Pay transparency and pay gap reporting may be rising but how effective are they?

Nearly all countries have one thing in common: a persistent gender pay gap. The gender pay gap represents not just a moral quandary but an inefficient and untenable utilization of human capital. The International Monetary Fund reports that the estimated economic cost of economic disempowerment of women ranges from 10% of gross domestic product in advanced economies to more than 30% in South Asia, the Middle East and North Africa.

Yet, there appears to be a renewed determination to address this longstanding issue. Societal reckonings such as the #MeToo movement have laid bare entrenched inequalities and barriers that permeate workplaces. Governments worldwide are now keen to reduce pay gaps and are adopting pay transparency and reporting measures.

“Pay transparency” encompasses various policies, from simply publishing pay ranges in job adverts to calculating and publicly reporting pay gaps. This last approach has gained increased traction in recent years.

In 1991, Italy introduced a reporting obligation for large companies concerning male and female employees’ work conditions and salaries. It was only in 2013, however, that the trend really began: Denmark introduced mandatory reporting on gender pay disparities for large companies, with the United Kingdom following suit in 2017.

Several other countries, including France, Spain, Italy, and Ireland, have since introduced similar reporting requirements. In May 2023, the European Union issued its Pay Transparency Directive, which requires all member states to implement gender pay gap reporting obligations and other mechanisms to reduce gender inequality.

Beyond Europe, more countries are joining this movement. In Australia, over 5,000 large employers have recently had their gender pay gaps published. In Brazil, new legislation will oblige companies with more than 100 employees to report salary differences between men and women in management and leadership positions. Japan implemented gender pay gap reporting in 2022. Twenty-one of 38 Organization for Economic Co-operation and Development countries now have a gender pay gap reporting regime.

Pay reporting at the most basic level involves calculating and publishing statistics about men and women in the workforce. However, there is a high degree of variation between regimes, making comparison difficult.

Below are the questions that any policymaker must consider when devising a gender pay gap reporting regime. The aim is to motivate employers to increase gender diversity in their workplace without imposing too big a burden.

Gender pay gap reporting is borne from the idea that “sunlight is the best disinfectant.” Rather than legislative micromanagement, employers are left to decide what specific measures to take.

But gender pay gaps change slowly. Knowing whether this type of nudge is an effective policy will take time. Although plenty of examples of employers have been nudged into action, at the macro level, evidence of the effectiveness of pay gap reporting is still developing.

Using data from the United Kingdom, researchers at the London School of Economics found that gender pay gap reporting led to a 1.6% reduction in pay gaps. Similar conclusions have been made about the impact of legislation in Denmark; however, this research found that gaps are reduced due to decreasing male pay rather than increased pay for women. Therefore, the primary motivation for pay reporting – the advancement of women in the labour market – was not achieved.

There is also evidence against pay transparency: one study found that pay transparency could reduce pay by 2%, as it reduces the bargaining position of workers. While this is a theoretical study of negotiation dynamics rather than an empirical study of outcomes, its conclusions shouldn’t be ignored.

These studies indicate that pay transparency is far from a proven policy. Legislators worldwide are, therefore, taking leaps of faith by creating new pay reporting regimes. Although the scale of potential economic, social and political benefits is significant, time will tell whether pay reporting can achieve these.