Would you be happier if you found out that you earned more than other people at your workplace – particularly the people who do the same job as you?
For obvious reasons, questions about relative pay have been around a long time – and getting a definite answer to them has proved difficult. We can study people’s happiness in the real world, but then it’s difficult to exclude other explanations. Or we can manipulate people in a laboratory, but then we don’t know if this applies in people’s actual jobs with their real-world colleagues.
So it’s genuinely exciting to read a new NBER study that provides answers based on a natural experiment – and the answers should be required reading for policymakers concerned about inequality.
The opportunity for the study presented itself when a court decision led to a ‘right to know’ law about the pay of state employees in California – which enabled a local newspaper (the Sacramento Bee) to list individual people’s pay on a website. Luckily for David Card and his colleagues, less than 20% of staff at the University of California were using the site when they started doing their research, so they sent selected staff an email telling them about it – which led to another 30% of the staff checking out their colleagues’ pay.
The results are striking: for people who earned less than the median in their job, there was a noticeable decrease in their job satisfaction, and they were also more likely to say they were going to look for another job. And for the people earning more than the average: there was simply no effect at all.
This is actually reassuring in terms of human nature (or at least, human nature among Californian university employees) – people felt unhappy to be underpaid because they felt the system was unfair, but people who were overpaid didn’t take pleasure from the system being skewed in their favour. Moreover, there was some evidence that everyone who knew more about pay was slightly more concerned about nationwide pay inequality.
Acting on evidence
So what does this mean for policy? The study itself is exceptionally high-quality, and – combined with all the earlier research – deserves policymakers’ attention. It seems to point in three directions:
- Firstly, firms have an incentive to put ‘no-disclosure’ clauses in their contracts, where people are not allowed to tell others about their pay. This enables pay inequality without any of the reduced job satisfaction if it were done transparently.
- Secondly, people seem to be more concerned about inequality when they know the truth about how much their colleagues are paid. (Confirmation of this in other research would be helpful too). This implies that our ignorance about each others’ pay makes us less concerned about inequality.
- Third, policymakers who are concerned about inequality have various options available. As Card et al suggest, they can ban no-disclosure clauses, as some US states have done. Alternatively, they could require all organisations to publish the pay of people in their organisations earning above some threshold level – an option which might be considered by the wide-ranging review of public (and possibly private) sector pay currently being conducted by Will Hutton for the UK Government.
Added to which, though, there is the obvious downside: in general we are happier in blissful ignorance of how much our colleagues earn… It reminds of a classic cartoon (which I sadly now have lost), where a man is saying to his boss “well if you can’t give me a raise, then at least can give you Robinson a pay cut?”