Pay transparency arrives clothed as a worker's cause. Ban salary-history questions, require pay ranges in job postings, publish what companies pay, and the assumption is that more information always tilts the field toward the employee. For comparisons inside a firm the picture is at least contested. For comparisons across firms, the direction of the tilt is not obvious at all, and the best current synthesis suggests it can run the other way. The same daylight that helps a worker spot an unfair internal gap can, at the level of the labor market, hand leverage to employers and pull wages down.
Three transparencies, not one
The distinction that untangles this comes from Cullen (2024), who separates pay transparency into three kinds with opposing effects. Horizontal transparency, seeing peers' pay, tends to reduce effort and satisfaction when it exposes disadvantage. Vertical transparency, seeing the boss's pay, can raise effort by signaling a return to advancement. Cross-firm transparency, the domain of most new laws, is the one with the counterintuitive result: laws that force pay into the open across employers tend to compress and reduce wages, because they weaken the individual worker's bargaining position. The review's overarching claim is that transparency is neither good nor bad in the abstract, its sign depends on which of these channels a policy activates. Conflating them is how well-meaning rules produce perverse outcomes.
Why cross-firm openness can favor the employer
The mechanism runs through negotiation. When pay is private, a worker's specific offer or salary is information the employer cannot fully see, and that asymmetry is a source of leverage: an employer that does not know exactly what it takes to retain someone may pay more to be safe. Publish the going rates and post fixed ranges, and the employer learns the ceiling it can hold to, while the worker loses the private knowledge that let them push above the median. Cullen and Perez-Truglia (2022) offer an adjacent piece of evidence about how much private information shapes behavior in the first place. Employees at a Southeast Asian bank misjudged their managers' pay by 14.1 percent on average and their peers' by a smaller margin, then changed their effort when the truth was revealed. Beliefs about others' pay, accurate or not, drive real decisions, which is precisely why controlling the flow of that information is a lever over outcomes, and why a law that standardizes it does not automatically favor the side it was written for.
The compression pattern shows up elsewhere too
The tendency of forced disclosure to compress rather than raise pay is not unique to cross-firm rules. Mas (2017), studying a California law that required municipalities to post managers' compensation online, found that disclosure reduced those managers' pay by roughly 7 percent and raised their quit rates, with the figures best read as approximate. Different setting, same shape: mandated openness pushed pay down and drove some of the exposed talent out. A worker cheering a transparency law as an unambiguous win should sit with that pattern. Compression can be equity when it trims an indefensible premium, and it can be a wage cut when it trims a hard-won one.
The practical read
Transparency is a design problem, not a slogan. If the goal is fairer pay for equal work, the internal, horizontal audit is the right tool, and it should come with a plan to fix what it finds. If the instrument is a cross-firm mandate, understand that its most likely effect is compression, which helps the underpaid and can cost the worker who was out-negotiating the median. Cullen's framework is the one to keep on the desk: name the channel before you praise the policy. The question is never whether pay should be transparent. It is transparent to whom, about whom, and with what effect on the bargaining that sets the number in the first place.
Sources
- Cullen (2024). Is Pay Transparency Good? The review separates horizontal, vertical and cross-firm transparency and finds cross-firm laws tend to compress and reduce wages by weakening workers' bargaining power, the central claim of the piece. https://doi.org/10.1257/jep.38.1.153
- Cullen and Perez-Truglia (2022). How Much Does Your Boss Make? The Effects of Salary Comparisons. Employees misjudged others' pay and changed effort when informed, showing that private information about pay drives behavior and is therefore a lever over outcomes. https://doi.org/10.1086/717891
- Mas (2017). Does Transparency Lead to Pay Compression? Mandated disclosure of municipal manager pay cut it by roughly 7 percent and raised quits, evidence that forced openness tends to compress pay rather than raise it. https://doi.org/10.1086/693137