, this assumes that employers must pay a single price for workers. If workers can price discriminate by offering marginal employees lower wages, then market power need not create unemployment. This is a specific example of the general rule that price discrimination can increase everyone’s welfare by increasing output.

So why wouldn’t employees do this? Fairness norms may make paying some employees less than others untenable in the workplace. This can matter in situations other than marginal hiring decisions as well. In a recession it can be difficult for employers to cut wages, and it seems obvious that this would be even more true when wages need to fall unevenly, e.g. not 5% for all workers, but 10% for some and 0% for others. Fairness norms may prevent employers from making these cuts and instead forcing them to rely on firing some workers. If workplaces can prevent wage and salary information from being shared, it may stop fairness norms from getting in the way of employment maximizing wages.

Some important caveats are obviously in order. First, I am not presenting a concrete case against this law, as there are many other provisions in it. Second, I am not even presenting a concrete case against the specific aspect of the law discussed above. I am simply offering a possible downside to this law. It very well may be the case that sharing of wage and salary information would not lead to much or any extra unemployment.  The upsides would be that workers may better learn about their marginal productivity, and it could thus lead to more efficient allocations of labor. Or perhaps it would lead to the harmless redistribution of rents from firms to employees. But is important we consider all possible effects of this law, and this is one of them.

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