Closing The Gap

When firms disclose wages the pay gap narrows—but not because women get paid more

Hundreds of women gather in Russell Square for the Women's Strike Assembly on International Women's Day on 8th March 2018 in London, England, United Kingdom. International Women's Day is celebrated on March 8 every year. It commemorates the movement for women's rights, and for all women to stand together in solidarity over women's issues.
photo by Mike Kemp/In Pictures via Getty Images

Legislation that requires companies to reveal gender pay disparities will shrink gender wage gaps, but won't necessarily increase women's wages, according to new research from the Harvard Business Review.

Researchers examined wage statistics of Danish firms before and after the country implemented the 2006 Act on Gender Specific Pay Statistics, which requires firms with more than 35 workers to disclose pay inequities.

The gender pay gap at mandatory reporting firms shrank by 7 percent between 2003-2007, a dip from 18.9 percent to 17.5 percent. Meanwhile, pay gaps at non-disclosing firms remained the same.

In addition to shrinking pay disparities, companies that disclosed saw an uptick in female hires and promotions of women to senior positions, as well as a decrease in firm wage bills as a result of slower growth for male wages. The findings oppose common arguments that forcing wage gap transparency fails to have any impact, but costs firms substantial profit and administrative resources.

"The closing of the wage gap was not because female wages went up, but because male wage growth slowed down," Daniel Wolfenzon, chairman of the Finance Division at Columbia Business School and an author of the study, told CNBC Make It. "It's possible that the least expensive way for firms to close the wage gap is that instead of raising wages for women, they just don't increase wages for men. Even though the wage gap is closing, it's closing at the expense of pay for employees overall."

Reporting firms also promoted more low-level female employees and hired 5 percent more women in intermediate and low-levels than non-disclosing firms. The law didn't impact the pay performance on top-level management.

The U.K. government has required firms with over 250 employees to file annual disclosures of pay inequities. The U.S. does not require companies to disclose, but as gender pay equity becomes a bigger point of contention and political figures continue to speak out against the gap, some U.S. firms have volunteered pay figures. In January, Citigroup was the first in the U.S. to announce its "unadjusted" gender pay gap of 29 percent.

Some experts acknowledge that legislation requiring wage transparency is a positive step towards gender equity and that other countries should follow suit.

"Shaming businesses into proper behavior by requiring they make these disparities publicly available and having them explain it — it's an effective strategy," Steve Hine, a labor economist at the Minnesota Department of Employment and Economic Development, told CNBC Make It. "You raise awareness of issues when you can present data on a topic like this."

But the effectiveness of legislation requiring wage transparency depends largely on culture, according to Wolfenzon. The Harvard study focused on firms in Denmark, a country with a relatively high female labor force participation rate and a low wage gap. But other countries with different cultural norms might "not care as much about the wage disparity issue," he said.

Wage transparency also does not come without a cost. Firms that disclosed in the study saw not only decreased wage growth for men during the trial period, but a 2.5 percent decline in productivity compared to control group companies.

But overall, increased transparency did not ultimately impact firms' net income, since decline in productivity was offset by saved wage cost. Researchers found that by the end of the study period, firms that reported had overall wage bills that were 2.8 percent lower than control group firms.

"Firms concerned about a negative impact of these new laws on their profit don't seem to have reason to fear," the researchers said.

Like this story? Subscribe to CNBC Make It on YouTube!

Don't miss: Nancy Pelosi and Democratic lawmakers unveil the Paycheck Fairness Act in an effort to close the gender wage gap

Londoners march for equal pay
Londoners march for equal pay