Why we need to know each other’s pay: an experiment

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 study

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:

  1. 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.
  2. 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.
  3. 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?”

About Ben Baumberg

I am currently a Lecturer in Sociology and Social Policy at the School of Social Policy, Sociology and Social Research (SSPSSR) at the University of Kent. I also helped set up the collaborative research blog Inequalities, where I regularly write articles and short blog posts. I have a wide range of (too many...) research interests, at the moment focusing on disability, the workplace, inequality, deservingness and the future of the benefits system, and the relationship between evidence and policy. You can find out more about me at http://www.benbaumberg.com
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4 Responses to Why we need to know each other’s pay: an experiment

  1. Paul says:

    Thanks for this post. An issue not mentioned is the question of whether the inequalities were *justified*. I do not believe that income inequalities in the U.S. are in general justifiable, but certain local inequalities may be. According to the the NBER paper, the relevant groups for intra-group comparisons were defined in terms of department and then in terms of whether the individuals were faculty or staff. This means people in the same “occupation” could be doing very different jobs (defined by a set of tasks) and could be at very different ranks (e.g. junior vs. senior). But these difference could very well justify some of the inequalities that people discovered upon snooping in the database.

    One possibility that is raised by noting the question of justifiability is that there may be nothing at all wrong with taking pleasure in being on the better end of an inequality. For one may be pleased that one’s seniority, efforts and/or contributions are being adequately acknowledged. And there is nothing wrong with that. This suggests, however, that it might be tendentious to describe a situation of inequality as one where those on top are “overpaid” or have the system “skewed in their favor.”

    Finally, my favorite pay inequality quotation: “H.L. Mencken once defined wealth as any income that is at least $100 more a year than the income of one’s wife’s sister’s husband” (http://bit.ly/9Piw1i , p. 5)

  2. Ben Baumberg says:

    Thanks Paul – the issue of fairness and what we could call ‘justified inequality’ is central here, and we’ll hopefully come back to it on the blog. Politicians seem to be talking about this the whole time in the UK given the very high earnings of those in certain forms of investment banking, which suddenly seemed to totally disproportionate given the risks they created to the wider economy and the taxpayer costs they created in the banking crisis.

    In this study, you’re right that we don’t know for sure that the people who are paid more than the median for faculty/staff in their department are actually ‘overpaid’. However, this measure seems to be a reasonable proxy for being overpaid given the results of the study, i.e. that finding out other people’s wages has the effects I described above. It’s actually very difficult to determine if two people are doing exactly the same job, so proxies for being overpaid are often necessary.

    As an aside, epidemiologists have also recently been finding that unfairness at work is a risk factor for heart attacks and other forms of ill-health – see http://jech.bmj.com/content/61/6/513.abstract

  3. Paul says:

    Ben, By “overpaid” you must mean “on the winning end of a genuinely unfair inequality”? After all, even if there is something to the complaint about unfairness, nothing follows about the absolute level around which all (relevant) wages should hover. No complaint about unfairness could should then be assumed to translate readily into the complaint that the person with the higher salary should not have *that high* a salary.

    Thanks for the citation to the Whitehall II study. I’m always skeptical about social scientist’s claims to measure happiness or the effects of unfairness, in part because I don’t really know what those things are and I’m a philosopher who works on those concepts! That said, identifying unfairness is probably easier than measuring happiness, if only because we have stronger intuitions about what unfairness is than what happiness is. Still, perhaps it’s best for social scientists to be safe and refer to “perceived unfairness” where this seems to do all the theoretical work needed, because often it is *that* they are really making claims about. I admit, however, that untoward consequences can follow from refusing to validate the perceptions of those who often really are on the receiving end of unfairness.

  4. Pingback: Highlights so far… | Inequalities

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