This is a free excerpt from one of Shortform’s Articles. We give you all the important information you need to know about current events and more.
Don't miss out on the whole story. Sign up for a free trial here .
What is pay transparency? How will revealing salary information impact employees and employers alike?
California is the latest U.S. state to adopt pay transparency laws, contributing to a culture shift that could make disclosure the norm. While this shift will inevitably improve pay inequity, it will also bring unintended benefits and consequences.
Read on to learn more about what pay transparency is and the pros and cons of salary disclosure.
What Is Pay Transparency?
In September, California became the latest state to pass a law requiring companies to disclose workers’ pay. With more than 19 million workers, California is a heavyweight joining the tide toward transparency alongside states like Colorado (the first state to adopt such a law), Maryland, and Washington, and municipalities like New York City and Cincinnati—but what is pay transparency, exactly?
In this article, we’ll explore what pay transparency is and what’s catalyzing the shift toward salary disclosure.
Transparency Laws Combat Pay Inequity
The main goal of salary transparency is to reduce pay inequities based on gender and race. The idea is to drive out shadowy injustices by shining a light on everything from the janitor’s salary to the CEO’s.
Pay transparency laws vary, but they generally require companies to post the salary ranges for every filled and open position. California’s law even requires businesses to categorize pay rates by race, ethnicity, and sex. Some laws also prohibit employers from asking job candidates for their salary history, which can keep workers locked in low wages from job to job.
Data shows just how much pay inequity hurts non-white and non-male workers. The U.S. Census reveals that for every dollar a white man earned in 2021, women were paid half to three-quarters of that:
- White women made 73 cents
- Asian, Native Hawaiian, and Pacific Islander women made 75 cents
- Black women made 64 cents
- Latina women made 54 cents
- Native American women made 51 cents
Comparable racial pay gaps also exist. The U.S. Department of Labor reports that for every dollar paid to a white worker (regardless of gender),
- Asian and Pacific Islander workers made $1.12
- Black workers made 76 cents
- Latinx workers made 73 cents
- Native American workers made 77 cents
- Multiracial workers made 81 cents
Additionally, LGBTQ workers in the U.S. earn about 90 cents for every dollar a typical worker makes, according to an analysis by the Human Rights Campaign.
Perspective: Wages Are Driving the New Age of Inequality
In Capital in the Twenty-First Century, award-winning French economist Thomas Piketty analyzes national incomes, income tax returns, estate tax returns, and other financial data across multiple countries and centuries. The result is a groundbreaking study of the history of economic inequality and its implications for 21st-century society.
Piketty writes that the history of economic inequality in the advanced economies of Western Europe and North America followed a distinct historical pattern—an era of high inequality in the period before World War I, followed by a significant compression of the wealth distribution in the decades after World War II, and a new age of rising inequality beginning in the 1980s and continuing to the present.
But he notes an important difference between the earlier period of massive inequality during the 18th, 19th, and early 20th centuries and the one we are living through today. Before World War I, a much larger share of the total income of the richest people came from ownership of capital assets—dividends, rents, interest on government bonds, and capital gains.
(Shortform note: The 19th century in particular was an era of staggering inequality. In the PBS documentary The Gilded Age, the filmmakers observe that in 1897, the richest 4,000 families in America controlled as much wealth as the other 11.6 million American families combined. But, as Piketty argues, we may be returning to a similar economic paradigm. In November 2017, the three richest individuals in America were as wealthy as the bottom half of the population.)
Since the 1980s, however, he observes that the top decile and even the top centile’s income primarily comes from highly compensated labor. He argues that skyrocketing salaries for high-ranking executives and managers (most notably in the finance sector) are driving today’s inequality. In this respect, today’s wealthy are different from their predecessors of the 18th and 19th centuries. They are less a class of rentiers than they are a class of highly compensated salary-earners.
But regardless of its source, Piketty warns that the rich are only getting richer: In the U.S., the top decile increased its share of national income by 15 points, from 35 to 50% from the 1970s to 2010.
(Shortform note: We can see direct evidence of Piketty’s argument by looking at the extraordinary divergence between average CEO pay and average worker pay that has taken place in the U.S. since the mid-20th century. In 1965, CEOs earned, on average, 21 times more than the average worker. By 1989, that ratio had nearly tripled to 61:1. And by 2020, a CEO at one of the top 350 companies in the country could expect to earn more than 351 times the salary of a typical worker. In total, from 1978 to 2020, CEO pay grew by an exponential 1,322%—more than the growth in the S&P stock market growth during that time and the relatively paltry 18% wage growth of the typical worker over the same period.)
Is Wage Inequality a Choice?
Piketty argues that this wage inequality is a political and social choice that our society has made. He acknowledges that wage inequality is partially a function of workers’ productivity—how much they contribute to the firm’s marginal output—and that this marginal productivity, in turn, is determined by workers’ education and skill levels.
But ultimately, writes Piketty, the mechanisms that allow for such a degree of overcompensation are the result of social, political, and legal decisions—specifically, to accept and even celebrate what he sees as unjustifiable income disparities.
These include political decisions about where to set the minimum wage (or whether to establish one at all); the level of legal protections afforded to labor unions; the degree of progressiveness of the tax system; the generosity of the welfare state; and how much we choose to invest in quality, universal education.
|A Federal Jobs Guarantee to Address Inequality|
Piketty writes that inequality is a result of the decision by our society and our governments to accept it. In The Deficit Myth, Stephanie Kelton similarly writes that the American political system has chosen to focus inordinately on purely fiscal deficits (how much the government spends vs. how much revenue it brings in), but is largely unconcerned with social and human deficits—the lack of jobs, the lack of education, the lack of healthcare, and the lack of equality of opportunity that are imposing significant suffering on people.
Kelton proposes using the federal government’s extraordinary fiscal power to create a society that is more equitable, sustainable, and prosperous through a federal job guarantee. She positions this as a crucial remaking of the economic order—having the federal government serve as an employer of last resort, guaranteeing the fundamental right to a job for anyone who wants one, and bringing important benefits to the economy and society as a whole.She argues that such a guarantee would break the cycle of mass unemployment during recessions, improve the bargaining power of labor, and address society’s most pressing needs by creating much-needed jobs in nursing and eldercare, clean energy, and infrastructure repair.
Legal Change Leads to De Facto Change
As more companies face legal mandates for pay transparency, businesses in other places feel the pressure to implement their own pay disclosure policies. There are several reasons for this.
First, many firms anticipate that their state or municipality will inevitably pass a similar law, and they’d rather get ahead of the curve than scramble later. Posting salaries requires more than pushing a button—executives often need to review salaries, correct inconsistencies, and develop a formal system for determining pay rates and raises.
Second, many large national companies with offices affected by disclosure laws—like Apple and Disney in California—are enacting pay transparency throughout the business to maintain standard hiring practices within the organization.
Third, businesses want to stay competitive in a tight labor market. Employers are competing for top talent, and job candidates often prefer jobs with posted salaries. Additionally, businesses have to face the fact that even if they don’t include the salary range on a job listing, an applicant could easily find the information online—or worse: They could find wrong salary information online.
Transparency Brings Pros and Cons
Besides addressing the pay gap, the shift toward pay transparency brings a number of benefits—as well as drawbacks—for job seekers, employees, and employers.
- Job seekers can target jobs that meet their salary needs.
- Employees will know whether their salary is at market rate and may be more motivated to work toward a promotion because they know how much more they could earn.
- Employers avoid liability for discriminatory practices that may have been hidden in the shadows of pay obscurity, and they avoid screening and interviewing job candidates who want more than the company is willing to pay.
- Job seekers who live in places with disclosure laws may not be considered for jobs in companies without pay transparency.
- Employees may face compressed pay and unequal benefits.
- Employers could lose workers to companies with higher posted salaries, and they could face wage discrimination lawsuits if they fail to correct inequities.
TITLE: Capital in the Twenty-First Century
AUTHOR: Thomas Piketty
Want to fast-track your learning? With Shortform, you’ll gain insights you won't find anywhere else .
Here's what you’ll get when you sign up for Shortform :
- Complicated ideas explained in simple and concise ways
- Smart analysis that connects what you’re reading to other key concepts
- Writing with zero fluff because we know how important your time is