Pay is the most important factor when searching for a job, according to a recent poll by Talent.com. And, increasingly, job seekers can expect to see pay ranges included in job postings. That is because a wave of pay transparency laws – which require employers to show pay ranges in job postings – have been passed, notably in Colorado, but coming soon to New York, California, and more states. Polls show that the public overwhelmingly supports pay transparency laws because people believe it will have positive impacts on job seekers, particularly women and racial minorities.
Effective January 1, 2021, the “Equal Pay for Equal Work Act” became law in Colorado. This law requires employers to include compensation ranges in job postings and keep records of wage rates for those positions. New York City, California, and Connecticut have all passed similar laws recently.
From the perspective of an individual job seeker, this has a big impact. Imagine they see an ad for a job expecting the pay to be $25 per hour. But when they read the job description, it lists the wage range as $16 to $20 per hour. It likely reduces their willingness to apply. Conversely, if the range was higher than the job seeker expected, their likelihood of applying jumps.
From the perspective of an individual employer unwilling to provide pay ranges, besides limiting their informational leverage in negotiation, this law requires another step to post a job. In economics jargon, this is known as a friction – an extra regulation that shifts the labor market equilibrium. There have been many frictions passed that have changed the long-term outlook of the labor market. Political leaders, backed by union movements, legislated the 40-hour work week, child labor laws, and minimum wages. While not nearly to the same scale as these advancements, pay transparency laws are another shift in the job search and match process.
Assessing the impact of these laws requires a deeper analysis of fundamental labor market characteristics. The first coming from the job-seeker side, to understand if this would incentivize people out of the labor force to return to work. Then, a similar analysis on the hiring side to understand if this impacts the employer’s appetite to hire.
We found that on average the labor force participation rate increased 1.5% in Colorado compared to Utah from 2020 to 2021. We also found that on average, Indeed’s daily job postings fell 8.2% in Colorado compared to Utah. Effectively, those out of the workforce felt better about applying to jobs in a jurisdiction that mandated pay ranges, and employers were discouraged from posting jobs in Colorado given the additional friction.
Job seekers:
The labor force participation rate (LFPR) is a classic statistic used by the Bureau of Labor Statistics to measure job seeker activity. It is the ratio of those in the labor force divided by the civilian population. Since the Great Recession, it has fallen dramatically. There’s a slew of reasons why this happened, but in the end it’s a serious concern for employers.
Both Utah and Colorado had similar trends in this measurement. A gradual decrease in the years of slow recovery from the recession that ended in 2009, with a rebound from 2015 and onward. This pattern is a key assumption of the results we present below.
Using a difference-in-difference model, we compared Utah’s LFPR to Colorado’s from early 2020 to the end of 2021. Using Utah as a control group, we found that after Colorado’s compensation transparency law was passed in 2021, there was a 1.5% increase in Colorado’s LFPR relative to Utah’s LFPR. Why Utah? As a bordering state with relatively similar demographics and economic characteristics, we used our judgment in selecting this “control” state. Others may disagree or take a more holistic approach; we encourage such research.
In the simplest terms, controlling for both states’ characteristics resulted in Colorado having a 1.5% boost in its labor force. Recruiters know 2021 was an historically tight labor market and this slight increase can make hiring easier.
Employers:
Since February 1st, 2020, Indeed has been providing publicly available data on daily postings.
In the months following the onset of COVID, daily postings fell heavily. By the late summer months of 2020, employer demand crept back up and eventually peaked in the fourth quarter of 2021.
Indeed, Job Postings on Indeed in the United States [IHLCHGUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IHLCHGUS, July 19, 2022
Similar to the analysis performed from the job seeker side, Colorado and Utah’s daily posting velocity was compared from early 2020 to late 2021. Controlling for both states’ characteristics, following passage of the law, Indeed postings in Colorado declined comparatively more than in Utah by a margin of 8.2%.
This result follows what the national media has been reporting: companies deliberately chose to not post jobs in Colorado due to this new requirement. This goes back to the point about economic “frictions.” Salary transparency laws add another step in the process to post a job; as well as repel recruiters unwilling to divulge pay ranges. It’s that simple. This law clearly did not cause a recession in Colorado but it seems to have had a small negative effect on job openings, on the margin.
We want to strongly emphasize this is not peer-reviewed, academic research. Instead, this is an empirical research project to better understand the effect this law has on the labor market because more laws like it are coming to other states. Please review our code and model online; and read the methodology section below.
If you ever took a statistics course, you are probably familiar with the term “correlation does not imply causation.” This is relevant here; this study does not imply these results are causal in any way.
Conclusion:
Most American adults are in the labor force – that is, they have a job or are actively searching for one. Even the already-employed browse for a new job opportunity. And the single most important factor these job seekers are looking for is pay. Think of the current job search landscape as Zillow but without estimated home prices. Not every employer putting out a job posting discloses a salary or wage range publicly. Job seekers are thirsty for information on pay.
It is no wonder pay transparency laws are so popular. Most of the public believes that requiring employers to detail pay ranges will address labor market inequalities by sex and race. Starting with Colorado, these laws have spread to other states – notably California and New York. Ironically, these salary transparency laws may help recruiters, at least the ones willing to incur the additional friction of displaying a salary range. In the narrow example of Colorado and Utah in our study, we found that job postings declined and job seeker activity increased.
Methodology:
Using data from FRED, we collected time series on Colorado and Utah’s labor force participation rate. Using a causal inference technique called the “difference-in-difference estimator”, we estimated the average treatment effect of enacting the law in 2021 compared to 2020. Similarly, we collected time series on Indeed’s daily postings in Colorado and Utah and estimated the average treatment effect using the same model. You can view the source code here.
Data citation: Indeed, Job Postings on Indeed in the United States [IHLCHGUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IHLCHGUS, July 19, 2022
Coauthor: Andrew Flowers
