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Wage transparency cuts pay gap by 7%

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Wage transparency cuts pay gap by 7%

Mind the gap, train platform

Compulsory disclosure by employers of gender segregated wage statistics can help to lower the gender pay gap by 7 per cent, an international business school has suggested.

France-based INSEAD said that opponents of legislated pay transparency argue the impact is unclear, and simply adds an administrative burden to business while simultaneously impeding confidentiality.

But it said that research its economist undertook in conjunction with universities in the US and Denmark identified measurable improvements in the gender pay gap as a direct result of this measure.

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The researchers examined the impact of Denmark’s 2006 introduction of mandated disclosure, in conjunction with wage statistics in the years before and after it took effect.

The law requires all businesses with more than 35 employees to disclose gender pay gaps among their workforce, where there are at least 10 men and 10 women employed within any given occupation.

Data was analysed for the years between 2003 and 2008 for two groups of employers of a similar size: those with 35 to 50 employees bound by the disclosure rule, and those with 25-34 employees that are exempt.

They found that male employees were collectively paid 18.9 per cent more than female employees before the regulation was introduced – with the researchers allowing for other mitigating factors such as demographics, work experience, specific occupations and macro trends.

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After the regulation come into effect, the pay gap had narrowed to 17.6 per cent among the roughly 1,000 businesses it covered – a 7 per cent reduction relative to the control group that were exempt from making the disclosure.

“For the first time we are able to document, that pay-transparency really works,” said Morten Bennedsen, professor of economics at INSEAD and the University of Copenhagen.

“A 7 per cent reduction in the pay-gap may not sound impressive, but given the fact that only a limited number of firms in Denmark are governed by this legislation, the effect is significant. We can even prove the effect amongst firms, that were not required to provide gender segregated pay-statistics.

“We know now that wage-transparency works and it is a measure that can be applied nationally as well as internationally. So from this point, it is really just a question of whether or not the politicians actually wish to do something about the pay-gap between men and women.”

Transparency puts breaks on wage growth

What surprised the researchers, though, was the way in which the gap closed.

Rather than female employees seeing higher annual increases than their male counterparts, pay increases of male employees narrowed.

“As a result, the total wage bill grew slower in firms that were required to report wage segregated statistics,” said Daniel Wolfenzon, professor of finance and economics and chairman of the Finance Division at Columbia Business School.

More women hired, promoted; productivity falls

Researchers also found a number of other trends emerge.

Perhaps unsurprisingly, that the pay gap was narrowest in businesses where the executives had more daughters than sons – a factor that was prevalent even before the legislation had been introduced.

But the regulation change did have a material impact on the number of women hired. Those firms subject to mandatory disclosure employed 4 per cent more women in lower and intermediate roles, while they also increased the promotion of women into more senior positions.

“What is interesting is that the law has unintended consequences on women’s ability to climb up the corporate ladder and their willingness to join the labor market,” noted Elena Simintzi, assistant professor of finance at the University of North Carolina Kenan-Flagler Business School.

“When firms adopt more fair wage practices towards women, this can have positive effects on women’s labor market outcomes that go well beyond pay gaps.”

The researchers also noted a 2.5 per cent drop in productivity among the businesses affected by the regulation, but the 2.8 per cent reduction in total wage costs for the group meant there was no hit to profitability.

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