Abstract
Wage secrecy is common in many cultures, especially in highly competitive markets. This paper examines why people in a society honor the wage taboo and explains the role of the secrecy norm in a growing-inequality economy. Assuming that people do take their relative position on the pay ladder into consideration, secrecy affects the utility of underpaid workers and their willingness to cooperate in the workplace. Secrecy also decreases workers' ability to monitor their firms' pay scheme and, hence, allows firms to attain greater pay inequality. By the same token, secrecy impairs firms' ability to cut wages reliably when they experience a negative shock. In the model, senior and junior agents who display a fairness-oriented utility function work in an environment where the secrecy norm is practiced. In this setting, stronger secrecy corresponds to greater income inequality. In equilibrium, both types of agents favor a certain level of wage secrecy over full information, i.e., all agents follow the secrecy norm and do not wish to deviate. By allowing agents to continue to cooperate under rising income inequality, the wage-secrecy norm decreases the social disharmony that is evoked by a widening gap in pay and, therefore, prevents rage and revenge reactions by underpaid agents. Interestingly, the more able the agents are, the more strongly they are expected to favor secrecy.
Published Version
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