The Effect of Salary History Bans on Wages, Learning, and the Gender Pay Gap

Abstract

A number of important jurisdictions have recently enacted salary history bans to combat the gender pay gap. This paper models the effect of such bans by augmenting the standard asymmetric learning setting with efficiency wages, such that wages themselves are both necessary to motivate optimal production and informative of employee ability. We demonstrate that, in the absence of other public signals, wage disclosure can result in an equilibrium of symmetric learning. Imposing a ban reverts to asymmetric learning, with adverse selection in the lateral hiring market and higher wages for new entrants to the labor market. We extend our model to include a form of taste-based discrimination that matches both the empirical characteristics of the gender pay gap and the biases cited by proponents of bans: some firms consistently but unconsciously under-evaluate the ability of their incumbent female workers, leading to failure to promote, lower wages, and anchoring in the lateral job market. Wage disclosure allows high-performing women to escape discriminatory firms, although some degree of anchoring and wage gap persists. In contrast, bans may reduce the gender wage gap, but do so at the expense of high-performing women, who may be trapped at discriminatory firms. Efficiency also declines under a ban, as trapped high-skill women under-produce. These results imply that the wage gap (and the welfare of working women, particularly high-performers) is better addressed through policies that promote efficient job switching.