Back when we still had a cafeteria at The Washington Post, the topic of salaries would occasionally come up over lunch among the reporters. I'd invariably conduct a little experiment in behavioural economics, offering to reveal my salary if they revealed theirs. Over more than two decades, not one of these professional snoops and truth-tellers ever took me up on the offer.
I was reminded of that when reading about the new regulation by the Obama administration banning gag rules at government contracting firms that prohibit or discourage employees from talking to each other about pay.
A survey this year by the Institute of Women's Policy Research found that 62 per cent of private sector employees thought their companies had such policies. Even at The Washington Post, where as far as I know there was no such policy, the social norm against revealing your own pay was sufficiently entrenched that nobody did it anyway.
There are lots of reasons why incomes have become more unequal in recent decades and why pay raises have been so infrequent and so skimpy, but one that is often overlooked is the degree to which labour markets are rigged in favour of employers.
In any market in which there's bargaining over prices, information is power. And when it comes to bargaining over pay, employers have a huge information advantage.
As a result many workplaces have wide variations in what people are paid that can't be explained by factors such as skill or work effort or length of service. How much people make is often affected by the salary they were hired at, or how aggressive they have asked for raises or looked for opportunities elsewhere. People who are shy, insecure or content to stay put are taken advantage of.
Economists at Princeton University and the University of California at Berkeley studied what happened when employees suddenly found out what everyone else at their workplace was making. The results were hardly surprising: Underpaid employees were apt to quit or become measurably less productive, without any offsetting increase in productivity from better-paid employees.
Other studies show that overall pay levels tend to be higher in firms and industries where pay is more transparent. Consider the case of actors, professional athletes, Wall Street bankers, law firm partners and corporate chief executives, all of whom have seen their pay rise rather smartly in recent years, despite a slow economy.
For various reasons, everyone in these industries knows what everyone else makes. Because of the tendency for both employees and firms to think of themselves as "above average," there is natural built-in pressure for pay to rise.
In other words, there are good reasons why so many employers discourage or prohibit workers from sharing pay information, even though such policies have long been illegal under federal labour law. In the rare instance when such policies are challenged in court, the employee usually prevails. But because few workers are willing to risk it - and because many people still think it unseemly to talk about their salaries - pay secrecy remains the norm.
Not so among employers, however. In almost every region, and in almost every industry, employers actively share information about their wage and salary scales. The "good" reason for such information sharing among competitors is that it allows companies to ensure that they don't lag so far behind the market that they are unable to attract and retain the employees they need.
President Barack Obama signed an executive order in April that would ban federal contractors from retaliating against employees who discuss their pay with each other. Photo / AP
But the less benign reason is that these "wage surveys," invariably conducted by industry associations, become yet another instrument by which competitors collude to avoid getting into costly bidding wars for talent.
If you doubt that employers engage in collusive behaviour to hold down salaries, consider the revelations of the secret "no poaching" agreements among the tech firms in Silicon Valley that came to light during a Justice Department inquiry and a subsequent class-action suit.
While refusing to admit they did anything illegal, Apple, Google, Intel, Intuit, Adobe and Pixar have all reached settlements with the government or the private plaintiffs, and documents uncovered during discovery in the civil case reveal that many more companies were involved, among them IBM, eBay, Microsoft, Comcast, Oracle, Sun Microsystems and Dell.
The documents show that the collusion reached well beyond human resources departments to the executive suites, or were enforced with threats of patent litigation against any firm that defected from the arrangement. The companies' improbable defence was that because each firm decided "independently" not to try to recruit each other's key employees, there was no illegal conspiracy.
And it's not just high tech. Just last week, the Federal Trade Commission reached a settlement with two of the biggest makers of ski equipment, Tecnica and Marker Volkl, on charges that they colluded in not trying to hire away employees or celebrity racers who endorse their equipment.
Back in 2010, the FTC, acting on information uncovered in a suit brought by an employee of Exxon, reportedly looked into evidence that the big oil companies share information about the pay of engineers and other professions as part of an effort to hold down salaries. Exxon settled with the employee after a federal appeals court refused to dismiss the case, citing evidence that the firms routinely shared information not only about current wages but projected budgets. The FTC took no formal action.
There have also been a raft of class-action suits filed on behalf of nurses in Detroit, Chicago, Memphis, San Antonio and Albany, New York, alleging that hospitals routinely used wage surveys in an effort to hold down pay increases in the face of a nationwide nursing shortage.
In a study of the Detroit market, Princeton economist Orley Ashenfelter compared the pay of staff nurses with that of nurses contracted from temporary employment agencies. Ashenfelter concluded that because of the collusion facilitated by the information sharing, staff nurses were shortchanged by more than 20 per cent.
Ironically, one reason for the ubiquity of employer wage surveys is that they get a free pass from antitrust officials as long as they meet criteria that employers have long since learned how to game.
At a minimum, the FTC and the Justice Department should require that firms that participate in such surveys should be required to share the results with their workers, to create a more level playing field in terms of pay negotiations.
As it happens, some progressively managed companies have embraced pay transparency. Whole Foods has published the pay of all employees since 1986, along with detailed sales and profit results for each store and region. Chief executive John Mackey believes that the transparency helps to create a corporate culture of accountability and shared fate.
"If you're trying to create a high-trust organisation, an organisation where people are all-for-one and one-for-all, you can't have secrets," Mackey told the authors of a recently published book, The Decoded Company. Such "open-book management" has been shown to yield higher profit in other firms as well.
Thanks to the Web, it may not be long before every company will have to learn to live with pay transparency. Already, more than 23 million workers around the world have signed up at Glassdoor.com, a "give-and-get" information website that has detailed pay information and employee satisfaction ratings on 300,000 firms.
Studies indicate that as many as half of all job seekers consult Glassdoor, which has become influential enough that company HR departments are signing up - 2,000 a month - for the privilege of posting job listings and receiving reports on the demographics of those who are checking them out on the site.
The pay information for specific job categories at Glassdoor may not always be reliable. But along with other social media, it has begun to break down the "don't ask, don't tell" social norm that long prevailed at the office water cooler and in company cafeterias. For an American workforce that hasn't seen a pay raise in some time, that ought to be good news.
- Washington Post