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Gender pay gap shrinks when companies disclose wages

Governments around the world are increasingly requiring companies to make their wage data public to encourage them to pay men and women equally.

Supporters say transparency helps to close persistent gender wage gaps – but opponents say the requirement fails to make pay for women more equitable, tanks profits and creates administrative headaches. There’s been no strong evidence supporting either argument – until now.

A study by a Cornell finance expert and her colleagues shows for the first time that the policy does shrink the gender pay gap.

“It reduced the pay gap by 7 percent, just by having this type of regulation. That’s pretty big,” said Margarita Tsoutsoura, co-author of the study, “Do Firms Respond to Gender Pay Gap Disclosure?” Tsoutsoura and her co-authors have presented their findings at several conferences around the world.

The researchers were especially surprised by the way in which the companies adapted to the regulation – by slowing the growth of men’s wages, not increasing women’s.

“Before doing this study, we would have predicted that they would increase their female compensation,” said Tsoutsoura, associate professor of finance and the John and Dyan Smith Professor of Management and Family Business at the Samuel Curtis Johnson Graduate School of Management. “But that’s a more costly way to adjust. Slowing the growth of male wages had the effect of lowering the wage bill of firms, given that most employees in firms are men.”

The researchers based their study on a natural experiment that occurred in Denmark. In 2006, a new law required companies with more than 35 employees to publicly disclose the discrepancies in pay between their male and female employees. The researchers compared those companies to firms with 25 to 34 employees that didn’t have to release their data.

From 2003 to 2008, the gender pay gap at the reporting companies shrank 7 percent, from 18.9 percent down to 17.5 percent, while the wage gap at the non-reporting firms held steady, according to the study.

Wage transparency did come at a cost. The reporting firms had a 2.5 percent decline in productivity – perhaps because men were dissatisfied that their wages didn’t increase as fast as they would have without the regulation, Tsoutsoura said.

However, that decline in productivity was more than offset by a decrease in the companies’ wage bill, which dropped an average of 2.8 percent compared with the non-reporting group. “At the end of the day, the regulation didn’t have any effect on profit,” Tsoutsoura said.

The law created a more equitable workplace in other ways, too. The regulated firms were more likely to promote women, and hired 5 percent more women in intermediate and lower level jobs compared with the non-reporting group. That suggests companies attract more women when they offer more equitable compensation, the researchers said.

“This type of regulation brings more emphasis on these disparities in the workplace,” Tsoutsoura said, “so it might become more salient to managers that they need to grow the participation of females in the firm and give them opportunities.”

Women at the top of the corporate hierarchy, where the law had no effect on pay levels, were slightly more likely to leave their jobs at the reporting firms, suggesting that women may be more likely to quit when compensation is unequitable.

Other mechanisms boosted the pay gap improvements even further. In companies where male managers had more daughters than sons, women’s wages rose 5 percent higher than the rest of the mandatory reporting group, closing the gap by an additional 2.4 percent.

The study suggests this type of regulation can reduce gender pay gaps, Tsoutsoura said. But, she cautioned, pay disclosure laws might also have unintended consequences in promotion or hiring policies.

“It’s important to understand how this type of regulation affects companies in order to see what is the best way to form this type of mandate,” she said. “On one hand we want to lose the pay gap. On the other, we want to do it in a way where we don’t harm companies.”

Tsoutsoura’s co-authors are Morten Bennedsen of INSEAD, France; Elena Simintzi of the University of North Carolina; and Daniel Wolfenzon of Columbia University. The study was supported in part by funding from the Danish National Research Foundation.

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Rebecca Valli