Pay transparency and its effect on the gender pay gap

Morten Bennedsen, Elena Simintzi, Margarita Tsoutsoura, Daniel Wolfenzon 07 May 2020

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Despite two-thirds of OECD countries having introduced policies on pay equality, men are still being paid more than women (Blau and Kahn 2017). Governments have been seeking to address this by increasing their focus on pay transparency. Unfortunately, evidence of transparency’s effects on gender pay disparities and firm outcomes has, to date, been limited.

In our recent paper (Bennedsen et al. 2020), we conduct the first empirical study on the impact of mandated gender pay gap disclosure, using evidence from Denmark. We examine whether such legislation would successfully incentivise firms to respond by adjusting their compensation policies and, if so, by what margins.

Mandatory transparency legislation reduced gender pay disparity primarily by slowing down the growth of male wages. Results from a difference-in-differences analysis and a difference-in-discontinuities analysis show that the gender pay gap declined by approximately two percentage points, or 13% relative to the pre-legislation pay gap.

We also find that the legislation affects other labour-market outcomes for female employees. After enforcing transparency of gender pay discrepancies, more female employees join treated firms, supporting the argument that firms are more willing to hire female employees or that women are more likely to seek employment in firms where gender pay transparency improves. We also find an increase in the number of promotions of female employees.

How does the gender pay gap close?

We examine the wage statistics of firms prior to and following the introduction of Denmark’s 2006 Act on Gender Specific Pay Statistics, which requires companies with more than 35 employees to report gender pay gaps. In our difference-in-differences analysis, we focus on companies with 35–50 employees and compare their pay data with identical information from a control group of firms with 25–34 employees – firms that are of a similar size but are not required to release gender-segregated wage data.

We find that between 2003 and 2008, the gender pay gap shrunk by 13% relative to the pre-legislation mean. Although all employees’ wages increase during this period, the wages of male employees working in firms affected by the legislation increase significantly less than those in the control group. Figure 1 shows no difference in the wages of male employees in treated versus control firms prior to the legislation, whereas the difference is negative after the law is introduced. We also find no significant difference in female employees’ wage dynamics between the treatment and the control group (Figure 2).

Figure 1 Dynamics of male employee wages

Notes: The plot shows difference-in-differences year-by-year coefficient estimates for male employees’ wages. Year 2005 is omitted. The vertical lines represent 95% confidence intervals.

Figure 2 Dynamics of female employee wages

Notes: The plot shows difference-in-differences year-by-year coefficient estimates for female employees’ wages. Year 2005 is omitted. The vertical lines represent 95% confidence intervals.

The results are robust to an alternative empirical strategy where we take the difference between the pre-treatment and post-treatment discontinuity at 35 employees. As such, the difference-in-discontinuities allows us to difference out the effect of any potential pre-existing discontinuity at 35 employees.

The significant reduction in the size of male employees’ wage increase suggests that the introduction of mandatory transparency laws has given CEOs a tool to resist aggressive bargaining tactics by men during wage negotiations while strengthening the relative bargaining power of women.

The effects are not equally distributed

We further examine the effect of the legislation at different points of the firm-level wage distribution. The firm-level gender wage gap decreases more at the bottom and the middle of the pre-treatment firm gender pay gap distribution, whereas the impact at the top is less pronounced.

The closing of the gender gap is most prevalent in firms with a higher gender pay gap pre-treatment. Having children also matters: male employees with children experience a lower decline in wages than men without children. Indeed, the pre-treatment wage gap is higher among employees with children, and yet it does not close as much for this group.

Creating a fairer workplace

The findings show that the effect of the new law extended beyond regulators’ intention to correct the gender wage gap. Our estimates show that the law increases female hiring rates (number of female employees hired/total employment) by 0.8 percentage points – which is large relative to the pre-law average of female-employee hiring rate of 5%.

Moreover, we find a significant decline in male employees joining the firm, which could be explained by the fact that male wage growth in treated firms is lower following the law and thus, these firms are less attractive to male employees.

Female employees in firms that reported on their gender pay gap were also more likely to get promoted to higher levels after the passage of the law: the probability of promotion for female employees increases in treated firms relative to control firms following the legislation. The legislation has no effect on the promotion probability of male employees.

Effect on firm outcomes

We also examine the effects of the legislation on firm outcomes. Although the wage bill declines in treated firms relative to control firms, the overall firm profitability is not affected. This result is likely due to the fact that firm productivity also declines in treated firms.

Governments should consider the trade-offs of mandated gender pay gap transparency

Our research provides evidence that regulatory mandates on pay transparency are a means to overcome biases against women in the workplace. Although the regulation reduces the gender wage gap, however, it also has the unintended consequence of reducing the average employee wage at the firm. Policymakers should thus weigh the welfare implications when designing regulation to reduce the gender wage gap.

References

Blau, F D, and L M Kahn (2017), “The gender wage gap: Extent, trends, and explanations”, Journal of Economic Literature 55: 789–865.

Bennedsen, M, E Simintzi, M Tsoutsoura and D Wolfenzon (2020), “Do firms respond to gender pay gap transparency?”, NBER Working Paper 25435.

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Topics:  Gender Labour markets

Tags:  Denmark, gender equality, gender wage gap, Inequality, labour, transparency, wage disparity, wage gap, wage transparency, wages, women

Niels Bohr Professor, University of Copenhagen André and Rosalie Hoffmann Chaired Professor of Family Enterprise, INSEAD

Assistant Professor of Finance, University of North Carolina

Associate Professor of Finance and John and Dyan Smith Professor of Management and Family Business, Cornell University

Professor of Finance and Economics, Columbia Business School

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