Can Transparency Close the Wage Gap?

New legislation in Denmark that emphasizes wage transparency reduces the salary gap between men and women.

IN 2006, THE DANISH government passed legislation requiring firms with more than 35 employees to report salaries for groups of employees, broken down by gender, and to inform their employees of any pay discrepancies between men and women. But did the law have its intended effect—did it close the country’s gender pay gap?

A new study quantifies the impact of Denmark’s law by comparing wages and other factors before and after its passing. The paper’s co-authors include Morten Bennedsen, a professor of economics at INSEAD in Fontainebleau, France; Elena Simintzi, assistant professor of finance at the University of North Carolina’s Kenan-Flagler School of Business in Chapel Hill; Margarita Tsoutsoura, associate professor of finance at Cornell University’s S.C. Johnson College of Business in Ithaca, New York; and Daniel Wolfenzon of Columbia Business School in New York City.

The researchers found that the wage transparency law slowed salary growth for men by 1.67 percent, compared to salary growth for men at firms in a control group, thereby reducing the salary gap between men and women. (Salaries for women at affected firms increased by .28 percent, but this was not a statistically significant amount.)

Affected firms hired more women and promoted women more often to senior positions than firms in a control group. At the same time, workers at affected firms saw lower wage increases than their counterparts in the control group (due to slower salary growth for men), and their productivity decreased by 2.5 percent. But lower wage costs offset the decrease in productivity. “Governments ... have proposed transparency as a tool to nudge firms to reduce the wage gap between men and women,” the co-authors write. “Regulatory mandates on pay transparency, as a means to overcome biases against women in the workforce, may be effective in closing the gender pay gap.”

Read the working paper “Do firms respond to gender pay gap transparency?