Thursday, September 24, 2015

Transparency Leads to Pay Compression Among City Managers -- But Also Increased Turnover

With historic levels of income inequality on the mind of many Americans these days, some politicians are wondering what sort of steps they might take to close the wage gap. Short of actually mandating salary reductions, an increasingly common proposal is to increase wage transparencies, so that we might better understand inequities -- between the pay of men and women, CEOs and rank and file workers, or managers and lower-level workers in the public sector. (As in this recent article by Cynthia Estlund.)

But what effects do such moves to increase transparency have on wages? This is the question that Princeton economist Alexandre Mas asks in a working paper that looks at the effects of a 2010 mandate requiring the disclosure of city managers' salaries in California. (A recent version of the paper is available here, via Harvard's Multidisciplinary Program on Inequality and Social Policy.)

What Mas found suggests a potential tension between increased transparency and good (or at least experienced) urban governance. After city managers' salaries were made public, compensation did tend to decrease, by about seven percent on average. In cities with higher initial compensation, the wage cuts tended to be larger. But cuts did not tend to be higher in cities where compensation had been out of line with fundamentals - in general, Mas notes, "wage cuts were not the result of the discovery of managers who exploited secrecy to inflate their wages." 

Yet even as transparency failed to create accountability by cutting the wages of city managers whose pay was out of line with their city's performance, it had a significant effect on the ability of cities to retain managers. Mas finds that the transparency policy was associated with a 75 percent rise in voluntary separations of managers. He concludes that "a potential drawback to transparency policies in the public sector is that wages fall to the point that cities cannot retain incumbent managers." Rather than increasing accountability or decreasing inequality, then, the effect of making city managers' wages more transparent might in fact be to simply increase their turnover.

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